11 September 1997 Press Release TAD/1847 UNCTAD SOUNDS WARNING ON GLOBALIZATION ADVANCE RELEASE GENEVA, 11 September (UNCTAD) -- The big story of the world economy since the early 1980s has been increasing integration through the unleashing of market forces. But there is also another story, one that is attracting increasing attention in the 1990s: social and economic divisions among, and within, countries are widening. The conclusion that evidence is mounting that slow growth and rising inequalities are becoming more permanent features of the world economy is documented by the United Nations Conference on Trade and Development (UNCTAD) in its Trade and Development Report 1997, and it is a wake-up call to policy-makers everywhere. Rising inequalities pose a serious threat of a political backlash against globalization, one that is as likely to come from the North as well as from the South. Such a backlash could reverse beneficial reforms achieved in developed and developing countries over the past decade. And, it may provoke a roll back of some of the more longstanding achievements of economic integration. The 1920s and 1930s provide a stark, and disturbing, reminder of just how quickly faith in markets and economic openness can be overwhelmed by political events. UNCTAD, however, also argues that it is possible to design policies to manage integration into the world economy that can reconcile rapid growth and distributional objectives. The TDR 1997 documents, in detail, seven troublesome features of the contemporary global economy: -- Although there are significant exceptions at the country level, overall the world economy is still growing too slowly -- whether to generate sufficient employment with adequate pay or to alleviate poverty (see later in this press release); -- Gaps between developed and developing countries, as well as within the latter, are widening steadily. In 1965, average GNP per capita for the top 20 per cent of the world's population was 30 times that of the poorest 20 per cent; 25 years later, in 1990, the gap had doubled -- to 60 times; -- The rich have gained everywhere, and not just in comparison to the poorest sections of society; "hollowing out" of the middle class has become a prominent feature of income distribution in many developing and developed countries; -- Finance has been gaining an upper hand over industry, and rentiers over investors. In some developing countries, debt interest payments have reached 15 per cent of GDP; trading in existing assets is thus often much more lucrative than creating wealth through new investment; -- The share of income accruing to capital has gained over that assigned to labour. Profit shares have risen in developed and developing countries alike. In four out of five developing countries, the share of wages in manufacturing value added today is well below that in the early 1980s; -- Increased job and income insecurity is spreading. As rising interest charges have eaten into business revenues, corporate restructuring, labour shedding and wage repression have become the order of the day in much of the North as well as parts of the South; -- The growing wage gap between skilled and unskilled labour is becoming a global problem. Already an established trend in many developed countries, absolute falls in the real wages of unskilled workers -- 20 to 30 per cent in some cases -- have been common in developing countries since the early 1980s. There should be no doubt, UNCTAD warns, that the burden of international economic disintegration, if it were to take place, would -- as during the Great Depression -- be borne by those who can least afford it. Managing Countries' Entry into World Economy Contrary to much current economic thinking, UNCTAD says that increased global competition does not automatically bring faster growth and development. Nor do growth and development automatically bring about a reduction in inequality. No economic law exists that will make developing economies converge automatically towards the income levels of developed countries if they only open up. Rather than the "big bang" approach widely adopted in recent years in many parts of the world, UNCTAD urges a carefully phased liberalization into the world economy -- tailoring the process to the strength of the economy concerned, as well as that of the country's institutions. Government policies devised to manage integration into the world economy can also be put to good effect in reconciling rapid growth and distributional objectives, it argues. Managing Profits for Development The prevailing notion that, faced with globalization forces, policy-makers in developing countries may have lost their room to pursue development objectives actively is not accepted by UNCTAD. Their role is as important as ever, the TDR 1997 says, as "growth and income distribution both depend on how profits are managed". In this regard, the report extends UNCTAD's existing work on the East Asian economies in new directions. In most of those countries, it reports, policies designed to provide incentives to private firms to retain profits and invest them in new equipment, capacity and jobs have been critical in establishing a strong profit-investment nexus. Closing unproductive channels of wealth accumulation and discouraging luxury consumption have also been essential. Experience shows that policies designed to manage profits so as to accelerate growth can also serve to manage distribution. It is important, though, that efforts to manage emerging inequalities be included at the outset when designing development strategies, as was successfully done in some, although not all, newly industrializing East Asian countries. Profits, Investment and Income Inequality "If speculative talk about converging incomes and living standards is to cede place to a realistic policy agenda, it is necessary to have a firm grasp of what drives economic growth in a market economy. That role belongs to profits." >From this starting point UNCTAD offers a distinctive analysis of the links between profits, income levels and investment in today's globalizing world. Turning higher profits into general improvements in standards of living hinges on the creative energy of entrepreneurs. But, the "animal spirits" of the entrepreneurial class are not necessarily being unleashed on creating new productive assets. Instead, they are often buying and selling second-hand assets with an eye to large speculative gains. Some of the factors making for greater inequality in a globalizing world at the same time deter investment and slow down growth. Rapid liberalization has delinked finance from trade and investment. An increased concentration of wealth in the hands of a few is associated with stagnant investment, rising unemployment and reduced pay. Redressing Trade Liberalization Biases Effective economic reforms in the developing world are only one part of the equation required to close income gaps across the world economy. Another part is an enabling global environment. "Among the asymmetries of globalization is the fact that liberalization of the world economy has proceeded so far in a lopsided way that tends to prejudice the growth prospects of developing countries by discrimination against areas in which they can achieve comparative advantage." Progressive redressing of these biases remains an important challenge for the whole international community. In future trade negotiations, it is necessary to restore balance to the agenda in such a way that would speed up the liberalization of sectors of traditional interest to developing countries, and at the same time to identify new areas in goods and/or services capable of providing additional trading opportunities. World Economy Still in Low Gear Growth in the world economy this year will again continue to be too slow to make a significant dent in poverty in the South and unemployment in the North, UNCTAD forecasts in the TDR 1997. Despite success in reducing inflation almost everywhere, expectations of faster growth have so far not been fulfilled. Since 1990, the world economy has been growing slower than in the previous decade, and the outlook is for a continuation of slow growth. Meanwhile, global trade imbalances similar to those of the 1980s have reappeared. Output growth picked up slightly in 1996, reaching 2.8 per cent. The improvement was achieved despite a sharp reduction in the growth of world trade (from 8.5 per cent in 1995 to 4 per cent in 1996). Developing countries again led the way, posting an overall growth rate of 5.6 per cent. The slight acceleration over the 2.4 per cent figure achieved in 1995 was largely due to recoveries in Japan and Latin America. However, these were partly offset by slower growth in Asia and in the European Union. Prospects for 1997 suggest little change in performance in either developed or developing countries. South's Growth: Sufficient and Sustainable? Despite somewhat slower growth, to 6.9 per cent compared with 7.3 per cent in 1995, Asia continued to perform well in 1996. Although little change is expected for the region in 1997, restrictive policies intended to safeguard external balances in a number of these countries have introduced an element of uncertainty into short-term regional prospects. Growth was affected last year by a sharp drop in exports from the first-tier newly industrialized economies (NIEs) (Hong Kong Special Administrative Region of China, Republic of Korea, Singapore and Taiwan Province of China), as well as from Malaysia, Thailand and China. In some countries, export expansion has been difficult to sustain now that the relatively easy stages of labour-intensive production for export have been completed. To maintain momentum, technological upgrading and productivity growth are now required. China, which continued to grow at an impressive rate of close to 10 per cent, is expected to sustain high rates of growth in 1997. It appears headed for a soft landing, as inflation has been brought down to a single-digit rate. This should allow policy-makers to focus attention on structural economic deficiencies in agriculture and infrastructure. Unlike East and South-East Asia, West Asia saw faster growth in 1996, largely due to favourable movements in oil prices. Growth also remained robust in South Asia. The economic recovery continued in Africa in 1996. It also became more widespread, extending to a number of least developed countries. At 3.9 per cent, the overall growth rate was the second fastest in the world economy, lagging only behind Asia. And the trend is expected to continue in 1997. In 11 countries, growth reached, or surpassed, 6 per cent and, in a further 28, it ranged from 3 to 6 per cent. This should be seen against the target of an average real growth rate of at least 6 per cent per annum for the decade, set in 1991 by the United Nations in its New Agenda for the Development of Africa (UN-NADAF). Helped by favourable commodity price movements, strong agricultural growth -- at 5.2 per cent in 1996 -- led the way. Spirited industrial growth, meanwhile, helped a number of North African countries to build up momentum last year. Latin America has recovered from the depressed conditions of the post- Mexican crisis, but its growth remained at a modest 3.3 per cent in 1996. Output growth is expected to accelerate further in 1997. The Latin American recovery has primarily been due to the upturn in Argentina and Mexico, in both cases driven by strong export growth. Elsewhere in the region (notably in Brazil, Costa Rica, Paraguay, Peru) trade has also played an important role, on account of both unilateral trade liberalization and the strengthening of regional trade. However, in many countries the recovery has sucked in imports at an even faster pace than in 1995; the growth of import volume for the region in 1996 was 9.5 per cent, almost double that in the previous year. As a consequence, the region's dependence on capital inflows is unabated. Reconciling external equilibrium and competitive exchange rates with growth and price stability still remains the main challenge for most Latin American countries, UNCTAD says. Improvements in overall economic performance have thus been recorded in many parts of the developing world. But the verdict over whether more sustained growth will take hold remains unclear. Vulnerability to swings in capital flows remains high in a number of countries with large external deficits. Moreover, UNCTAD argues that, for many developing countries, a speedy and flexible implementation of the IMF/World Bank Debt Initiative for Highly Indebted Poor Countries could play a significant role in ensuring sustainable growth. "One of the lessons of the debt crisis of the 1980s", it warns, "is that muddling through raises costs to both debtors and creditors." Uncertainty in Central and Eastern Europe Inflation has been contained in most of the transition economies. But while some have enjoyed recoveries in recent years, others are still searching for economic stability and balance. For the near future, monetary and fiscal austerity is likely to keep a tight lid on growth prospects in most transition economies. In Central and Eastern Europe, the strong growth performance in 1995 has not been carried over to 1996, dropping back 1.6 percentage points to 4 per cent per annum. Despite quite fast growth in 1996, prospects in the Czech Republic have dimmed, given its serious external imbalances and dependence on capital inflows. Economic conditions worsened considerably in Romania and Bulgaria. Contrary to earlier expectations, output continued to decline in Ukraine and the Russian Federation. Poland, by contrast, continued its strong growth performance in 1996, becoming the first transitional economy to exceed its 1989 output level. United States Continues to Expand The United States posted almost inflation-free growth in 1996 (2.5 per cent) for the sixth consecutive year, adding 12 million jobs to the economy since 1992 and helping to reduce the fiscal deficit to around 1.5 per cent of GDP. Contrary to many predictions, prices remained stable, even as unemployment dipped below 5 per cent in early 1997. This performance lends support to the proposal made in UNCTAD's Trade and Development Report 1995 that, in order to help solve the unemployment problem, central banks in the industrialized world must test their assumptions about potential growth rates and levels of employment compatible with stable inflation. "The Federal Reserve appears to be showing such a willingness", UNCTAD says in its 1997 Report. Despite its strong performance relative to other countries in the North, the United States average growth rate during the decade remains below that achieved in the 1980s. Moreover, until this year, average wages fell in almost every year of the recovery. Productivity gains have been captured by profits which have reached levels unseen since the 1960s. Restrictive Fiscal Policies Dampen Growth in Europe Prospects for Western Europe are currently surrounded by uncertainty. The average growth rate again fell in 1996, to 1.5 per cent. Of the larger economies, only the United Kingdom maintained respectable growth although at a somewhat slower pace than in 1995. In some other countries, slow growth and high unemployment have remained a problem. Current restrictive fiscal policies to achieve the targets set for the third phase of European Monetary Union render difficult the adoption of counter-cyclical policies capable of stimulating growth and fighting unemployment. The UNCTAD considers that there is room for flexibility. Monetary and exchange rate stability has already been achieved. However, although the fiscal targets are not being met, prolonging the debate over these targets is provoking volatility in financial and currency markets, further hindering recovery. Governments in the European Union are increasingly confronted by a major challenge: reconciling growth and employment with the achievement of fiscal targets. As UNCTAD has previously argued (in its Trade and Development Report 1994), perhaps the best solution is to cut the Gordian knot of fiscal convergence and to proceed directly to monetary union as soon as possible. Strong export growth reinforced by a budget stimulus made Japan the fastest growing member of the "Group of Seven" major industrialized countries last year. Along with the investment recovery which began in 1995, these forces led to an overall expansion of 3.5 per cent. However, Japanese profits and investment remain too centred on exports, and are thus subject to the behaviour of the exchange rate, which creates some uncertainty regarding the sustainability of the recovery. Risks of Global Imbalances for Developing Countries Disparities in demand growth among the major industrial countries lie behind a growing trade deficit in the United States and growing surpluses in Western Europe and Japan. The burden of adjustment, UNCTAD says, must be borne by surplus countries; Europe and Japan should therefore expand demand if there is to be a return to a more sustainable pattern of global demand and trade balances. Unless the upward pressure to the dollar can be eased, trade imbalances will worsen, UNCTAD warns, increasing the danger of trade frictions. For developing countries, the consequences of a combination of such frictions, dollar appreciation, and an eventual hike in international interest rates would be more serious and widespread than in the 1980s, in view of their increased integration into the global trading and financial system, and in light of their greater dependence on highly liquid capital inflows. For further information contact Yilmaz Aky=FCz, Chief, Macroeconomic Section, Division on Globalization and Development Strategies, UNCTAD, on telephone: 41 22 907 5841, fax: 41 22 907 0274, or e-mail: [EMAIL PROTECTED]; or Carine Richard-Van Maele, Senior Press Officer of UNCTAD, on telephone: 41 22 9075816/28, fax: 41 22 9070043; or e-mail: [EMAIL PROTECTED] 8
