Introducing the Report by the Secretary-General on International Trade and Development (A/63/324) of 25 August 2008
Ladies and Gentlemen:
It is an honor for me to introduce the Secretary-General´s Report on "International Trade and Development": in document A/63/324.
Since this report was prepared in August the world economy and the developing countries have had to weather a number of crises and we are now on the threshold of what may be a relatively prolonged slowdown, if not a recession. This has major implications for international trade and development, for the development prospects of developing countries, particularly LDCs, and for the timely attainment of internationally-agreed upon development goals including MDGs.
Aspiration Year of Development - 2008
In terms of the international communities´ focus, this year has been termed in the UN as a year dedicated to development. This is manifested in the successful conclusion of the UNCTAD XII Conference in Accra last April, the High-Level Event on the MDGs last September, and the FFD Review Conference scheduled for the end of this month. However, these events have and will have to not only take stock of, but also address the multiple challenges that have made more daunting the task of using trade as an engine for development and poverty reduction, as well as fashioning enabling international cooperation and policies.
Prelude of Buoyant Growth
As the Secretary-General´s report highlights, the trade and development crisis and reversals encountered in 2008 had come after a sustained period of buoyant growth in world output and trade. Developing countries led the expansion, growing at a robust rate of 7.3 per cent compared to 2.5 per cent for developed countries. World merchandise exports expanded by 14.4 per cent, developing countries merchandise exports grew by 15.2 per cent and their share in world merchandise exports increased to 37.5 per cent. What was noteworthy was that all developing regions, including Africa and the LDCs, shared in this buoyant growth in trade and export earnings. Developing countries, including African countries and the LDCs also received record levels of FDI-some $471 billion in 2007-in the extractive, manufacturing and services sectors.
Trade thus became a major source of development finance and, in many developing countries, accounted for more than 50% of GDP. Some developing countries including China and India, as well as energy and other commodity-exporters, have been able to accumulate substantial reserves. More and more developing countries have been able to mobilize resources generated by trade to raise incomes, reduce poverty, create full and productive employment and foster gender welfare and equity.
The Accra Accord of UNCTAD XII heralded the emergence of some developing countries as regional and global dynamos of trade and investment. The emergence of an alternative engine powering trade, development and the second wave of globalization is on the horizon. It has provided a new vitality to South-South trade, investment and economic cooperation.
Adverse Impact of the Triple Crisis
Against this positive background, the food, fuel and financial crises have posed a threat of reversing hard-won development gains from trade and negatively impacting productive and infrastructure capacities and the attainment of the MDGs. What has been a matter of particular concern is the perverse interaction among the food, fuel and financial crises and the resulting adverse impact on trade and development of developing countries. The global food crisis, caused by price hikes and shortages in some key commodities such as wheat, maize, rice, soy beans, has already worsened poverty, hunger and health conditions in many developing countries particularly net-food importing ones and the LDCs. High energy and commodity prices while bringing windfall gains to producers, have raised transport and other input costs and contracted the production of goods and services in many parts of the world. This has also contributed to the food crisis by increasing prices of inputs and infrastructure, like fertilizers, irrigation and transportation.
Another contributory factor to high food and energy prices was speculation. It amplified price variations, as portfolio investments shifted to food and fuel markets in search of higher returns. Now with a full-blown financial meltdown and the exit of those investors from these markets, we see a fall in food and oil prices even though the fundamental imbalance between supply and demand in both food and oil remains as do the challenges to food and energy security (ref: UNCTAD´s reports on the Food Crisis and the report on the Energy Crisis which elaborates on the challenges and opportunities for trade and development).
Implications of the Financial Crisis
As the global financial system is experiencing what UNCTAD has termed "the crisis of a century," finance, which is the lifeblood of economic transactions and of global trade and investment, is being squeezed with negative repercussions for economic growth. The liquidity shortages, credit crunch, loss of investor confidence and exchange rate misalignments have affected real economies in developing countries and countries with economies in transition, raising the specter of a prolonged global economic recession. These conditions have tangibly shaken the economic dynamism of the South and put its trade-related growth at risk exposing it to new vulnerabilities and shocks. Although these are early days, anecdotal evidence and trends that UNCTAD is monitoring indicates the fall of consumption and demand in developed countries as well as in the "regional and global dynamos of the South." This will have an effect on production and exports of commodities, manufactures, and services of most developing countries. FDI to developing countries is also expected to come down. The OECD recently estimated a fall of 40% in 2008, though this figure may be a bit high.
It has also become clear that there can be no real decoupling of developing countries from the crisis in the developed countries´ financial markets. However, it is apparent that developing countries will be affected in different ways depending on the degree of their exposure to financial markets, their international trade and investment linkages, their current account positions, their economic structures and their institutional solidity. Those with large foreign exchange reserves, large and well-regulated domestic markets, diversified economies and budget and current account surpluses will fare the best.
Commodity-Dependent Countries Impacted
Nearly ninety developing countries depend on exports of one or two commodities for their export earnings. The decline and gyrations in prices and in commodity export volumes across all commodity sectors that has been the trend in the last few months will hit these countries on account of the double impact of lower demand and declining prices for raw materials. Areas affected will encompass: agricultural commodities, including food and beverages, forestry and horticultural products, and marine products, many of which are new and dynamically growing sectors of international trade. Minerals and metals have also been similarly affected as well as oil and gas. Much of the lowered demand is also on account of the stalling or contraction of related manufacturing and service sectors for which these are inputs.
Manufacturing Sector Impacted
A number of manufacturing sectors in which developing countries have extant and potential comparative advantage are becoming affected as demand from U.S. and Europe stagnates and other developing countries´ engines are not able to pick up the slack. This will not only affect Asian manufacturing and exporting hubs, but it is also likely to affect developing countries in Africa and Latin America and the Caribbean directly or indirectly in terms of their exports of raw material and their intermediate products.
The fall in demand as well as the credit market squeeze is liable to be transmitted from developed countries to developing countries through TNC-driven global production sharing schemes and networks in key manufacturing sectors. The credit crunch might also affect the dynamic SMEs sector of developing countries which accounts for a significant and growing share in their production and exports. This is particularly true of the textiles and clothing and the automotive sectors which are experiencing a slow down.
For many developing countries, especially for LDCs, SVEs, and small-island developing states, textile and garment production and exports are particularly sensitive. In the case of the auto sector, it has been experiencing difficulties on account of the high energy prices, emission controls, climate change-related considerations, as well as the drying up of auto financing. As auto makers in developed countries cut production, close factories or stop new investments, OEM and other suppliers of auto parts from developing countries and transition economies will increasingly feel the negative impact. Machinery (agricultural, textiles, construction) and machine tools, petrochemicals, electricals and electronic goods, computer and ICT equipment, steel and steel products and toys and leisure equipment are among other industrial exports of developing countries that would be affected.
Services Sector Impacted
Apart from the contagion with regard to financial services, where the impact on developing countries has been proportionate to the degree of exposure to the epicenter, investment, both domestic and foreign, in infrastructure services, including transport, construction, energy and telecommunications is likely to be constrained. Some telling evidence of how the financial crisis is reverberating in the trade and transport sector is the fact that the freight orders and freight costs have dramatically fallen in the last several weeks (ref: Review of Maritime Transport 2008-UNCTAD). Simultaneously shipbuilding orders and investment in ports have fallen. Tourism services on which many developing and least-developed countries are dependent have felt the immediate impact. There are signs that IT-enabled services exports (Mode 1 of GATS) and the temporary movement of workers from developing countries, to deliver a range of services in developed and other developing countries (Mode 4 of GATS), are getting affected. The latter is evidenced by the shrinking of remittances noticed in the last few months from U.S. and Europe to some Latin American countries.
Tension Between Liberalization and Protectionism
Successive waves of autonomous and multilateral trade liberalization under the WTO, as well as RTAs and BTAs, on a North-South and South-South basis have resulted in an unprecedented reduction in tariff barriers. For example, between 2000 and 2005, the percentage of developed countries´ imports from developing countries admitted duty-free increased from 63 to 76 per cent and from 75 to 72 per cent in the case of LDCs. On the other hand, non-tariff measures, particularly government and private standards, have proliferated restricting the market access and entry of developing countries´ exports of goods and services. The food, fuel and financial crisis, economic uncertainties and policy-related insecurities, as well as climate change-related measures are already generating a plethora of import and export restrictions as well as protectionist stances. These need to be monitored, disciplined and countered.
A number of lessons can be distilled from this experience in looking ahead at strategic trade and development policies:
Trade expansion as an engine of growth and development remains valid. It is an enabling tool for employment generation and poverty reduction. Countries should be vigilant against relapsing into unilateralism and protectionism.
- The multilateral trading system must be maintained and strengthened. Despite the WTO Doha round of trade negotiations having suffered an unfortunate setback, every effort should be made to conclude the round and deliver a freer, fairer and more development-oriented trading system. The Doha Round of multilateral trade negotiations has provided unique opportunities to reform and rebalance the existing system of trade by further opening markets for developing countries´ exports in agriculture, manufactures and services; slashing farm subsidies including on cotton, that distort world agricultural trade; modernizing and ensuring fairness and equity in trade rules; and mobilizing support for competitive supply capacity and trade-related infrastructure building through Aid for Trade and other support mechanisms. Although the multilateral trading system alone cannot solve all developmental challenges, it does make an important, necessary contribution in the medium to long-term to addressing such challenges.
- The setback in the WTO Doha round should be seen as temporary and every effort must be deployed by WTO members at an earliest opportunity, to reengage in the negotiations and deliver the development promise of the Round. The multilateral trading system should be upheld as the cornerstone of the global trade governance and as a bulwark against emerging protectionist sentiments and trade disputes. The proliferating RTAs and BTAs should, in turn, complement the multilateral trading system and also uphold development.
- The recent crises have underlined what UNCTAD has been advocating for many years--that there is a need for global governance and rules of the game in financial and monetary systems as well. The governing structures and processes in the financial and monetary areas should be informed by the full participation of developing countries in agenda setting, decision-making and rulemaking, in the true spirit of inclusive multilateralism. The UN has an important role in making this change happen.
- Global economic interdependence which has been an article of faith with UNCTAD since its inception has been, yet again, affirmed. It therefore calls for greater coherence in policy-making as between national, regional, and international levels, between developed and developing countries and among them, as well as among trade, financial, monetary, technological, and development cooperation policies, as affirmed in the Accra Accord.
There is even greater need to work towards a more effective global partnership for development, especially in the context of MDG 8. The food, fuel and financial crises, as well as the climate change response requirements, call for enhanced ODA, debt relief, and transfer of technology to developing countries so that they can build economic resilience and resume their trade and development progress.
- In this regard also, anti-recessionary measures and stimulus packages being developed need not only be directed at stimulating developed-countries´ consumption and production, but also at improving the purchasing power of the poor in developing countries and raising their productive capacity. This will provide an exponential source of demand, production and trade growth, for the benefit of all.
Finally, in this hour of multiple economic crises, let me recall what Mahatma Gandhi had said in 1924, "Indeed one´s faith in one´s plans and one´s methods is truly tested when the horizon before one is the bleakest." On this historic day for the US and the world, it is a good reflection on how this could well be a defining moment or a switching moment for reexamining past methods and evolving new positive sum trade and development paradigms.