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2 September 2005, 17:00 GMT
The windfall profits being reaped by many developing countries as a result of surging economic growth in China and India should be used to diversify those countries´ economies and prepare them for more stable economic development in the future, recommends UNCTAD´s Trade and Development Report 2005 (1), released today. The Report notes that the East and South Asian region is well established as a new growth pole for the world economy, mainly due to the progress achieved by China and India. These countries´ rapid growth has been a key cause of the recent surge in primary commodity prices. However, growing imports by China and India will not be enough to reverse a long-term decline in real commodity prices, the Report argues, and developing countries should thus use the temporary windfall profits coming from these higher prices to step up diversification and industrialization. They should also cooperate in the formulation of generally agreed principles on the fiscal treatment of foreign investors so that more export income remains at home. The international community, in turn, should review and improve mechanisms for reducing price instability for a wide range of commodities, not just oil, and take further steps to reduce its adverse impacts on developing countries.
Despite their strong income growth, China and India still have a long way to go to reach the per capita income levels of the world´s leading economies, the Report notes. China´s per capita purchasing power in 2003 was around 10% that of the United States, and the figure for India was even lower. In addition, both countries are highly dependent on imports of fuels and industrial raw materials, and their imports of food are also likely to rise. In this regard, rapid economic growth in these two populous countries is helping other developing countries to raise per capita incomes and reduce poverty, thanks to higher export earnings.
Since 2002, strong demand from East and South Asia, especially from China and India, has been the main factor behind the hike in primary commodity prices. The prospects for exporters of primary commodities are thus brighter today than at any time in the past 20 years. However, it is unlikely that growing imports of such products by China and India will be enough to bring about a permanent reversal of a long-term decline in real commodity prices. The UNCTAD report points to the fact that these prices are still more than one third below their 1960-1985 averages. Future price developments will depend not only on further expansion in China and India, but also on how the global imbalances will be redressed. Should the correction of the US trade deficit trigger a recession, recent price developments on international commodity markets could well be reversed, especially in the presence of increasing supply capacities. UNCTAD economists therefore warn that sharp fluctuations in commodity prices are likely to continue if the international community is not willing to introduce appropriate mechanisms to stabilize them.
Further productivity gains and technological upgrading in manufacturing are needed in China, and a shift towards manufacturing is crucial in India, if the two countries are to sustain their impressive economic performances, the Trade and Development Report says. It will be critical for both countries to ensure that all sectors of their populations participate in income growth. Wage increases throughout the economy, in line with rising productivity, are necessary for the expansion of domestic consumption and thus for prolonged and stable economic growth.
At the same time, rapidly increasing exports by Asian economies - particularly China - pose new challenges for other countries. China´s weight in international markets may contribute to a decline in export prices of manufactures that are also produced and exported by other developing countries, such as clothing, footwear and certain types of information technology and communications products. In response, producers in these countries will need to improve production efficiency and diversify in order to enter new markets.
For the developed countries it would be counterproductive to respond to the new challenges by introducing new protectionist measures, the UNCTAD report cautions. Developing countries´ earnings from their exports to the developed world translate to a large extent into higher import demand for advanced industrial products and thus benefit, directly or indirectly, the developed countries as well.
Shifts in international trade are affecting developing countries in different ways, depending on their trade structure. Some have benefited greatly from higher prices for oil, and mineral and mining products. In Latin America and Africa, the positive effects of higher prices were reinforced by increases in the volume of exports. In other regions, gains from higher export values were offset by higher import prices. The terms of trade of countries with a dominant share of oil in their total exports soared by almost 30% between 2002 and 2004, according to the Report, while those of countries with a dominant share of mineral and mining exports rose about 15%.
The Report urges developing countries to use recent windfall gains from higher commodity earnings as an opportunity to step up investment in infrastructure and manufacturing capacity, both of which are essential for boosting development. Exporters of primary commodities are advised to diversify within the commodity sector and to expand their manufacturing and services sectors as well.
The distribution of export revenues from the oil and mining industries between the different domestic actors and foreign investors also needs careful consideration, with a view to establishing an effective export-investment nexus. Taxes on profits in these industries have typically been very low because of fiscal incentives to attract foreign direct investment (FDI). The Report warns developing countries to avoid "a race to the bottom" in an effort to attract FDI. It says developing countries should aim at reaping higher revenues from royalties, joint ventures and public ownership of firms operating in the oil and mining sectors. UNCTAD recommends cooperation between oil- and mineral-exporting countries in the formulation of some generally agreed principles on the fiscal treatment of foreign investors.
Wide fluctuations in primary commodity prices are not in the interest of either producers or consumers, the Report says. While the need for international measures to stabilize oil prices is increasingly recognized, the Report also draws attention to other primary commodities that are equally if not more important for those countries that depend on their exports. Among them are many of the poorest countries, where extreme poverty is a pressing problem. The issue is thus also of critical importance for the attainment of the Millennium Development Goals (MDGs). In the spirit of global partnership for development, the TDR 2005 calls on the international community to review mechanisms, at the global or regional level, for reducing the price instability of a wide range of commodities and to take steps to mitigate the impact of price fluctuations on exporting countries.