Press Release
For use of information media - Not an official record

Geneva, Switzerland, 31 August 2006

UNCTAD´s Trade and Development Report 2006 says hands-off approachhas not worked; national policies should support "creative forces of markets"aiming at higher investment and faster technological change

The contents of this press release and the related Report must not be quoted or
summarized in the print, broadcast or electronic
media before 31 August 2006, 17:00 GMT
(1 PM New York, 19:00 Geneva)

Downloads [PDF]: | Trade and Development Report 2006 [280 pages, 4,336 KB] | Overview | [26 pages, 412 KB]

The improved global economic environment for many developing countries -- including the current upswing in some nations resulting from high demand for oil and other raw materials, and the expanded manufacturing prowess of others, such as China -- needs to be turned into a dynamic process of economic growth and structural change that creates employment and raises living standards over the long term, a new UNCTAD report says.

To do this, the Trade and Development Report 2006 (1), (TDR) counsels, Governments of developing countries should be actively involved in fostering and strengthening domestic businesses -- in contrast to the 1980s and ´90s, when they were advised by the Bretton Woods Institutions to keep their hands off and let market forces do the work of "getting the prices right." These countries also should not be overly restricted by international trade rules or by conditions imposed by international lenders from doing what´s best for their economies, the report says. Such freedom of action has become a major issue in recent years and is often referred to as "policy space" (see UNCTAD/PRESS/PR/2006/019)

The report, also known as the TDR, urges Governments to take a pro-active stance in macroeconomic and industrial policies to accelerate private investment and technological upgrading and to stimulate the creative forces of markets: it is risk-taking, innovative entrepreneurial decisions that lead to new lines of production and the creation of new firms and jobs. Governments should also protect fledgling enterprises when necessary, including through the careful application of subsidies and tariffs, until domestic producers can meet international competition in the sale of increasingly sophisticated products.

The report, which addresses the theme of "Global partnership and national policies for development", does not call for inward-looking protectionist defence mechanisms. But it says Governments should find effective ways of solving information and coordination problems in the process of capital formation and productivity enhancement. Strategic integration into the world economy helps to maximize the benefits of these policies at the level of the national economy.

It notes that far-reaching reforms undertaken by most developing countries in the 1980s and ´90s, often at the behest of international financial organizations and lenders, did not deliver as promised. The reforms emphasized greater macroeconomic stability, greater reliance on market forces, and a rapid opening up to international competition. But in many cases private investment did not rise as predicted; many economies stagnated or even retracted; and many developing nations already struggling with high levels of poverty found that these steps towards liberalized economies increased rather than decreased inequality.

Current international economic conditions have brightened the picture considerably. But the report, along with other UNCTAD publications, notes that the recent upswing in many developing countries -- fuelled in part by demand from the United States and China -- will only lead to sustained growth when governments actively support the process of capital accumulation and structural change. It argues that structural change cannot be left to markets alone, and it criticizes the orthodox approach to "sound macroeconomic policies" under which price stability is considered to be the most important condition for sustained economic growth.

The TDR contends that monetary policy could play a more effective role in support of growth by focusing on the provision of low real interest rates, which would incite investment, and a competitive and stable exchange rate, which would promote domestic producers in world markets. To allow monetary policy to play that role, the report says, emerging-market economies should reduce their dependence on foreign capital inflows, as many of them have already done, and should identify additional non-monetary instruments for price stabilization, such as income policy or direct intervention into price and, especially, wage formation.

The Trade and Development Report underlines that any prescription for economic development must respect the specific situation of each country. There is no "one-size-fits-all." Nonetheless, it identifies some common factors that should be applied: policies supportive of innovative investment; adaptation of imported technology to local conditions; strengthening of industrial policy; and "strategic trade integration" -- that is, the careful, managed introduction of domestic businesses into international markets.

The report stresses that Government policy support of the private sector should be provided only on the basis of clearly established operational goals that can be monitored, and should be for specified periods. The "stick" of performance requirements must complement the "carrot" of support. It also recommends that attempts to attract foreign direct investment (FDI) should not aim at maximum quantity but at maximum quality, in the sense of generating domestic value added and technological progress. Policies towards FDI must be part of a broader development strategy.

Temporary, carefully designed subsidies can foster innovative investments, and temporary import protection can allow learning processes to unfold among domestic businesses, the report says. It adds that industrial tariffs remain an important instrument because they are a source of fiscal revenue that is difficult to replace in many of the world´s poorer nations, and because international agreements have reduced the degrees of freedom to use other policy instruments in support of diversification and technological upgrading.

The TDR recommends maintaining internationally approved tariffs at a relatively higher level and modulating applied tariffs on particular industrial sectors around a relatively lower average level. Such an approach is possible if industrial tariff reductions that might result from ongoing multilateral trade negotiations extend only to average tariffs and not to individual tariff lines, the report says.

This flexible approach to tariffs could be supported by setting aggregate limits to subsidies within which World Trade Organization (WTO) members are allowed to allocate subsidies flexibly to firms and economic sectors. Such a scheme could be similar to the provisions on Aggregate Measures of Support (AMS) for agriculture, under which WTO members have set targets for percentage reductions while leaving considerable flexibility to member Governments in the allocation of reductions across different agricultural products.