CHENNAI: The United Nations Conference on Trade and Development (UNCTAD) has counselled developing countries to get actively involved in `fostering and strengthening domestic business'.

In its Trade and Development Report 2006, UNCTAD has suggested this course in contrast to the Bretton Woods institutions' advice to governments of developing countries in the 1980s and 1990s to keep their hands off and let market forces do the work of getting the prices right.

What is more interesting, the UN agency has categorically stated: "These countries should not be overly restricted by international trade rules or by conditions imposed by international lenders from doing what is best for their economies." Such freedom of action has become a major issue in recent years.

The Trade and Development Report (TDR) 2006 emphasises that any prescription for economic development `must respect the specific situation of each country.' There is no `one-size-fits-all.' But the TDR has also identified some common factors that can be applied: policies supportive of innovative investment; adaptation of imported technology to local conditions; strengthening of industrial policy; and strategic trade integration — which is "careful, managed introduction of domestic business into international markets."

`Reforms failed'

It has noted that far-reaching reforms undertaken by most developing economies in the 1980s and 1990s, often at the behest of international financial institutions and lenders, `did not deliver as promised.' The reforms, the TDR noted, "emphasised 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 toward liberalised economies increased rather than decreased inequality."

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. The report makes it clear that 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.

"This flexible approach to tariffs could be supported by setting aggregate limits to subsidies within which World Trade Organisation 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 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," the report says.

While dealing with growing trade imbalances, the UNCTAD report has warned that without quick international action "to reduce global trade imbalances, financial crises in the wake of a tumbling dollar will threaten the benign growth performance of the world economy."

It calls for a multilateral effort to redress global imbalances, in part through an expansion in domestic demand in key industrialised countries other than the United States — countries such as Japan and Germany — which currently have huge surpluses, so that shocks do not reverberate through the developing world.

Coordinated approach

The TDR says "Crucially, what is needed for redressing global imbalances is a responsible multilateral effort rather than pressure on parts of the developing world. A well-coordinated international macroeconomic approach would considerably enhance the chances of poorer countries being able to preserve and continue recent improvements in their growth performances.

In the absence of such an approach, developing countries should defend their strategically propitious competitive positions and use the current favourable overall conditions to invest more and to reduce their foreign debts."

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