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Post-September 11 scenario

By M. SHAUKAT ALI
SHABBIR AHMED
Jan-21 - 27, 2002

The paper was written during the 3rd and 4th week of November 2001 during which a number of impacting events were occurring: WTO Doha Conference, concluded on 14 November with agreement to launch a new round of negotiation — dubbed the Doha Development Agenda; Ottawa meetings (16-17 November) of the IMFC (International Monetary and Financial Committee of the IMF), the Development Committee of the IMF and World Bank, and the G-20 Finance Ministers & Central Bank Governors, discussing inter alia how to cope with the current crisis; Argentina, with its $132 billion public debt, facing acute difficulty in remaining afloat in its debt payments; and war on Afghanistan still continuing.

The developing world at present is facing a crisis which is rather unprecedented as it clubs the number of already outstanding issues of the developing countries pertaining to globalization, trade, and finance with the contagion effect emanating from economic recession and uncertainty among the industrialized countries triggered by the September 11 incident. How the developing countries can be kept aboard with global development? is the subject matter of the paper.

The paper has two parts. The first part takes stock of the recent as well as outstanding issues in the area of trade, finance and globalization. The second part is suggestive and describes what can be done to keep the developing countries aboard.

There have been four striking effects of September 11 incident followed by war on Afghanistan:

1. The incident has worsened the already weak global economy by unleashing economic and financial uncertainties and provoking loss of investor and consumer confidence. All the major economies — the US, Europe, and Japan — are witnessing recession and deceleration in economic growth of the largest extent in the decade. All the growth forecasts made prior to September 11 have been revised downward. According to IMF, the world economic growth will be just 2.4% for both this year and the year 2002, with details given in table 1.

Table 1. World Growth Forecast (%)

 

2000

2001

2002

 

Actual

Forecast

Forecast

A. Before September 11 4.7 2.6 3.5
B. After September 11
(as on 15-11-2001)
4.7 2.4 2.4
US 1.1 0.7
EU 1.7 1.4
Japan 0.9 1.3
Emerging Asian Economies@ 1.2 2.3
Latin America 1.1 1.7
Middle East 1.7 4.0
Africa 3.5 3.6

@ For Asia as a whole, the forecast is 5.6% for both the years.Source: IMF, Briefing by Managing Director, Washington, 15 Nov. 2001.

For international trade, the assessment is that world trade in 2001 will grow by only 1% compared to over 13% in 2000, and exports from developing countries by 2% as against 19% in 2000. How it is going to fare in the coming years? depends on how quickly the war against terror is led to its conclusion. If the war prolongs and uncertainties enhanced, the probability of a full-fledged depression can not be ruled out.

2. Emerging economies have been hit even more than the industrial countries through two channels:

a. Recession in industrialized world, exerting a contagion effect due to profound inter-dependence in the wake of global economic integration.

b. Enhanced risk aversion, putting pressure both on equity and bond markets of the emerging economies more than that of the industrial countries, strangulating thereby the capital flows to these economies.

Unfortunately, the problem has been compounded by the recent developments in Turkey and Argentina. Several Eurobond issues in the pipeline are being postponed hitting badly the emerging capital markets. Latin American countries could be in serious trouble if Argentina collapses or remains in a near-collapsing situation for a longer period. It is worthwhile to mention that European banks have an exposure of over $40 billion to Argentina and American Banks of around $10 billion.

3. Significant deterioration has taken place in specific economic sectors, namely, tourism, air travel, and labor migration. The number of tourists all around the world has declined substantially. A number of air companies have declared cuts in their flight activities. Sabre Corp., the US largest computerized travel reservation system, estimates that 4h-quarter business could be down as much as 30% globally. An element of suspicion created by the incident, especially against Muslim, followed: by industrial countries' plans for making immigration rules/procedures stringent, is likely to curtail the existing flow of manpower across countries reducing thereby the well documented efficiency gains of labor migration.

4. Anti-Terror war has hit Afghanistan converting almost half of the country into debris and leaving millions in starvation while adding sufferings to its neighbor Pakistan, through intensifying the refugees' problem on the one hand and imposing economic cost of around $2-2.5 billion during the year, on the other hand. The World Bank estimated that because of the September 11th incident, 10 million more people could fall below the extreme poverty line which might cause up to 40,000 additional child deaths.

In addition to these September 11-related issues, there have been a number of outstanding issues between the developed and the developing countries on increasing the participation of the latter in global development. Three such main issues are discussed below.

Financing of development

Although there exist a number of multilateral institutions as well as arrangements, some even under the UN auspices, mandated to take care of the development financing needs of the developing countries, a whole set of issues persists in this regard relating to the adequacy of funds disbursement, neutrality in decision making, and terms and conditions of lending.

First of all, the Official Development Assistance (ODA) is totally inadequate despite consensus that ODA is of vital importance for many low and even lower middle income countries especially in the present circumstances when emphasis has increased tremendously on sustainable development and provision of national and global public goods like social security, health, education, cultural development, environmental protection, and civil conflict prevention. Dependence on private capital and free market forces alone would lead to damaging or at best ineffective results. To some extent, the volume of ODA reflects a degree of seriousness of the developed world towards greater global justice and a political commitment to take developing countries aboard in the global development.

It will not be wrong to say that presently the ODA is in serious crisis. The ODA contributions by all CECD countries fell from a level of around $60 billion in 1994 to $50 billion in 1998. In terms of ODA/GNP ratio, against the UN-recommended requirement target of 0.7%, the ratio came down to 0.24% in 1998 as against 0.30% in 1998 and 0.33% as long term average. Out of the 21 countries of the OECD's Development Assistance Committee (DAC), only four (Denmark, Norway, Netherlands, and Sweden) maintained the ratio above the recommended level, with all others falling below and the US being at minimum (0.10%). It has been assessed that the fall in ODA/GNP ratio in 1998 from its 1992 level has resulted in a net loss of $89 billion for developing countries. Today, this figure might be well over $100 billion.

Secondly, the experience has shown that financing development through debt raised on market or near-market interest rates has not yielded satisfactory results, as the debt servicing liability becomes unmanageable at later stage. This is particularly: true for the loans obtained for those activities and programmes which deliver neither sufficient yield nor enough foreign exchange.

Thirdly, no doubt, the multilateral financial institutions do have their soft loan windows, like IDA of the World Bank or IMF's SAF/ESAF/PRGF, such loans are usually linked to a set of conditionalities which, though initially agreed by the borrowing countries under the compulsions of seeking access to funds, turn out to be difficult to meet, leading in many cases to the suspension of the loan and thereby further worsening the credit-worthiness of the country concerned.

Fourthly, in some cases, the decisions of the Boards of the Fund and the Bank regarding loan approval are influenced by non-economic factors, such as, form of government, human rights, and nuclear detonation. In fact, many countries are becoming skeptical about the transparency and merit in the decision making of the Bretton Woods institutions.

Private capital flows and FDI

For reasons of its non-debt nature and associated transfer of technology, private capital flows are considered a better source of accelerating economic growth in developing countries. Presently, three major problems are being faced in this area.

First, having touched the peak in 1996, the flows have tended to decline after the East Asian Crisis of 1997.

Second, the flows have been concentrated in a few favoured countries — East Asia, Europe, and South America. The poor countries fail to share such flows because, according to the private investors, they lack adequate infrastructure, conducive investment climate, strong macroeconomic fundamentals, and a good credit rating.

Trends of private flows along with their regional distribution are shown in table

Table 2. Private Flows (net) by Region ($ Billion)

  95 96 97 98 99 2000

2001 2002
Forecast

Total

228.9

327.7

262.8

143.3

141.2

166.7

106.1

127.3

Latin America

45.5

104.4

105.9

98.7

65.3

61.2

44.6

42.7

Europe

40.8

47.8

69.4

37.5

34.7

40 2

13.9

35.2

Africa/Middle East

7.6

5.6

16.2

6.7

10.5

4.9

9.5

8.0

Asia/Pacific

135.0

169.9

71.3

0.3

30.8

60.5

3.8.1

41.3

(Five Asian Economies)*

80.4

102.3

0.2

-37.1

-5.8

7.6

-11.8

-3.1

*South Korea, Indonesia, Malaysia, Thailand, and Philippines.Source: Capital Flows to Emerging Market Economies, Institute of International Finance, Inc. September 20, 2001.

Third, those pre-occupied with sustainable development are worried about the likelihood that private investment may be used for unsustainable forms of development. Of course, if every penny that flows under FDI is to be evaluated on strict profit-maximization principles, such a likelihood cannot be ruled out altogether.

Market access and globalization

The objective of seeking equilibrium between the developed and developing world while keeping the globalization wheel in motion, is now believed, with almost consensus, to be served better by enhancing market access for the developing countries' exports to industrial countries' markets. The Uruguay Round in 1995 was hailed a great deal on the basis of market access envisaged in the agreements pertaining to:

• Agreement on Textiles and Clothing (ATC), aimed at abolishing the Multi-Fiber Agreement (MFA, in operation since 1971) through gradually phasing out the quota restrictions on textile and clothing exports,
•Trade in agricultural commodities and eliminating agricultural export subsidies;
• Dispute settlement body/understanding (DSB/U); and
• Strengthening rules of safeguard against dumping and subsidies.

The latter two were expected to strengthen the weaker trade partners against discrimination, make global trade more transparent, and combat behaviour that contravenes the rule-based trading system discouraging thereby the unilateral actions of protection by strong industrial countries.

But the actual implementation of these agreements has been awfully frustrating. For example, at the beginning of 1998, when, according to the ATC, 33% of the 1990 import volumes of textiles and clothing should have been integrated into the GATT discipline, only about 7% of items restricted under the MFA had been integrated. Agricultural subsidies in the developed countries, as mentioned below, are still phenomenal. The misuse of anti-dumping rules is reflected in the number of anti-dumping measures which are usually in force. As on 30 June 1997, for example, these measures were as large as 957, of which 305 were initiated by the US, followed by 157 by EU, and 100 by Mexico. What all this implies is that there exists a wide range agenda for multilateral discussion and seeking solution pertaining to implementation of the Uruguay Round agreements.

One may recall that the US is still at odds with Brazil, India, and most of the developing countries over Trade-Related Aspects of Intellectual Property Rights (TRIPs.).

The Europeans are still at odds with the US and the developing world as a whole with the US and EU both, on agriculture subsidy. It is estimated that currently the element of subsidy and other support to agriculture in the high-income countries is as large as $1 billion a day, representing a formidable level of protection against developing countries.

The developing countries have also been worried about the likely (mis)use of the Technical Barriers to Trade (TBT) provisions as an anti-market-access device as the standards being set by the international standards setting organizations are largely those relevant to the industrial countries and there is very little participation of the developing countries in these organizations.

Finally, the developing countries are neither mentally ready to sign any deal that would commit them to western level's environmental or labour standards, nor interested to get involved into a fancy discussion on subjects. Like 'trade and investment' and 'trade and competition', which the industrial countries plan to initiate in the new round of negotiations. These countries are still pre-occupied with Trade Related Investment Measures (TRIMs) under which the indigenization restrictions especially on foreign investment were to be phased out by January 1, 2000, and which was agreed to be reviewed by the close of 1999 or in the beginning of 2000.

The developing countries have been expressing their concerns over the implementation issues as well as the trade barriers maintained by developed countries, despite commitment to market access under WTO. The concerns are now well documented and accepted by most of the international fora. Even the Draft Outcome prepared by the Facilitator for the coming "International Conference on Financing for Development"' at Mexico in March 2002 takes due cognizance of these concerns. It, inter alia, mentions that, "trade barriers and subsidies in developed countries currently impose costs on developing countries that significantly exceed aid flows. Those barriers and subsidies must be eliminated" (p.8). Having said that, it also seeks to establish an open, equitable, rule-based, predictable, and non-discriminatory multilateral trading system.

Against this backdrop, it seems rather intriguing that industrial nations in the WTO, in Doha meeting on 9-14 November 2001, insisted, and even maneuvered to mobilize agreement, on launching a new round of negotiations for furthering globalization, while, as mentioned above, a wide-range agenda already exists to review and seek solutions for the implementation problems of the Uruguay Round agreements.

Action plan

In this section, attempt has been made to propose problem-wise solutions and necessary actions that need to be taken to make the solutions possible.

i) Recent downturn:

The concurrent problem of recession and stagnation requires a tri-frontal attack.

Firstly, its major responsibility lies on the major industrial countries who, incidentally, have already started taking necessary measures especially cut in interest rate. But, since uncertainty element is high, Keynesian traditional prescription of strong fiscal stimulus is also expected to mitigate the severity of the recession.

Secondly, measures are required to enhancing flow of funds into the emerging economies. In a state of uncertainty when private sector flows remain shy, this could be done only through intervention of multilateral institutions especially the IMF, which has the responsibility of maintaining a stable international financial system. In this regard, one can suggest:

•Increasing the use of Contingent Credit Lines specially meant for contagion;
• Extending Emergency Assistance to selected countries hardly hit by the incident; and
• Temporarily easing quota limits under the Supplemental Reserve Facility.

The World Bank can also accelerate its disbursements under quick-disbursing programme assistance to the emerging economies.

Thirdly, the international community must find a quicker and amicable solution to the Afghan dispute. In case, involvement of the US and Europeans in the dispute prolongs, it will keep the global economic horizon under clouds of uncertainty.

ii) Specific sectors

Non-economic and non-monetary solutions are needed for averting the deterioration that is taking place in specific sectors of tourism, airlines business, and labour migration. Basic factors behind this deterioration are the fear unleashed by the September 11 attacks and the misunderstanding between East ant West being sharpened by western media through distorted presentation of the beliefs and values, cultural as well as religious, of the East especially of the Muslim World. This trend needs to be stopped. On the contrary, the international media must give time to the representatives of different religious, ethnic and racial groups to present to the world their values and culture in proper perspective.

Secondly, the real factors behind such attacks need to be tackled on priority. Dissatisfaction prevails among a large percentage of developing countries on the handling of international disputes by the super powers and the IMF which exists for this purpose. In fact, many have lost faith in the neutrality and just-decision taking capability of the UN. Its history is fret with asymmetrical dispensation of cases; in some cases, decision to put resolution into effect was taken in two days while in others, action is pending since 50 years. With such an asymmetry in actions and decisions, the desire of mutual respect for each other and trust among countries will always remain a dream. To take the developing countries aboard in the UN system, it is necessary that UN enjoys autonomy in decisions making and adheres to a transparent and time-bound framework for implementing the resolutions. Also, keeping in mind the misuse of the veto power in the Security Council in the past, one may consider to dismantle it and, as an alternate, to increase the membership of the Council and to take decision by a majority rule.

iii) ODA

There is an urgent need to revitalize the ODA.

Firstly, the high income countries be made to reaffirm their commitment to fulfilling the UN target of 0.7% of their GNP for ODA. Arrangements for implementing the UN recommendation on ODA need to be put in place.

Secondly, burdensome restrictions on ODA such as tied aid be avoided. It better be linked to development strategies and programmes that are developed and owned by recipient countries.

Thirdly, Concessionality in ODA needs to be enhanced. In fact, if one talks about sustainable development and the idea of using such funds for provision of national and global public goods, one may advocate that "official resources should be increasingly made available in form of non-repayable grants" as proposed by Martens. It will be a nice substitute for debt canceling. Otherwise, pouring aid into a country at one end and extracting debt repayments at the other, is a futile exercise.

iv) Multilateral financing

Since both World Bank and IMF have available with them multiple facilities with significant amount of flexibility under which they can extend loans, there is a need to customize their responses to different situation and to selected countries. They also need consistency in approach and complementarity in resources. The current situation calls for acceleration in disbursements in cases in which programmes are in place and policy reform is underway. Funds under concessional facilities especially PRGF also need to be enhanced. The recent reservation of the IMF to finance $ 2 billion PRGF for Pakistan on the plea that enough funds are not available under this facility is against the imperatives of the time, especially when the negotiations on the programme are on since last one year. If availability of funds poses a problem, option of a new SDRs allocation may be considered. Moreover, it be ensured that decisions of the IMF and the Bank are taken purely on economic basis so as to keep political influence completely away from decision making.

v) Foreign direct investment

It would be in the interest of the world as a whole if multilateral institutions in collaboration with private sector support developing countries' efforts to improve investment climate for private investment and to attract FDI flows. There is a need to have a mechanism put in place which clubs FDI flows with the usually articulated concepts of partnership, mutual cooperation and support, and equilibrium between developing and developed world.

vi) Market access

Though the rich countries have so loaded the agenda with new issues, it is essential that the new round of negotiation first allocates ample time for discussing review (Built-in-Agenda) items and Implementation issues of the existing WTO agreements in order to ensure market access to the developing countries which was agreed in the Uruguay Round. This will require improvement in the rules as well as implementation of the rules relating to Anti- Dumping, DSU, ATC, TRIMS and TBT. WTO should set not only maximum standards for global trade, but also some minimum standards for implementation in true letter and spirit of what is agreed. Perhaps, it is premature on the part of the World Bank to have calculated gains of abolishing the remaining trade barriers (increase in global GDP by $2.8 trillion over the next 15 years), before making an evaluation of the gains which were envisaged at the time of conclusion of Uruguay Round in 1995, their distribution across various regions, and the share accrued to low income countries. The evaluation of the gains of Uruguay Round is essential specially for highlighting the weak areas of earlier trade agreements and indicating vulnerable groups of countries needing special treatment.

Conclusion

It is well known that actions are much easy to propose than implemented. Much depends on the stronger partners of the global economic and financial system. But one thing is very clear. If industrial countries keep on pursuing their own interest at the expense of the developing countries, sooner or later this is going to create a backlash on the growth of their own economies owing to the profound inter-dependence that already exists among countries. A stable and sustained global development is possible only when the weaker partners are equally integrated into the global development process.

*Economic Adviser, Saudi Arabian Monetary Agency, Riyadh, Saudi Arabia.

**PhD student at Quaid-i-Azam University, Islamabad, Pakistan.