China hailed as economic model for developing countries

GENEVA – The UN’s trade and development agency yesterday called on poor nations to be more interventionist and to strengthen their national economies in a similar manner to China.

The annual report from the UN Conference on Trade and Development (UNCTAD) said standard reforms and deregulation promoted by the Washington-based World Bank and International Monetary Fund (IMF) had failed to create enough growth or cut poverty. The advocacy of government intervention counters dominant economic thinking in many Western countries, which holds that open economies and free trade offer the best solution for the poor.”The market-based reforms pursued in the majority of developing countries since the early 1980s have not lived up to the promises of their proponents,” the ‘Trade and Development Report 2006’ said.Now steered by former World Trade Organisation chief Supachai Panitchpakdi, UNCTAD advocated more leeway for national government intervention on foreign exchange markets, interest rates, trade, capital flows and income support, on top of efforts to achieve price stability.The agency’s senior globalisation official, Heiner Flassbeck, highlighted China’s sustained sharp growth in recent years, combined with low interest rates and low inflation.”If you look at the traditional thinking in development and macroeconomic theory, and looked at China over the last 20 years, you would find that 95 per cent of good economists would come to the conclusion that China is impossible,” Flassbeck explained.”But it is possible and was possible …because they used more instruments, and the assignment of policies was quite different from the traditional one that was circumscribed by what we called sound monetary conditions,” he told journalists.The report said China’s growing domestic demand was playing a “vital” role for growth in the developing world and warned that the process “must not be derailed”.”Therefore renminbi (yuan) revaluation should continue gradually rather than abruptly,” it added.China severed a decade-old link between its currency and the US dollar last year but maintained a controlled foreign exchange regime.The United States has repeatedly complained that the yuan is kept artificially too low, which makes Chinese exports more attractive on international markets.During a visit to China this week, US Trade Representative Susan Schwab warned against “economic nationalism” in the country’s liberalisation process.UNCTAD said that for the past 25 years, reforms imposed by international development and lending institutions limited the range of policies poor nation governments could use to stimulate growth.Financial deregulation in Latin America led to extended banking crises, but East Asian economies achieved sustained growth through national credit regulation and capital controls, the report said.UNCTAD emphasised that interventionist and free market models both had a role to play.Governments must be able to support innovation, strengthen industrial policy and ease domestic businesses into international markets, it argued.Supachai, who headed the WTO until mid-2005, emphasised that there was space for some national support without stepping back from the gains in free trade negotiations.India has taken a similar stance.However, UNCTAD’s chief added: “In the same breath, we are recommending support but we are also saying that the support will not last forever.It’s not an absolute opt out, it’s a strategic approach.”Foreign exchange markets lacked multilateral rules similar to those that frame free trade, Supachai said.That encouraged “extreme positions” he argued, either fixed exchange rates or free-floating rates – both of which were “proven to have had some negative repercussions” – instead of flexible policies in between.”For some countries there needs to be some intervention on exchange rates, so that exchange rates can be part of the instruments used to create more competitiveness for domestic producers on the export market,” he said.Nampa-AFPThe advocacy of government intervention counters dominant economic thinking in many Western countries, which holds that open economies and free trade offer the best solution for the poor.”The market-based reforms pursued in the majority of developing countries since the early 1980s have not lived up to the promises of their proponents,” the ‘Trade and Development Report 2006’ said.Now steered by former World Trade Organisation chief Supachai Panitchpakdi, UNCTAD advocated more leeway for national government intervention on foreign exchange markets, interest rates, trade, capital flows and income support, on top of efforts to achieve price stability.The agency’s senior globalisation official, Heiner Flassbeck, highlighted China’s sustained sharp growth in recent years, combined with low interest rates and low inflation.”If you look at the traditional thinking in development and macroeconomic theory, and looked at China over the last 20 years, you would find that 95 per cent of good economists would come to the conclusion that China is impossible,” Flassbeck explained.”But it is possible and was possible …because they used more instruments, and the assignment of policies was quite different from the traditional one that was circumscribed by what we called sound monetary conditions,” he told journalists.The report said China’s growing domestic demand was playing a “vital” role for growth in the developing world and warned that the process “must not be derailed”.”Therefore renminbi (yuan) revaluation should continue gradually rather than abruptly,” it added.China severed a decade-old link between its currency and the US dollar last year but maintained a controlled foreign exchange regime.The United States has repeatedly complained that the yuan is kept artificially too low, which makes Chinese exports more attractive on international markets.During a visit to China this week, US Trade Representative Susan Schwab warned against “economic nationalism” in the country’s liberalisation process.UNCTAD said that for the past 25 years, reforms imposed by international development and lending institutions limited the range of policies poor nation governments could use to stimulate growth.Financial deregulation in Latin America led to extended banking crises, but East Asian economies achieved sustained growth through national credit regulation and capital controls, the report said.UNCTAD emphasised that interventionist and free market models both had a role to play.Governments must be able to support innovation, strengthen industrial policy and ease domestic businesses into international markets, it argued.Supachai, who headed the WTO until mid-2005, emphasised that there was space for some national support without stepping back from the gains in free trade negotiations.India has taken a similar stance.However, UNCTAD’s chief added: “In the same breath, we are recommending support but we are also saying that the support will not last forever.It’s not an absolute opt out, it’s a strategic approach.”Foreign exchange markets lacked multilateral rules similar to those that frame free trade, Supachai said.That encouraged “extreme positions” he argued, either fixed exchange rates or free-floating rates – both of which were “proven to have had some negative repercussions” – instead of flexible policies in between.”For some countries there needs to be some intervention on exchange rates, so that exchange rates can be part of the instruments used to create more competitiveness for domestic producers on the export market,” he said.Nampa-AFP