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A call for softer money

The Trade and Development Report of the UNCTAD for 2008 has examined the inter-linkages between commodity prices, capital flows, and investment levels in the developing countries. Its assessment of economic growth during the year is substantially in line with that of the IMF and other global organisations. The world economy is expected to slow down to about 3 per cent from 4 per cent. Over the short-term, developing countries are likely to grow at 6 per cent, much faster than the developed countries, whose estimated growth rate is 1.5 per cent. However, over the medium-term these countries will be constrained by the uncertainty and instability in international financial, currency, and commodity markets. The sub-prime crisis has spread far beyond the United States. The deleterious consequences of tighter money have already been well documented. There is a squeeze in liquidity and credit. Rampant speculation in many commodities has aggravated the sharp price swings. The report calls for better financial sector governance and coordinated macroeconomic policies as an antidote to the current turmoil.

What is distinctive about the UNCTAD report is its analysis of the current global inflation. While the conventional monetary response to supply side shocks has been to raise interest rates, it warns of a situation where tight monetary policies could exacerbate the global slowdown. A one-off sharp increase in the consumer price index on the back of high commodity prices is not the same as broad-based inflation. While analysing the linkages between international capital movements and developing countries, the report throws some new light. Contrary to mainstream economic thinking, capital has been flowing from the capital-scarce developing world to the developed countries. Higher productivity growth, more favourable real exchange rates, and higher commodity prices are some of the factors responsible for turning some developing countries into net exporters of capital. At the same time, a number of commodity-dependent developing countries continue to rely on capital inflows to finance essential capital goods imports. The report calls for a higher level of overseas development assistance for these countries. Such funds should be better utilised than has been the case so far. Social and human development objectives should receive equal priority with growth.

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