CAIRO: In what could be described as a revolutionary economic study, the United Nations Conference on Trade and Development (UNCTAD) issued their 2006 report, rebuffing conventional theories governing economic growth and suggesting a potential change in domestic and international approach to economy.
The widely accepted policies of the Washington Consensus that dictates that competitive exchange rates and interest rates are indicators of a prosperous economy have been proven wrong. China, for example, has achieved an annual 10 percent growth rate throughout the past 10 years in spite of the devalued currency exchange rate and minimal interest rates.
“The report argues that there is no single quantifiable balance between multilateral disciplines and national policy autonomy that would suit all countries or apply across all spheres of economic activity, reads a UNCTAD statement. “The degree of national policy autonomy needed to promote national economic development differs across countries.
The report was released in Egypt yesterday, following its international release in London earlier this week. The Consensus failed in many ways, says Heiner Flassbeck, officer-in-charge of the Division on Globalization and Development Strategies in UNCTAD.
Flassbeck notes the Chinese experience, in which the government’s policies were categorized as “wrong in conventional terms but turned out to have outstanding results.
“Deregulation of domestic financial markets, the elimination of credit controls, deregulation of interest rates and the privatization of banks were key elements in the reform agenda of the 1980s and 1990s, explains a UNCTAD statement. “Paradoxically, the UNCTAD report says, while the conventional agenda made every attempt to ‘get the prices on financial markets right,’ there was no concept of how the most important prices, the exchange rates and the closely related interest rates should be managed. The two options for national exchange-rate policy that eventually emerged were either to let the currency float freely or to adopt a completely fixed exchange rate, an option that has come to be known n as ‘corner solutions.’ The Consensus was also proven wrong in the concept of global economic recovery. Flassbeck explains that the Consensus doesn’t consider global recovery as an important element for economic growth, but the most recent recovery led by the United States, India and China has created a similar wave in developing countries.
The Group of 77, in which Egypt plays a prominent role, identified the importance of talking about the phase after the Washington Consensus, says Flassbeck. “There must be something fundamentally wrong with this forecast, is the comment Flassbeck recalls.
Ambassador Hagar Islambouly, assistant foreign minister for international economic affairs, says that Egypt is now involved in negotiations over the implementation of these new economic theories “to protect our interest. She notes the importance of having a universal governing system in this regard, especially since all countries are affected.
While real life experience could provide models on the policies contradicting the Consensus’, further studies and monitoring devices would also help. Flassbeck explains that while exchange rates have proven not to be real indicators of the performance of the economy, there must be an entity to determine whether a currency is devalued or overvalued.
This requires a multilateral approach, he adds. Noting the concept of privatization, Flassbeck explains it is not a magic solution. While it has worked for others, it was disastrous to Argentina in the 1990s due to a lack of parallel regulatory policies.
He also explains the other elements involved in evaluating economies, from investing in education and building a manufacturing base to recognizing the difference between short-term foreign direct investment and long-term ones. All, he says, are factors that affect the performance of the economy, not just currency rates.
“In the absence of effective multilateral arrangements for exchange rate management, macroeconomic policy in many developing countries has aimed increasingly at avoiding currency overvaluation, reads the UNCTAD statement. “This has not only been a means of maintaining or improving international competitiveness; it has also been a necessary condition for keeping domestic interest rates low and has provided insurance against the risk of future financial crisis.
“Moreover, independence from international capital markets allows central banks to use their instruments to actively pursue development targets. Encouraging examples have shown that it is possible to avoid an acceleration of inflation by non-monetary measures, such as income policy, institution building in support of forming a national consensus on reasonable wage claims, or direct government intervention into the process that determines prices and, even more importantly, nominal wages.
A financial multilateral survey system would also help in setting standards for growth without effecting neighboring countries. For example, Egypt’s devaluation of its currency has helped in increasing its exports and attracting tourists, affecting its African neighbor, Mauritius. Such a system would also help economies to be detached from international speculations, which caused the Asian crisis in the 1990s, he adds.
While establishing this survey system could be the solution, as opposed to similar entities governing world trade, Flassbeck says developed countries like the United States and some European governments are unwilling to consider the possibility. The issue, however, will be discussed in a conference in Singapore this month.