1

Presentation by Heiner Flassbeck Presentation by Heiner Flassbeck

Director, Division on Globalization and Director, Division on Globalization and Development Strategies Development Strategies

UNCTAD Training Course onKey Issues on the International

Economic AgendaTopic 1: Managing Global Integration and

InterdependenceGeneva, 26 February 2007

Macroeconomic Policies Under Globalization

2

Global economic expansion continuesGlobal economic expansion continuesin all the main regionsin all the main regions

Growth of world output, 2002 to 2006 (forecast)Growth of world output, 2002 to 2006 (forecast)

0

1

2

3

4

5

6

7

8

9

World Developedcountries

Developingcountries

South-EastEurope and

CIS

2002

2003

2004

2005

2006 (f)

3

Growth in developing countries is accelerating Growth in developing countries is accelerating since the turn of the centurysince the turn of the century

-2

0

2

4

6

8

10

1991 1993 1995 1997 1999 2001 2003 2005

East and South Asia M.A.East and South Asia

-2

0

2

4

6

8

10

1991 1993 1995 1997 1999 2001 2003 2005

Africa M.A.Africa

-2

0

2

4

6

8

10

1991 1993 1995 1997 1999 2001 2003 2005

Latin America and the Caribbean M.A.Latin America and the Caribbean

-2

0

2

4

6

8

10

1991 1993 1995 1997 1999 2001 2003 2005

West Asia M.A.West Asia

4

Most commodity prices kept growing in 2005 and Most commodity prices kept growing in 2005 and 2006, owing to sustained demand of Asian countries 2006, owing to sustained demand of Asian countries and the US, supply constraints and speculation. and the US, supply constraints and speculation.

Monthly commodity price indices by commodity group, 1995-2006 Monthly commodity price indices by commodity group, 1995-2006

(Index numbers, 2000 = 100)(Index numbers, 2000 = 100)

5

Current account balance of developing Current account balance of developing countries in per cent of GDP (1980-2005)countries in per cent of GDP (1980-2005)

-3

-2

-1

0

1

2

3

4

5

1980 1985 1990 1995 2000 2005

6

Argentina: the shock of a devaluation and the Argentina: the shock of a devaluation and the positive response of the economypositive response of the economy

0

100

200

300

400

IV'01

I2002

II III IV I2003

II III IV I2004

II III IV I2005

II III IV I2006

II

Ind

ice

s: 4

th q

ua

rte

r 2

00

1=

10

0

Employment in manufactures Nominal wages private sectorExchange rate: pesos per US$ Manufacture producer pricesCPI

7

Nominal interest rates and inflation, G-7 and Nominal interest rates and inflation, G-7 and developing countriesdeveloping countries

0

5

10

15

20

25

1990 1995 2000 2005

Pe

r ce

nt

Nominal interest rate: G-7 Inflation: G-7

Nominal interest rate: developing countries Inflation: developing countries

8

Nominal interest rates and inflation are at very Nominal interest rates and inflation are at very low levels in developing countrieslow levels in developing countries

Sub-Saharan Africa

0

10

20

30

40

50

1990 1995 2000 2005

Per

cen

t

Nominal interest rate Inflation

Asia

0

10

20

30

40

50

1990 1995 2000 2005

Per

cen

t

Nominal interest rate Inflation

Latin America

0

10

20

30

40

50

1990 1995 2000 2005

Per

cen

t

Nominal interest rate Inflation

9

Nominal interest rate, exchange rate and Nominal interest rate, exchange rate and inflation in China, 1980-2005inflation in China, 1980-2005

-5

0

5

10

15

20

25

1980 1985 1990 1995 2000 2005

Pe

r ce

nt

0

1

2

3

4

5

6

7

8

9

10

NC

US

D e

xch

an

ge

ra

te

Nominal interest rate Inflation Exchange rate (right scale)

10

A more flexible and pro-active A more flexible and pro-active macroeconomic policy should:macroeconomic policy should:

• Put the monetary policy at the service of investment Put the monetary policy at the service of investment and growth, not only price stability. This would require and growth, not only price stability. This would require the use of non-monetary instruments to control the use of non-monetary instruments to control inflation;inflation;

• Target a real exchange rate consistent with external Target a real exchange rate consistent with external competitiveness. This would require the pragmatic use competitiveness. This would require the pragmatic use of “intermediary” exchange rate regimes;of “intermediary” exchange rate regimes;

• Additional policy space may also be gained through Additional policy space may also be gained through temporary capital controls.temporary capital controls.

11

The need for proactive The need for proactive development policiesdevelopment policies

12

The need for a re-orientation of The need for a re-orientation of development policydevelopment policy

• Market-oriented reforms over the past 25 years did Market-oriented reforms over the past 25 years did not deliver the expected results;not deliver the expected results;

• More attention has to be given to enhancing More attention has to be given to enhancing productive capacity and technological change;productive capacity and technological change;

• This requires a reform of macroeconomic and This requires a reform of macroeconomic and industrial policies;industrial policies;

• At the same time, developing countries have lost At the same time, developing countries have lost policy autonomy.policy autonomy.

13

Good governance is not enough: per capita Good governance is not enough: per capita income growth, selected groups of economies, income growth, selected groups of economies, 1995–2005 and governance indicators1995–2005 and governance indicators

14

Open-economy industrial policies Open-economy industrial policies support innovative entrepreneurssupport innovative entrepreneurs

• Industrial policies should aim at:Industrial policies should aim at:

– solving information and coordination problems in the solving information and coordination problems in the investment process;investment process;

– ensuring that production experience is translated into ensuring that production experience is translated into productivity gains;productivity gains;

• Complementary trade policies aim to achieve Complementary trade policies aim to achieve international competitiveness in increasingly international competitiveness in increasingly more sophisticated products;more sophisticated products;

• This is not an inward-oriented protectionist This is not an inward-oriented protectionist approach but an element of strategic trade approach but an element of strategic trade integration.integration.

15

There is no “one-size-fits-all” industrial There is no “one-size-fits-all” industrial policy but there are some general policy but there are some general

principles principles

• Innovative private enterprises have lead role;Innovative private enterprises have lead role;• Policy support should stimulate innovative investment Policy support should stimulate innovative investment

and should not be a protectionist defence and should not be a protectionist defence mechanism;mechanism;

• Support should not be open-ended but based on Support should not be open-ended but based on operational goals, observable monitoring criteria and operational goals, observable monitoring criteria and specific time horizons;specific time horizons;

• Policy measures should result from dialogue between Policy measures should result from dialogue between the government, enterprises and research the government, enterprises and research institutions.institutions.

16

Need for more coherence in Need for more coherence in multilateral rules and disciplinesmultilateral rules and disciplines

The bottom line is:The bottom line is:• More multilateral disciplines needed in monetary and More multilateral disciplines needed in monetary and

financial relations, but more flexibility needed in the financial relations, but more flexibility needed in the multilateral trading system;multilateral trading system;

• Multilateral rules and disciplines must be strengthened in Multilateral rules and disciplines must be strengthened in the area of macroeconomic, capital account and exchange the area of macroeconomic, capital account and exchange rate policies to avoid ever growing imbalances; rate policies to avoid ever growing imbalances;

• Anne O. Krueger: …”the absence of a multilateral, non-Anne O. Krueger: …”the absence of a multilateral, non-discriminatory framework governing international capital discriminatory framework governing international capital flows (and exchange control mechanisms) is an important flows (and exchange control mechanisms) is an important and potentially costly gap in the multilateral economic and potentially costly gap in the multilateral economic system” (Singapore 2006)system” (Singapore 2006)