United Nations
General Assembly
Second Committee


                         STATEMENT TO THE
                        SECOND COMMITTEE

                         MR. NITIN DESAI

                                                 6 October 1998

Mr. Chairman, Distinguished Delegates, Friends,

     The Second Committee is meeting this year when the world economy is
clearly in a state of crisis. This has been the major focus of the work of our
intergovernmental processes as well as of the Secretariat's analytical work
over the past year.  The high level dialogue on 17 and 18 September, the
high-level meeting of ECOSOC, on 18 April, and the discussions on market
access during the high level segment of ECOSOC in July are some of the recent
related meetings.  On all of these occasions one sensed an effort by
Member States to understand why such an extraordinarily deep crisis has hit
the world economy at a time when everything seemed to be moving reasonably

     Some of what I would have wished to say has been included in a statement
which the heads of the economic secretariats in the United Nations, that is
DESA, UNCTAD and the regional commissions submitted jointly, in an
unprecedented gesture, to the Interim and Development Committees.

Mr. Chairman,

     The dimensions of the crisis are well known.  There is firstly a
financial crisis, which has taken the form of a drying up of the flow of
private capital to emerging market economies, high interest rates, very sharp
changes in exchange rates, a disruption of credit flows, growing sickness in
financial enterprises and in many cases, a massive decline in asset prices.

     There is also a growth crisis.  Because the growth process has more or
less collapsed in many of these countries in crisis, they will experience a
decline in GDP this year.  In Latin America, which is not directly in the
centre of this crisis right now, growth is expected to fall from 5 to 3 per
cent.  In the world as whole, last year we thought the prospects for growth in
1998 would be around 3.3 per cent.  This year our assessment is that it will
not be more than 1.9 per cent and it may well be lower.  The downside risk is
much greater than the upside risk thus far.

     If we compare what we were expecting last year and what is likely to
happen, we are talking of a loss of output running into perhaps $500 billion
plus.  This loss of output, this collapse of growth, this financial
stringency, is translating into a human crisis, a massive increase in poverty
in many of these countries.  We have seen figures which suggest that in a 
country like Indonesia the number of people in poverty will go up from
around 20 million to some 60 million.  We are seeing widespread unemployment,
reverse migration from urban to rural areas and also a movement across
national boundaries and an increase in ethnic and social tensions.

     Even more important is what this crisis is doing by way of loss of future
development prospects as a result of budgets coming under pressure and the
cutbacks in investment and the erosion of expenditures on social and human
development.  At the same time there is a loss of valuable technical and
managerial capacity, with even viable firms going to the wall when confronted
by extraordinary interest rates and very rapid changes in exchange rates

Mr. Chairman,

     I recognize that the situation could be worse.  In some ways, the growth
process of the world economy is being held in place by the continued growth in
North America and in Europe and by the fact that at least some of the crisis
countries seem to be coming out of this problem.  Nevertheless, as we survey
the situation today, the capacity of the world economy to tolerate further
stress is greatly reduced.  With just one or two more major crises the world
economy could slip into a recession.  This is the dilemma.  I do not think
that the world economy has faced risks of this magnitude at any time in the
past fifty years.  

     Many explanations have been given for this situation - explanations which
focus on deficiencies at the national level, weak surveillance, crony
capitalism, over investment, unsustainable asset price bubbles, incorrect
exchange rates policies and explanations which focus on systemic features, the
growth in the volume of financial flows, leveraged operations which increase
greatly the risks of large scale movements of funds at short notice, the lack
of regulatory control of such flows, incompatibilities in exchange rate

     The nature of the immediate remedies is also now more widely recognized. 
Almost everybody accepts that the risks that confronts us are more of
deflation than inflation and that the priority, particularly in industrial
countries, must be to maintain demand-led growth, and in Japan, to revive the
process of demand-led growth.  There is also an acceptance that there will be
a need to strengthen the institutions which exercise surveillance over free
markets at the national level and at the global level.  There is an
acceptance that we must strengthen the capacity of international institutions
like the IMF to be able to respond to the crisis.  Increasingly, there is
recognition that we need to respond before crises occur , not after.  And of
course, there is talk of a new architecture for the global financial system. 
I do not wish to go into these details.  There will be a time later in the
debates of this Committee to talk about these; more particularly, when we
take up macroeconomic issues on Friday.  What I wish to do today is focus on
what I believe are three deeper features which should guide our thinking on

     The first feature is that we are seeing during the nineties a disjunction
of the real economy and the financial economy.  The turnover of foreign
exchange markets is now about ten times global GDP.  Since 1973 when the whole
process of financial liberalization really started, these flows have increased
roughly 100 times.  When you are talking of foreign exchange flows of that
magnitude, (300/400 trillion dollars a year), not more than 2 to 3 per cent of
those flows have an immediate real transaction behind them.  And yet, it is
the totality of the flows which affects exchange rates which in turn effect
the real economy.

     Let me give another example.  We have built up policy approaches and even
institutions to tackle current account imbalances.  The IMF has a mandate to
finance current account imbalances of a short term nature.  At the domestic
level, we focus our attention on instruments like exchange rates which are
essentially current account instruments.  For a typical medium-sized country
of the sort which has been affected by this crisis, a current account
disturbance which may arise as a result of import prices shooting up, or of
some sudden collapse of some particular export item, may lead to losses in the
order of a billion dollars or so.  It will take place over maybe a year or
two, and there is no reason why in today's environment we cannot cope with
that.  We have predictable financing mechanisms that can be relied on for
these situations, like the old mechanism of compensatory financing for export

     What we are seeing today is a shift in the locus of instability from the
current to the capital account.  For that same country, which would normally
experience a current account imbalance of a billion dollars, the capital
account imbalance will be even more say $10 billion or more.  It will take
place over a much shorter period - not over a year or two, but a month or two.

And we have no predictable mechanisms to which to resort when confronted by
such a capital account imbalance.  Policies have to be designed essentially
for capital account stability.  It is the assets and liabilities of one
country vis-a-vis another which is shaping macro policy, not necessarily the
requirements of the real economy.  Therefore you end up with exchange rates
and interest rates regimes which may be entirely out of tune with what the
real economy requires.  I cannot imagine a real economy which requires
interest rates of 50 per cent.  I cannot imagine what real imbalance could
justify an exchange rate change of 50 per cent over weeks.  In short, we
have not yet developed policy instrumentalities or institutions which really
recognize the shift from the real to the financial part of the economy.

     The second feature concerns contagion, a word which we see again and
again in descriptions of this crisis.  This also has become more complex.  We
tend to focus attention on the contagion that arises in another country
because it has either lent or borrowed from the country in crisis.  Yet you
also have the contagion that arises from  the psychological impact of crisis. 
Today flows to all emerging markets are drying up regardless of whether those
markets are in crisis or not.  

     An even broader sense of contagion is when this crisis affects the real
economy, hurting growth and trade.  Through commodity prices and export
prospects, it affects countries which are outside this framework of global
finance.  This is happening in Africa.  Zambia, for instance, will experience
a huge drop in its export earnings relative to its GDP simply because of the
fall in copper prices.   Other cases are cited in the Trade and Development
Report.  So my second point is that when we look at policy measures let
us work with a broader conception of contagion, not simply a capital market
based conception which focuses on the countries which are linked together as
borrowers and lenders.

     The third feature that should guide our thinking about this crisis is
that we are confronted by the public consequences of private decisions.  The
liquidity and in some cases insolvency crisis which has been at the root of
our current problem almost always involves the private sector either as a
borrower or as a lender, or in many cases at both ends.  But the burden of
adjustment falls on the public sector because the consequences are for the
economy as a whole.

     Recognizing this, what I would argue is that the focus of policy, the
test of what we need to do, cannot be simply "Is this good for re-establishing
confidence in the financial markets?".  That's important.  But it cannot be
the only criterion for deciding whether the proposed institutional or policy
innovation is desirable.  There are at least three further things that we need
to look at in designing such policies.

     First, we must look through the veil of money and ask ourselves what is
the impact of this on the real economy, on investment, on growth, on equity,
on distribution, on social expenditures.

     Second, there is a tendency, because financial markets are so integrated,
to define good policy in terms of certain standardized norms like - a three
per cent deficit is good; a five per cent deficit is bad; this type of
liberalization is good, that type of liberalization is bad.  It is most
important to recognize that conditions differ from country to country. 
Political possibilities differ from country to country.  One size does not fit
all.  Thus, the second point I would wish to stress in designing policy is
differentiation.  Allow space for national governments to chose.  Do not put a
template which every body has to conform to.

     My third point is that the goal of public policy must be public interest,
not private profit.  The test of whether what we do is necessary and desirable
should be whether it serves the public interest. I am not sure that all of the
proposals which are on the table satisfy this criteria.

Mr. Chairman,

     The crisis we face is an outcome of the fact that our institutional
arrangements for economic governance have fallen way behind the realities of
the growth and interdependence that we call globalization.  Let me offer a
possible definition of this word which is shaping so much thinking and policy
debate.  I think of globalization as a widening and deepening of economic,
political and cultural transactions across national boundaries between
citizens , enterprises and governments in a large number of countries. 
Each of these words is important.  We see the widening in the change in what
has been described as center/periphery relationships to relationships which
are more multilateral.  Countries which were linked only to their former
imperial powers have diversified trade, finance and technology relationships. 
You see the deepening in terms of increases in the ratio of trade to GDP or
the growth in the flow of finance.  The reference to the fact that it
relates to economic, social and political and cultural transactions indicates
that globalization is not just the globalization of trade and finance  - other
processes of widening and deepening of relationships take place in the
political and cultural spheres, which also deserve to be included as part of
the framework of globalization.  I will not say much about these today because
this is the economic committee.  Let me here stress the third element that
globalization is not just the widening and deepening of relationships
between governments, but also of relationships among enterprises, most
manifest in the growth of the transnational enterprise, and a widening and
deepening of relationships between individual citizens and in fact the
emergence of an international civil society.  I do not propose to go more
deeply into this definition here, but I have offered some friends
in the Second Committee the possibility of  a more informal discussion group
or session on this matter.

     Today it is recognized that globalization has benefitted many countries
enormously.  But it is also recognized that is has led to the marginalization
of some countries and groups, that in many ways globalization plus
liberalization may have exacerbated inequalities.  It certainly seems to be
associated with some measure of concentration of management control in
industry, finance and elsewhere.  And of course there have been concerns about
its impact on environmental stress.

     Today, however, globalization is being questioned not on these grounds,
which are the older grounds on which many people had raised concerns about it,
but on the grounds that it is not even delivering in the economic sphere.  In
country after country we see a cry for controls on capital, on trade, etc.  At
the national level it is not possible for a national decision maker to say
this is happening because of the decisions that have been taken in this or
that country.  It is the national policy maker who is held responsible
for unemployment, for poverty, for rising prices and so on.  There is the risk
that we will find ourselves rolling back from globalization because we are not
yet ready with a set of institutions to manage it.  I put it to you that
globalization without effective and robust multilateralism is bound to lead to
crisis because incompatible national ambitions are not restrained by rules. 
Where we have an effective system of multilateralisation, such as in
trade, when crises occur they are smaller, more localized, more manageable. 
There are some reasonable chances that in the discussions which are taking
place we will evolve this type of effective and robust multilateralism even in
the sphere of finance.

     We must also recognize that multilateralism is required not only in the
fields of international trade and finance but also in the areas of
environment, social development, areas where the United Nations has played a
major role in defining the framework for multilateral cooperation.  Nor is
interdependence all.  Our work has been guided not simply by the notions of
interdependence and globalization; the notion of shared values, like
solidarity, underlies much of the work that we do. 

Mr. Chairman,

     I have dealt with this matter of the current crisis of globalization
because I believe this is what is exercising the minds of the delegates here. 
The question before the Second Committee is "What next?".  What is the
contribution which we in the UN can make to a resolution of this crisis?  We
can contribute at the analytical level through the work that will be done by
the Secretariat, and we certainly intend to pursue these matters in all of
our secretariats.  There is also the operational dimension - the capacities
that we would have to assist countries in coping with these forces.

     Most important, we can make a contribution at the level of consensus
building, on understanding the problem, identifying approaches which would
work, listening to one another, because this is the strength of this body. 
Your agenda this year offers you many opportunities.  There are other
possibilities which arise in the process of finance for development.  There
are possibilities in the renewal of the dialogue on international cooperation.

One of the challenges before you is to move this issue forward, to move the
world towards a more robust multilateralism to address these problems of
globalization so that crises of the sort we have now become less frequent,
more manageable.  

Mr. Chairman,

     I look forward to your general debate and to your debate on the other
issues in the hope that at the end of this process we are a little closer to a
better understanding of the type of multilateralism which will truly widen
options for all countries and enable them to pursue growth with equity and
people-centered sustainable development, the basic objectives which our work
in development is meant to serve.


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Date last posted: 27 September 2000
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