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Text File | 1994-05-06 | 40KB | 774 lines

<text> <title> Global Markets, Poor Nations, Poor People </title> <article> <hdr> Human Development Report 1992 Global Markets, Poor Nations, Poor People </hdr> <body> The disparities in the distribution of global economic opportunities between rich and poor nations are widening. There are many reasons for this, both domestic and international. This focuses on only two of the reasons: the role of international markets in this process, and the impact of human development on a country's performance in international markets; a look at the international flows of capital, labour, goods and services, assessing them from the perspective of poor nations and poor people. -- Financial markets--Real interests rates have been four times higher for poor nations than rich ones. Developing countries effectively paid 17% a year on their foreign debt during the 1980s, while rich nations paid only 4%. -- Foreign direct investment--Multinational companies channel most of their investments toward rich countries--83%. And the developing countries that do receive investment tend to be the already better off. -- Goods and services--Trade barriers are highest for manufactured goods for which poor countries enjoy a competitive advantage--for labour-intensive exports such as textiles, clothing and footwear. The market for agricultural produce is also distorted--by import barriers and by $300 billion a year in agricultural subsidies and price supports in industrial countries, reducing the export opportunities for developing countries. Sub-Saharan African countries have seen their trade share fall to a quarter of its 1960 level. And the least developed countries, with 8% of world population, have been among the greatest losers: their already small share of global trade has been halved over the past 20 years--from .8% to .4%. -- Labour--Immigration laws deny workers the right to equalize the global supply and demand for labour: to move to where they could best earn a living. This lack of market opportunities for developing countries costs them at least $500 billion a year, 10 times what they receive in foreign assistance. But the analysis also shows that some developing countries have fared quite well in international competitiveness. They often share one common characteristic--high levels of investment in their people and in strengthening their national technological capacity. Financial markets The financial markets have come a long way from the musty, secretive offices of the City of London. They are global, fast, and highly efficient--responding quickly to the supply and demand for investments and to the smallest changes in exchange or interest rates. Computerized dealing systems despatch $300 billion or more across national borders each day. Developing countries use these markets to raise funds, but they have to deal with the cycles of markets with short-term fluctuations in interest rates and with longer term cycles in which periods of excessive lending are followed by sudden withdrawals of funds. Developing countries also have to deal with the fact that some market players are more equal than others. They generally have to pay higher real interest rates and can thus find it very difficult to service debts. And even though they are already short of capital, the international money markets have a strong tendency to move funds out of developing countries to safer havens in the already capital-rich industrial countries. Real interest rates Interest rates rose sharply in the 1980s to a level without precedent in the past 100 years. In the 1980s, real interest rates were more than twice the level that prevailed in most of the period for which data are available. In the United States, real interest rates were five times higher than their average for the preceding 25 years. And even though US interest rates fell sharply during 1991, most analysts believe that this will be only a temporary respite. When global rates are high, everyone pays more. But in the 1980s, the developing countries effectively paid more than most, partly because they were considered higher-risk borrowers and were charged a commensurate premium. Mauritius, for example, has been relatively stable financially. Yet in early 1983, when the London interbank offered rate (LIBOR) was 10%, the Mauritian sugar industry was paying domestic rates of 18.5%. And when LIBOR rose to 14.4%, the local interest rose to 23.3%. The domestic interest cost went up on account of the "country (borrower) risk" of 2.4% above LIBOR, banking charges, and a premium for expected currency depreciation of 6%. The burden for local enterprises in developing countries also increased as international lenders, such as the International Monetary Find (IMF), imposed a series of devaluations--and the price of repayment in local currency rose accordingly. This had a devastating effect, especially in Latin America, where the amount of local currency to service external debt increased three or four times in one year. Developing countries also suffered from the collapse in commodity markets. As the international prices for coffee, sugar and other primary commodities fell, developing countries had to export ever greater tonnages to maintain interest payments. The real interest rates are calculated in different ways for industrial (creditor) and developing (debtor) countries. For industrial countries, the real rates are arrived at by taking the nominal rate and subtracting the domestic rate of inflation. For developing nations, however, the real interest rate on foreign debt is calculated by adjusting the nominal rate they are charged according to the rate of change in the dollar prices of the goods they export. Since the prices of the goods they export have generally fallen in the postwar period, the developing countries have effectively paid interest rates much higher than those stipulated in their debt contracts. While real interest rates in industrial countries averaged around 4% in the first half of the 1980s, in developing countries they were effectively around 17%. It is a sad commentary on the workings of the international financial markets that poor countries and their people have to pay interest rates four times those in rich countries. And the rates may well stay high as demands for the world's investment resources intensify. The continuing claims of the US budget deficit, the need to strengthen the capital base of US and Japanese banks, the creation of a single internal market in Europe, the costs of German reunification, the costs of postwar reconstruction in Kuwait and Iraq, the social and physical needs of Eastern Europe and the republics of the former Soviet Union--all these pressures are likely to keep interest rates high in the 1990s. If so, the developing countries will continue to shoulder a heavy debt burden and will receive relatively little new investment--restricting their opportunities for economic expansion, now and for years to come. High interest rates have their greatest impact on poor people--who cannot afford to borrow in such terms. But such interest rates can also result in serious damage to the environment. They act as a signal from the market that future income will be worth much less, so they encourage the present generation to discount the future at a very high rate. There is a strong case, therefore, for institutions such as the World Bank and the regional development banks to serve as intermediaries between developing countries and the financial markets--and to take measures to ease the burden of real interest rates. Cycles of lending International lending can fluctuate wildly--with rapid increases in flows followed by even more rapid withdrawals of funds. Such cyclical tendencies in the intern