The focus of the annual Trade and Development Report, released last week by the United Nations Conference on Trade and Development (Unctad), is on the inter-linkages between commodity prices, capital flows and investment levels in developing countries. The report begins with Unctad’s outlook on the global economy, which is different from the current mainstream view on how to deal with global inflation. The dominant monetary policy position is that supply shocks induced by rising commodity prices can translate into inflationary spirals. Therefore, even though tightening liquidity conditions may not help immediately, they will be effective in moderating medium-term inflationary expectations — the so-called “anchoring” objective that is often spoken of by heads of central banks. Unctad’s economists believe that this cautiousness can be carried too far and that the risk of monetary overkill significantly slowing down global growth is high. They argue that rising commodity prices, while they have a one-off impact on the price level, are unlikely to trigger the kind of wage-price spiral seen in the 1970s, because of fundamental institutional changes in the global economy. Increased trade, far more flexible market mechanisms and rapid productivity increases have, in their assessment, contributed to dampening the potential for the spiral as well as to keeping expectations in check.
But, it is the analysis of international capital flows that really raises some interesting issues. It highlights the paradoxical situation in which the relatively capital-scarce countries of the world are net exporters of capital to the relatively capital-abundant countries. This flies in the face of conventional theory, in which capital will flow in the reverse direction, eventually equalising returns across the world’s economies. In today’s situation, capital is actually flowing out of countries in which returns on investment are high, to those in which returns on investment are low. The report points to a number of factors that contribute to this. Undervalued exchange rates, which contribute to huge current account surpluses, are being reinforced by high commodity prices, which expands the list of surplus countries looking for investment opportunities in developed markets.
This is happening in an environment in which development assistance to the really poor countries is falling way short of requirements. The inability of aid-receiving countries to effectively use funds is a part of the problem, but the global distribution of surpluses and, perhaps, the absence of a collective understanding on how they can best be used also contributes. The policy implications range from restructuring exchange rate regimes to collective efforts to manage commodity prices.