Trade and Development Report, 1992 An Overview

The world economy has been suffering its most severe recession since the World War-II. Production has fallen in the United States and flattened in Japan. Western Europe is stagnating: the boost provided by German unification has petered out, while high interest rates remain. Growth has picked up in Latin America, but remains slow there and in other developing regions, other than parts of Asia. Central and Eastern Europe are suffering a precipitous fall in living standards; the transition process is proving much more painful than anticipated. Overall, signs of improvement are scant. The unexpected severity of the global recession reflects the presence of debt deflation in a number of industrialized economies - a process not experienced since the Great Depression. Household and business expenditures are being reduced, the flow of credit is shrinking, and confidence is being eroded. Econometric forecasts, by taking little or no account of the domestic debt overhang, have tended to paint an overoptimistic picture. A private sector weighed down by debt and high long-term interest rates will not generate stability or growth unaided. Governments must resume their responsibilities, by acting to foster a return to financial stability and to stimulate the level of economic activity. No single country can solve the macroeconomic problem on its own: the situation demands improved coordination. Without a swift policy response, cumulative forces may be unleashed, damaging all countries. World economic recovery is especially important for developing countries, for without sustained export growth further bouts of instability can be expected, including an intensification of threats to democratic institutions in countries where these have been established or re-established only recently. Many developing countries, as well as countries in transition, have unilaterally undertaken a fundamental change of direction towards greater openness in trade. For them to succeed in pursuing outward-oriented strategies, developed countries need to follow suit by relaxing their own import restrictions. A successful conclusion to the Uruguay Round is therefore highly important. Improved development performance will also require further policy effort at home. The need for reforms is inescapable, but these should be introduced thoughtfully, on the basis offa ct, not fiction.