Postbox for Windows

Abstract: IEEE Std 896.1-1991 provides a set of tools with which to implement a Futurebus+architecture with performance and cost scalability over time, for multiple generations of single- and multiple-bus multiprocessor systems. Although this specification is principally intended for 64-bit address and data operation, a fully compatible 32-bit subset is provided, along with compatible extensions to support 128- and 256-bit data highways. Allocation of bus bandwidth to competing modules is provided by either a fast centralized arbiter, or a fully distributed, one or two pass, parallel contention arbiter. Bus allocation rules are provided to suit the needs of both real-time (priority based) and fairness (equal opportunity access based) configurations. Transmission of data over the multiplexed address/data highway is governed by one of two intercompatible transmission methods: (1) a technology-independent, compelled-protocol, supporting broadcast, broadcall, and transfer intervention (the minimum requirement for all Futurebus+systems), and (2) a configurable transfer-rate, source-synchronized protocol supporting only block transfers and source-synchronized broadcast for systems requiring the highest possible performance.

Article #:

Date of Publication: 10 March 1992

UNITED NATIONS CONFERENCE ON TRADE AND DEVELOPMENT
GENEVA

TRADE AND DEVELOPMENT
REPORT, 2005

Report by the secretariat of the
United Nations Conference on Trade and Development

UNITED NATIONS
New York and Geneva, 2005

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composed of capital letters combined with
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imply the expression of any opinion what-
soever on the part of the Secretariat of the
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its frontiers or boundaries.

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containing the quotation or reprint should be
sent to the UNCTAD secretariat.

Sales No. E.05.II.D.13

ISBN 92-1-112673-8
ISSN 0255-4607

Note

UNITED NATIONS PUBLICATION

Copyright © United Nations, 2005
All rights reserved

UNCTAD/TDR/2005

FOREWORD

Kofi A. Annan
Secretary-General of the United Nations

This year’s Trade and Development Report demonstrates that the conditions for achieving
the Millennium Development Goal of halving extreme poverty by 2015 have improved
considerably over the past three years, as economic growth in the developing world has become
more broad-based and embraced many of the poorest countries.

At a time when the forces of economic expansion in some major developed countries
have been slackening, China and India have become major engines of growth for the world
economy as a whole. Rapid economic development in both countries has helped reduce levels
of extreme poverty at home, by generating employment and boosting incomes. It has also had
positive effects beyond the two countries’ borders, in particular in many other developing
countries.

However, the Report stresses that progress remains far too slow in certain regions. In
sub-Saharan Africa, which has the highest proportion of people living in extreme poverty, per
capita income growth is still too low to make decisive progress. This only underscores the
need for further action by the international community to achieve and maintain strong global
growth dynamics with broad-based participation.

The recent rise in the prices of many primary commodities has provided some economic
breathing space in commodity-dependent economies, but this must not lead to complacency.
On the contrary, this breathing space should be viewed as an opportunity for many developing
countries to accelerate the process of structural change and capital accumulation, and indeed
to reduce their dependence on exports of such commodities. This would boost progress towards
all development goals, and have positive effects in countries with more advanced manufacturing
sectors that provide the machinery and equipment needed for such change.

Our challenge is to sustain the recent positive developments. The Report argues that it is
important not only that the fast-growing Asian countries make the right policy choices, but
also that developed countries take appropriate policy measures to overcome the persistent
imbalances and inequities in the international trading system. A global approach, based on
international action with the effective participation of developing countries in global policy
coordination, is in the interest of all, developed and developing countries alike.

The Goals can still be reached – worldwide and in most, or even all, individual countries
– but only if we break with business as usual. The information and analysis contained in this
Report should contribute to the debate about how best to make the global partnership for
development a reality – and how to help many millions of people realize their long-standing
hopes to live in dignity and peace. In that hopeful spirit, I recommend this volume to a wide
global audience.

v

Contents

FOREWORD ............................................................................................................................................... iii
Explanatory notes .................................................................................................................................... xiii
Abbreviations ............................................................................................................................................ xiv
OVERVIEW ............................................................................................................................................... I-X

Page

Trade and Development Report, 2005

Chapter I

CURRENT ISSUES IN THE WORLD ECONOMY ........................................................................... 1

A. Introduction ......................................................................................................................................... 1

B. The world economy: growth performance and prospects ........................................................... 2
1. Economic activity in developed countries ..................................................................................... 2
2. Economic activity in developing countries ................................................................................... 4
3. Recent developments in world trade and finance ....................................................................... 10

C. The global imbalances and the United States current-account deficit .................................... 12
1. Twenty-five years of deficits in the United States ...................................................................... 14
2. The surplus regions ........................................................................................................................ 18
3. Tailoring policy measures ............................................................................................................. 19

D. Oil price hikes in perspective .......................................................................................................... 20
1. The impact of an oil price shock on prices and economic activity ........................................... 20
2. The 1973–1974 and 1979–1980 oil price shocks: putting current events in perspective ........ 22
3. The impact on oil-importing developing economies .................................................................. 25

E. Rapid growth in China and India and the profit-investment nexus ........................................ 28
1. The sectors driving economic growth .......................................................................................... 30
2. Stable and balanced demand growth as a condition for sustained rapid growth ..................... 33
3. Policy conditions underlying the Asian catching up processes ................................................. 35
4. Challenges for sustained growth in China and India .................................................................. 38

Notes .......................................................................................................................................................... 39

vi

Page

Chapter II

INCOME GROWTH AND SHIFTING TRADE PATTERNS IN ASIA ......................................... 41

A. Introduction ....................................................................................................................................... 41

B. Evolving demand and trade patterns in Asia: a comparative perspective ............................. 44
1. Changing patterns of food consumption ...................................................................................... 44
2. Intensity of metal and energy use ................................................................................................. 46

C. Domestic resource constraints and the balance-of-payments constraint ................................ 51
1. Relative resource constraints and country size ........................................................................... 52
2. Shifts in trade composition: experiences of Asian industrialization ......................................... 54

D. World market shares and prices .................................................................................................... 70
1. The growing impact of China and India on global primary commodity markets .................... 70
2. The role of textile and clothing exports ....................................................................................... 77

Notes .......................................................................................................................................................... 82

Chapter III

EVOLUTION IN THE TERMS OF TRADE AND ITS IMPACT
ON DEVELOPING COUNTRIES ........................................................................................................ 85

A. Introduction ....................................................................................................................................... 85

B. The terms-of-trade problem revisited ........................................................................................... 87

C. Recent trends in the terms of trade ............................................................................................... 92

D. Effects of terms-of-trade changes on domestic income ............................................................ 101

E. The distribution of gains or losses from terms of trade ........................................................... 103

F. The distribution of export income and rent from extractive industries ............................... 108

Notes ........................................................................................................................................................ 114

Annex to chapter III

Distribution of Oil and Mining Rent:
Some Evidence from Latin America, 1999–2004 ............................................................................. 117

vii

Page

Chapter IV

TOWARDS A NEW FORM OF GLOBAL INTERDEPENDENCE ............................................. 129

A. Introduction ..................................................................................................................................... 129

B. The growing importance of developing countries in global markets .................................... 132

C. Shifts in the composition of developing-country exports ......................................................... 146

D. What has changed? An assessment ............................................................................................. 153

E. Policies for managing the new forms of global interdependence ........................................... 155

Notes ........................................................................................................................................................ 160

REFERENCES ...................................................................................................................................... 163

viii

List of tables

Table Page

1.1 World output growth, 1990–2005 ............................................................................................... 3
1.2 GDP growth in selected developing economies, South-East Europe and CIS, 1990–2005 ..... 6
1.3 Export and import volumes of goods, by region and economic grouping, 1996–2004.......... 8
1.4 Current-account balance, selected economies, 2000–2004 .................................................... 13
1.5 Real GDP per capita and GDP growth in China, India, Japan and the Republic of Korea

during their rapid growth periods ................................................................................................. 29
1.6 Contribution of consumption, investment and trade to GDP growth

in China, India, Japan and the Republic of Korea ................................................................... 34
2.1 Dietary composition in China and India, 1994 and 2002 ....................................................... 46
2.2 Per capita metal consumption, selected countries, 2003 ......................................................... 47
2.3 Food self-sufficiency ratios in China and India, selected products, 1994–2002 .................. 57
2.4 China’s agricultural trade by major product category, 1980–2003 ........................................ 58
2.5 Product structure of imports of selected Asian countries, 1965–2003 .................................. 61
2.6 Magnitude of change in selected raw material imports by Japan, the Republic of Korea,

China and India, selected periods ............................................................................................. 64
2.7 Product structure of exports from selected Asian countries, 1965–2003 .............................. 66
2.8 World primary commodity prices, 1999–2004......................................................................... 72
2.9 Shares in world exports of manufactures of selected Asian developing economies and

major developed countries, 1962–2003 .................................................................................... 78
2.10 United States apparel imports from selected sources,

market shares and unit values, 1995–2005 ............................................................................... 80
3.1 Export structure of developing countries, by region and by broad product category,

1980–2003 ................................................................................................................................... 91
3.2 Distribution of developing countries by their dominant export category, 2003 ................... 91
3.3 Sensitivity of developing countries to terms-of-trade changes,

by broad product category and by region, 1996–2004 .......................................................... 102
3.4 Impact of changes in terms of trade and net income payments on

national income, selected economies, 2002–2004 ................................................................. 106
3.5 Government revenue from international trade and extractive industries,

selected developing countries .................................................................................................. 112
3.6 Government revenue from fuel industry in selected developing countries ......................... 113
3.A1 Argentina: estimate of oil rent, 1999–2004 ............................................................................ 118
3.A2 Argentina: estimate of government revenue from oil rent, 1999–2004 ............................... 118
3.A3 Ecuador: estimate of oil rent, 1999–2004 .............................................................................. 119
3.A4 Ecuador: estimate of the distribution of oil rent, 1999–2003 ............................................... 120
3.A5 Mexico: estimate of oil rent, 1999–2004 ................................................................................ 120
3.A6 Venezuela: estimate of oil rent, 1999–2004 ........................................................................... 121
3.A7 Venezuela: estimate of the distribution of oil rent, 1999–2004............................................ 122
3.A8 Venezuela: composition of government revenues from oil, 1999–2004 .............................. 122
3.A9 Chile: estimate of copper rent, 1999–2004 ............................................................................ 124

ix

Table Page

List of tables (concluded)

3.A10 Chile: estimate of government revenue from copper rent, 1999–2004................................ 124
3.A11 Peru: estimate of gold rent, 1999–2004 .................................................................................. 125
3.A12 Peru: estimate of copper rent, 1999–2004 .............................................................................. 126
3.A13 Peru: estimate of government revenue from gold rent, 1999–2004 ..................................... 126
3.A14 Peru: estimate of government revenue from copper rent, 1999–2004 ................................. 127
4.1 Matrix of world merchandise trade by major product category,

1965, 1985 and 2003 ................................................................................................................ 131
4.2 The origin and destination of merchandise trade, 1970–2003.............................................. 133
4.3 South-South trade in world trade, 1970–2003 ....................................................................... 134
4.4 South-South merchandise exports, by geographical region, 1970–2003............................. 140
4.5 Top 10 economies in South-South trade, 2003 ...................................................................... 141
4.6 Importance of South-South trade for developing economies, 1990–2003 .......................... 142
4.7 Export value growth and share in total South-South exports

of the 30 most dynamic products, 1990–2003 ....................................................................... 149
4.8 Composition of developing-economy exports to developed countries,

by broad product categories, 1980–2003................................................................................ 150
4.9 Composition of trade among developing economies,

by broad product categories, 1980–2003................................................................................ 152

x

1.1 United States current-account balance, relative GDP growth and
real effective exchange rate, 1980–2004 .................................................................................. 14

1.2 Merchandise trade balance of the United States, by country/region, 1980–2004 ................ 18
1.3 Current-account balances of 10 OPEC countries ..................................................................... 21
1.4 Crude petroleum prices, nominal and real, 1970–2005 .......................................................... 22
1.5 Oil import bill, OECD major oil-consuming countries, 1973–1978,

1979–1983, 1999–2005 .............................................................................................................. 23
1.6 Changes in consumer prices and unit labour costs, OECD major oil-consuming

countries, selected periods ......................................................................................................... 24
1.7 Real interest rates and real effective exchange rates, selected Asian and

Latin American countries, 2003–2005 ...................................................................................... 27
1.8 Productivity in the manufacturing and services sectors compared to

overall productivity in China (1984–1993, 1993–2002) and India (1991–2000) ................. 31
1.9 Productivity in the manufacturing sector in China (1984–1993, 1993–2002)

and in the manufacturing and services sectors in India (1991–2000) .................................... 32
1.10 Evolution of private consumption in China, India, Japan and the Republic of Korea ......... 35
1.11 Real interest rates in China and India, 1980–2004 .................................................................. 37
2.1 Intensity of metal use, selected metals and countries, 1960–2003 ........................................ 48
2.2 Stylized representation of the relationship between intensity of metal use and

per capita income ........................................................................................................................ 50
2.3 Intensity of energy use, selected countries, 1965–2003.......................................................... 50
2.4 Resource combinations of countries/regions, 1960–2000 (at 5-year intervals) .................... 53
2.5 China: consumption and production of oil and coal, 1965–2004 ........................................... 60
2.6 Non-fuel primary commodity prices, nominal and real, by commodity group, 1960–2004 ...... 71
2.7 Shares in world imports of selected primary commodities,

China and India, 1990 and 2003................................................................................................ 74
2.8 Net trade by China and India and world prices, selected primary commodities,

1990–2004 ................................................................................................................................... 75
3.1 United States import and export price indices for selected electronics products, 1980–2004 .. 89
3.2 Terms of trade, export volumes and purchasing power of exports

in developing economies, by region, 1980–2004 .................................................................... 93
3.3 Terms of trade of selected developing economies, by dominant export category, 2000–2004 .. 96
3.4 Contribution of different product groups to terms-of-trade changes,

selected developing economies, 2000–2004 ............................................................................ 98
3.5 Changes in gross domestic product, gross domestic income, gross national income

and terms-of-trade indices, selected developing countries, 1996–2004 .............................. 105
4.1 Schematic illustration of the impact of production-sharing on the statistically

recorded value of South-South trade ...................................................................................... 138
4.2 Triangular trade in manufactures between East Asia and the United States, 1990–2003 .... 139
4.3 Evolution of developing-country exports, by broad product category, 1976–2003 ........... 148

Figure Page

List of figures

xi

List of boxes

Box Page

1.1 Primary trade balance effects of changes in the United States GDP growth
and in exchange rates ................................................................................................................. 16

1.2 Income disparities in China and India ...................................................................................... 36
3.1 State income from extractive industries: a historical perspective ........................................ 110
4.1 Towards a new structure of global maritime trade ................................................................ 144

xiii

Explanatory notes

Classification by country or commodity group
The classification of countries in this Report has been adopted solely for the purposes of statistical or
analytical convenience and does not necessarily imply any judgement concerning the stage of devel-
opment of a particular country or area.

The major country groupings used in this report follow the reclassification by the United Nations
Statistical Office (UNSO). They are distinguished as:

» Developed or industrial(ized) countries: in general the countries members of OECD (other than
Mexico, the Republic of Korea and Turkey) plus the new EU member countries which are not
OECD members (Cyprus, Estonia, Latvia, Lithuania, Malta and Slovenia).

» The category South-East Europe and Commonwealth of Independent States (CIS) replaces what
was formerly referred to as “transition economies”.

» Developing countries: all countries, territories or areas not specified above.

The terms “country” / “economy” refer, as appropriate, also to territories or areas.

References to “Latin America” in the text or tables include the Caribbean countries unless otherwise
indicated.

Unless otherwise stated, the classification by commodity group used in this Report follows generally
that employed in the UNCTAD Handbook of Statistics 2004 (United Nations publication, sales no.
E/F.05.II.D.2).

Other notes
References in the text to TDR are to the Trade and Development Report (of a particular year). For
example, TDR 2004 refers to Trade and Development Report, 2004 (United Nations publication, sales
no. E.04.II.D.29).

The term “dollar” ($) refers to United States dollars, unless otherwise stated.

The term “billion” signifies 1,000 million.

The term “tons” refers to metric tons.

Annual rates of growth and change refer to compound rates.

Exports are valued FOB and imports CIF, unless otherwise specified.

Use of a dash (–) between dates representing years, e.g. 1988–1990, signifies the full period
involved, including the initial and final years.

An oblique stroke (/) between two years, e.g. 2000/01, signifies a fiscal or crop year.

A dot (.) indicates that the item is not applicable.

Two dots (..) indicate that the data are not available, or are not separately reported.

A dash (-) or a zero (0) indicates that the amount is nil or negligible.

A plus sign (+) before a figure indicates an increase; a minus sign (-) before a figure indicates a
decrease.

Details and percentages do not necessarily add up to totals because of rounding.

xiv

Abbreviations

ATC Agreement on Textiles and Clothing
ASEAN Association of Southeast Asian Nations
bpd barrels per day
CIS Commonwealth of Independent States
CPI Consumer Price Index
ECLAC Economic Commission for Latin America and the Caribbean
EIA Energy Information Administration (United States)
EIU Economist Intelligence Unit
ESCAP Economic and Social Commission for Asia and the Pacific
ESCWA Economic and Social Commission for Western Asia
EU European Union
FAO Food and Agriculture Organization of the United Nations
FDI foreign direct investment
FFE foreign funded enterprise
f.o.b. free on board
GDI gross domestic income
GDP gross domestic product
GFCF gross fixed capital formation
GNI gross national income
GSTP Global System of Trade Preferences
GTAP Global Trade Analysis Project (model)
ICT information and communication technology
IEA International Energy Agency
IMF International Monetary Fund
IT information technology
LDC least developed country
MDG Millennium Development Goal
MERCOSUR Southern Common Market
MFA Multi-Fibre Arrangement
NBTT net barter terms of trade

xv

NIE newly industrializing economy
NIIP net international investment position
NPL non-performing loan
OECD Organisation for Economic Co-operation and Development
OEM original equipment manufacturing
OPEC Organization of the Petroleum Exporting Countries
PPP purchasing power parity
R&D research and development
RCA revealed comparative advantage
REER real effective exchange rate
RTA regional trade arrangement
ROW rest of the world
SARS Severe Acute Respiratory Syndrome
SITC Standard International Trade Classification
SME small and medium-sized enterprise
SOE State-owned enterprise
SPS sanitary and phytosanitary
TDR Trade and Development Report
TNC transnational corporation
TRIPS trade-related aspects of intellectual property rights (also TRIPS Agreement)
UN United Nations
UN COMTRADE United Nations Commodity Trade Statistics Database
UN/DESA United Nations, Department of Economic and Social Affairs
UNESCO United Nations Educational, Scientific and Cultural Organization
UNCDB United Nations Common Database
UNCTAD United Nations Conference on Trade and Development
VER voluntary export restraint
WTI West Texas Intermediate (price – reference price for standard crude oil)
WTO World Trade Organization
Y2K year 2000

Looking at recent trends in the world economy from the perspective of the
Millennium Development Goals (MDGs), the good news is that in 2004 growth
in the developing countries was rapid and more broad-based than it had been
for many years. Strong per capita income growth continued in China and
India, the two countries with the largest number of people living in absolute
poverty. Latin America has seen a rebound from its deep economic crisis, and
a return to faster growth, fuelled by export expansion. Africa again reached a
growth rate of more than 4.5 per cent in 2004. Moreover, relatively strong
growth in many African countries is envisaged in the short-term, owing to
continuing strong demand for a number of their primary commodities. The
bad news is that even growth rates of close to 5 per cent in sub-Saharan
Africa are insufficient to attain the MDGs, and that the outlook for 2005,
overshadowed by increasing global imbalances, is for slower growth in the
developed countries with attendant effects on the developing countries.

Since the beginning of the new millennium, the performance of the world
economy has been shaped by the increasingly important role of China and
India. Rapid growth in these two large economies has spilled over to many
other developing countries and has established East and South Asia as a new
growth pole in the world economy. Their ascent has been accompanied by
new features of global interdependence, such as a brighter outlook for ex-
porters of primary commodities, rising trade among developing countries,
increasing exports of capital from the developing to the developed countries,
but also intensified competition on the global markets for certain types of
manufactures.

OVERVIEW

II

Global prospects and imbalances

The slowdown in global output growth in 2005 is mainly due to a deceleration in the major
developed economies and some emerging economies in Latin America and East Asia. The temporary
weakness in the United States economy has not been compensated by stronger growth performance in
the euro area and in Japan. Both continue to lack the dynamism needed to redress domestic imbalances
and to contribute to an adjustment of the global trade imbalance. Indeed, beginning in the second half
of 2004, output growth in the euro area and Japan has slowed down markedly, causing forecasts for
2005 to be revised downwards. While greatly benefiting from the global expansion over the past three
years, and especially the Asian boom, neither the euro area nor Japan has managed to revive domestic
demand.

Another reason for concern about global economic prospects is the increase in oil prices, which
have doubled since mid-2002, to reach $58 per barrel in July 2005, despite flexible supply adjust-
ments on the part of oil producers. However, the much feared shock of surging oil prices on economic
activity and inflation in developed countries, an impact of the kind witnessed in the 1970s, has so far
not occurred, for two reasons. First, developed countries have become less oil dependent, as energy is
being used more efficiently. At the same time, the share of services in their GDP has gained in impor-
tance at the expense of industry, where more energy is used per unit of output. Second, the recent oil
price increase was not the result of a big supply shock, but of a gradual increase in demand. Under
these conditions, the wage and monetary policy responses in the developed countries have been meas-
ured, and have not jeopardized price stability or output growth.

The recent surge in oil prices has a stronger impact on oil-importing developing economies,
especially in countries where industrialization has led to greater dependence on oil imports. In Brazil,
for example, the oil intensity of domestic production is 40 per cent higher than the OECD average; in
China and Thailand it is more than twice as high, and in India almost three times as high as in the
OECD countries. Therefore, it is primarily in developing countries where inflationary pressures
resulting from further rising oil prices imply risks for the sustainability of the growth process. Even
though inflation has so far been modest, monetary policy has already been tightened in some coun-
tries.

On the other side, not only oil exporters but also many developing countries exporting non-oil
primary commodities benefited from increased demand and rising prices for their exports. Since 2002,
strong demand from East and South Asia, in particular China and India, has been the main factor
behind the hike in commodity prices. In the markets for some primary commodities, emerging supply
constraints have also contributed to the strong price reaction. Asian demand for primary commodities,
particularly for oil and minerals such as copper, iron ore and nickel, as well as for natural rubber and
soybeans, is likely to remain strong, boosting the earnings of the exporters of these products. But
further developments on the markets for primary commodities will also critically depend on how

III

much additional supply capacity will be created by recent new investments, how fast this capacity will
go on-stream, and how commodity demand from developed countries will be affected by the need to
correct the existing trade imbalances.

Despite the increasing importance of the fast growing developing countries for international com-
modity markets, developed countries, which still account for two thirds of global non-fuel commodity
imports, will continue to play an important role. It is unlikely that the growing imports of primary
commodities by China and India alone will bring about a permanent reversal of the declining trend in
real commodity prices. Indeed, in real terms, commodity prices are still more than one third below
their 1960–1985 average. Moreover, the sharp fluctuations in commodity prices constrain the ability
of many developing countries to attain a path of stable and sustained growth and employment creation
that could benefit all segments of their population and allow them to reach the MDGs.

The large global current-account imbalances represent the greatest short-term risk for stable growth
in the world economy. The United States trade deficit has continued to grow despite the depreciation
of the dollar: it has lost 18 per cent of its value on a trade-weighted basis since February 2002. And the
United States current-account deficit accounts for two thirds of the combined global surpluses. The
deficit has increased in recent years vis-à-vis virtually all its trading partners; the increase has been
the most pronounced in trade with Western Europe and China. On the other hand, China’s trade is in
surplus not only with the United States but also with many other developed countries. However, despite
these surpluses, China’s imports from these countries have also increased rapidly, as have its imports from
neighbouring countries and other developing countries.

A well coordinated international macroeconomic approach would considerably enhance the chances
of the poorer countries to consolidate the recent improvements in their growth performance. Such an
approach would also have to involve the major developing countries and aim at avoiding deflationary
adjustments to the global imbalances.

East and South Asia as a new growth pole

Asia has been a region of economic dynamism over the past four decades, with different econo-
mies in the region successively experiencing rapid growth. The large size of the countries that entered
this process most recently, China and India, has established the East and South Asian region as a new
growth pole in the world economy. Due to the high dependence of these large Asian economies on
imports of primary commodities for industrial output growth, in particular fuels and industrial raw
materials, and the resulting linkages with other developing countries, variations in their growth per-
formance will have strong repercussions on the terms of trade and export earnings of other developing
countries. This inevitably raises the question of the sustainability of the pace of growth of these two
economic powers in the medium and long term.

In terms of per capita GDP, both China and India still have a long way to go to approach the
levels of the leading economies. Their potential for catching up is enormous. To realize this potential,
it will be crucial for both countries to achieve further productivity gains in manufacturing activities

IV

and ensure that all segments of their population participate in income growth. Broad-based income
growth is essential for accelerating the eradication of poverty and gaining widespread social accept-
ance of the required structural changes; but wage increases throughout the economy in line with rising
productivity are also a central pillar for the expansion of domestic consumption and, thus, the
sustainability and stability of output growth. Fixed capital formation depends on favourable demand
expectations in general, and not just on exports, which are subject to the vagaries of the world market
and to changes in international competitiveness.

Shifting trade patterns in China and India

Sustained rapid growth and rising living standards in China and India have been accompanied by
a dramatic increase in Asia’s shares of world exports and raw material consumption. Given the large
size of the Chinese and Indian economies and their specific patterns of demand, changes in their
structure of supply and demand have a much larger impact on the composition of world trade than did
those of other late industrializers in Asia during their economic ascent. The impact of China’s growth
on international product markets and global trade flows is already apparent. India’s merchandise trade
structure may follow a sequence of changes similar to that of China, with a lag of one or two decades,
if industrialization in India gains the same importance in its further economic ascent as it did in the
other fast growing Asian economies.

Metal use in China – and to a lesser extent in India – has strongly increased over the past few
decades, particularly since the mid-1990s. In China, growth in the use of aluminium, copper, nickel
and steel now exceeds that of GDP. Part of this recent increase coincides with very high rates of
investment, especially in infrastructure. However, this recent rapid rise in China’s intensity of metal
use, and the concomitant increase in its imports of minerals and mining products, may well slow down
once investment growth, especially in construction and infrastructure, decelerates. By contrast, India’s
intensity of metal use has remained fairly stable over the past four decades, reflecting the country’s
slower pace of industrialization and the relatively small share of investment in infrastructure in its
GDP.

China’s energy use has steadily increased since the 1960s, but at a slower rate than its GDP. Its
future energy use will depend on how opposing trends play out: on the one hand, continued rapid
industrialization, higher living standards and improved transport infrastructure will tend to further
increase energy use; on the other hand, there remains considerable potential for the adoption of energy-
saving technologies. In either case, China’s energy demand is likely to continue to outpace the future
growth of domestic supply.

Agricultural imports will be determined by a number of factors. To the extent that imports of raw
materials for industrial use are needed as production inputs for the expanding domestic market, import
demand will grow further. This is likely to be the case for rubber and wood. On the other hand, imports
of cotton, which to a large extent have depended on the production of textiles and clothing for export,

V

can be expected to slow down as the composition of exports shifts to more technology-intensive
products.

A continuous increase in average living standards and further progress in poverty reduction in
China will also lead to higher demand for food and to a change in its dietary composition. So far,
China has remained largely self-sufficient in all major food items. But with increasing consumption it
is likely to become more dependent on food imports in the future, notwithstanding possible productivity
and output growth in its domestic agricultural sector as a result of recent agricultural policy reforms.
Given the size of its economy, even small changes in self-sufficiency ratios can have a considerable
impact on China’s agricultural imports.

Since the mid-1980s China has substantially upgraded its export basket, in which labour- and
resource-intensive manufactures and, increasingly, electronics, have become dominant. China’s ex-
ports still have a relatively high import content, but there are indications of a rise in the share of
domestic value added in China’s processing trade, particularly in the electronics sector. India has not
experienced the kind of manufacturing export boom that has characterized the other rapidly growing
economies in Asia. It has become a leading exporter of software and IT-enabled services, particularly
to the United States, but it is highly uncertain whether their share in India’s export earnings can rise
much further. Over the next few years, the absolute value of these services’ exports may continue to
grow, but export dynamism in manufacturing is likely to become stronger.

The growth dynamics in China and other Asian economies have positive effects for many devel-
oped and developing countries. This is true for those countries that benefit directly from the surge in
import demand from the fast growing Asian economies. It is also true for those that benefit indirectly
through the positive growth effects in the economies of their main trading partners. Still others have
achieved higher export and income growth as a result of the rise in commodity prices, even though
their exports to the fast growing Asian economies are relatively small. But it also has to be recognized
that China’s increasing participation in international trade poses new challenges for many countries.
Its weight in international markets due to the very large size of its economy may contribute to a fall in
the export prices of manufactures that it produces and exports along with other developing countries,
such as clothing, footwear and certain types of information and communication technology products.
The rise of China’s clothing exports, in particular, occurred at a time when several developing coun-
tries had adopted more outward-oriented development strategies, and many had developed production
and export activities in the clothing sector partly in response to the quota regulations under the Multi-
Fibre Arrangement.

There is little doubt that the pace of development in the populous Asian economies, and espe-
cially in China, requires accelerated structural change in many other countries – developing and
developed alike. In some sectors, such as the clothing industry and, more generally, in activities at the
low-skill end of the economy, the adjustment pressure is stronger than in others where there is less
competition from low-wage producers with relatively high productivity. There are widespread fears in
many countries that the pace of structural change could result in higher unemployment and lower
output. Paradoxically, among the developed countries, those with large deficits in their trade balance,
such as Australia, Spain, the United Kingdom and the United States, have performed much better in
terms of domestic growth and employment than countries that have been recording large trade sur-
pluses and greater competitiveness, such as Germany and Japan. Challenging the commitment of all
countries to develop a global partnership for development and responding to the integration of large
and poor countries by giving in to protectionist pressures would be counterproductive: most of the
earnings of developing countries from their exports to the developed countries are translated into
higher import demand for advanced industrial products, and thus flow back, directly or indirectly, to
the latter.

VI

The growing importance of South-South trade

Trade among developing countries has sometimes been promoted as an alternative to the tradi-
tional trade pattern where developing-country trade relies mainly on primary commodity exports to
developed countries in exchange for imports of manufactures. The rapid rise in the importance of
South-South trade, particularly over the past two decades, reflects a number of factors. First, there has
been an upswing following the downturn of such trade during the 1980s. Second, the move towards
the adoption of more outward-oriented development strategies, along with trade reform and regional
trade agreements, in a wide range of developing countries has significantly improved access to their
markets, including for imports from other developing countries. But the most important reason for the
rapid growth of South-South trade is that output growth in some large developing economies, particu-
larly China, has been much faster than in the developed countries. Moreover, these countries’ buoyant
growth performance has been closely linked with increasing intraregional specialization and production-
sharing.

While increased South-South trade is a fact, recent developments in the developing countries as
a whole require a careful assessment of the statistical data. Indeed, such an assessment calls for a
number of qualifications to the prima facie impression that trade among developing countries has
grown massively over the past decade or so, and that exports of manufactures account for much of that
rise.

The growing role of developing countries in world trade flows appears to be the result, above all,
of the above-average growth performance of a few Asian economies, and the associated shifts in the
level and composition of their external trade. A substantial part of the statistical increase in South-
South trade in manufactures is due to double-counting associated with intraregional production-sharing
in East Asia for products eventually destined for export to developed countries. It is also due to double-
counting associated with the function of Hong Kong (China) and Singapore as transhipment ports or
regional hub ports. The important role of triangular trade in the measured rise of South-South trade in
manufactures implies that the bulk of such trade has not reduced the dependence of developing countries’
manufactured exports on aggregate demand in developed-country markets. As long as final demand
from developed countries – notably the United States, which is East Asia’s most important export
market – remains high for products for which production-sharing within East Asia plays an important
role, triangular trade and, thus, South-South trade, will remain strong. On the other hand, the economic
rebound in Latin America has improved the prospects for South-South trade in manufactures that is
not related to triangular trade.

The rise of South-South trade in primary commodities appears more modest in trade statistics.
However, it has involved a larger number of countries than the strong rise of South-South trade in
manufactures. It has allowed Africa, as well as Latin America and the Caribbean to recoup some of the
market shares in total South-South trade that they had lost in the 1980s. Indeed, the rise in South-

VII

South exports of primary commodities to the rapidly growing Asian developing countries is likely to
evolve into the most resilient feature of what has come to be called the “new geography of trade”.

The promotion of South-South trade remains a desirable objective for a variety of reasons. First,
sluggish growth in developed countries and their continued trade barriers against products of export
interest to developing countries implies that developing countries need to give greater attention to
each other’s markets to promote export growth in order to achieve their economic growth targets.
Second, the vast size of the rapidly growing Asian economies reduces the need for developing coun-
tries to seek developed-country markets in order to benefit from economies of scale. Third, continued
dependence on developed-country markets exposes developing countries to possible pressure that
links better access to those markets with binding commitments to rapid trade and financial liberaliza-
tion, protection of intellectual property and an open-door policy for FDI. More generally, it also en-
tails the risk of increasingly narrowing the policy space for developing countries.

Terms of trade revisited

The recent and ongoing changes in international trade, with respect to both product composition
and direction of trade, is affecting developing countries in different ways, depending on the product
composition of their exports and imports. On the export side, the impact differs according to the
shares of manufactures and primary commodities, and on the import side, it is especially the depend-
ence on fuels and industrial raw materials that determines the outcome for individual countries.

The same factors that improved the terms of trade of some groups of countries, especially the
higher prices of oil and minerals and mining products, led to a worsening of the terms of trade in
others. In some countries, particularly in Latin America, but also in Africa, the positive effect of price
movements on the purchasing power of exports was reinforced by an increase in export volumes;
whereas in others, gains from higher export unit values were compensated, or even over-compensated,
by higher import prices. Since 2002, economies with a high share of oil and minerals and mining
products in their total merchandise exports have gained the most from recent developments in interna-
tional product markets. The terms of trade of countries with a dominant share of oil exports increased by
almost 30 per cent between 2002 and 2004, and those of countries with a dominant share of minerals
and mining products in their exports increased by about 15 per cent. Terms-of-trade developments
have varied the most among economies where agricultural commodities have dominated total mer-
chandise exports. This reflects large differences in the movement of prices for specific products within
this category, differences in the shares of other primary commodities in their exports and the share of
oil in their merchandise imports.

Developing countries for which manufactures are the dominant category of exports, and which
are at the same time net importers of oil and minerals and metals have seen a deterioration in their
terms of trade in the past two or three years. The deterioration, due to the combined effects of rising
prices of imported primary commodities and stagnating or falling prices of their manufactured exports,
could well become a longer term feature in their external trade. There are two reasons for this: first,
there are indications that the prices for their manufactured exports are falling relative to the prices of

VIII

the manufactures they are importing from the developed countries; second, prices for primary com-
modities are likely to remain strong as long as industrial growth remains vigorous in the large Asian
economies and the imbalances in the developed world can be settled without entering into a recession.

Indeed, the terms-of-trade losses of exporters of manufactures among the developing countries
are partly explained by the pace of the catch-up process in some of these countries, particularly in
China and India. This process has been driven by higher productivity in the export sectors, which has
given them a competitive edge and led to higher import demand. The variations in the global pattern
of demand and their impact on individual countries have resulted in a redistribution of income, not
only between developed and developing countries, but also, and to an increasing extent, between
different groups of developing countries. However, it is important to recognize that a change in the
distribution of real income does not necessarily imply absolute losses. As long as output growth is
strong enough, all countries can gain in terms of real income, with some gaining more than others,
depending on the structure of their exports and the international competitiveness of their producers: a
terms-of-trade deterioration can be compensated by rising export volume. The probability for this to
happen is much greater if exports consist of manufactures, for which the price elasticity of demand is
high, than if they consist of primary commodities.

The productivity gains in Asia have led not only to higher company profits, but also to higher
wages; they have also benefited consumers at home and abroad through lower prices. Higher export
earnings, despite lower export prices, have enabled Asian countries to pay higher prices for imported
inputs, which, in turn, has represented terms-of-trade gains for many primary commodity exporters.
Moreover, exports from Asia also benefit from rising demand in those developing countries that have
seen their export earnings rise thanks to growing Asian demand for their commodities.

Policies for managing the new forms
of global interdependence

Although continuing growth in East and South Asia and recovery in other regions of the developing
world are likely to sustain the demand for primary commodities, the basic problem of instability in
these prices and their long-term tendency to deteriorate in real terms vis-à-vis the prices of manufactures,
especially those exported by developed countries, remains unresolved. Therefore, it is imperative for
developing countries not to become complacent about industrialization and diversification. There is a
risk that the recent recovery of primary commodity markets could lead to a shift away from invest-
ment – both domestic and foreign – in the nascent manufacturing sectors of commodity-exporting coun-
tries in favour of extractive industries. While higher investment in that area may be beneficial in terms
of creating additional supply capacity and raising productivity, this should not be at the expense of
investment in manufacturing. Exporters of primary commodities that have recently benefited from
higher prices and, in some cases, from higher export volumes, have to continue their efforts towards
greater diversification within the primary commodity sector, as well as upgrading their manufacturing
and services sectors. The recent windfall gains from higher primary commodity earnings provide an
opportunity to step up investment in infrastructure and productive capacity – both essential for boosting
development.

IX

At the national level, this raises the question of the sharing of export revenues from extractive
industries, which has always been a central concern in development strategy. Higher global demand
and international prices for fuels and mining products have been attracting additional FDI to these
sectors in a number of developing countries, and this may increase the scope in these countries for
mobilizing additional resources for development. However, government revenues from taxes on profits
in these sectors have typically been very low, partly due to a policy since the beginning of the 1990s
of attracting FDI through the offer of fiscal incentives. Such a policy risks engaging potential host
countries in “a race to the bottom” which, clearly, should be avoided.

Additional sources of fiscal revenue from primary export-oriented activities may be royalties,
the conclusion of joint ventures or full public ownership of the operating firms. However, efforts to
obtain adequate fiscal revenue should not deprive the operators, private or public, of the financial
resources they need to increase their productivity and supply capacity, or their international competi-
tiveness. Recent upward trends in world market prices of fuels and minerals and mining products as a
result of growing demand from East and South Asia provide an opportunity to review the existing
fiscal and ownership regimes. Such a review – which is already under way in several countries – and
possible strategic policy adjustments could be more effective if oil and mineral exporting countries
would cooperate in the formulation of some generally agreed principles relating to the fiscal treatment
of foreign investors. Moreover, a higher share of the public sector or consumers in the rent generated
by extractive industries does not automatically enhance development and progress towards the MDGs;
it has to be accompanied by strategic use of the proceeds for investment that would enhance productive
capacity in other sectors, as well as in education, health and infrastructure.

At the international level, recent increases in the prices of some primary commodities and im-
provements in the terms of trade of a number of developing countries may not have changed the long-
term trend in real commodity prices or altered the problem of their volatility. Wide fluctuations in
primary commodity prices are not in the interest of either producers or consumers. This has also been
recognized by the IMF’s International Monetary and Financial Committee, which, at its April 2005
meeting, inter alia, underscored “the importance of stability in oil markets for global prosperity” and
encouraged “closer dialogue between oil exporters and importers”. Although primary commodities
other than oil may be less important for the developed countries, they are nevertheless equally, if not
more important for those developing countries that depend on exports of such commodities. And since
in many of the latter countries extreme poverty is a pressing problem, the issue of commodity price
stability is of crucial importance not only for the achievement of the MDGs but also for global pros-
perity in general. Consequently, in the spirit of a global partnership for development, the international
community might consider reviewing mechanisms at the global or regional level that could serve to
reduce the instability of prices of a wider range of commodities, not just oil, to mitigate its impact on
the national incomes of exporting countries.

In the short term, however, the central policy issue concerns the correction of existing global
trade imbalances. It is often argued that the decision of central banks in the developing world, and in
particular in Asia, to intervene in the currency market is the main reason for these imbalances. Indeed,
most of the intervening countries explicitly try to avoid currency appreciation that could result from
speculative capital inflows, in order to ensure that the international competitiveness of the majority of
their producers is not put at risk. Most of the East Asian countries adopted a system of unilateral fixing
of their exchange rates following the Asian financial crisis, while most Latin American turned to
managed floating. In both cases, the aim has been to maintain the real exchange rate at a competitive
level while gaining a certain degree of independence from international capital markets.

In the absence of a multilateral exchange rate system that takes account of the concerns of small
and open developing economies, such unilateral stabilization of the exchange rate at a competitive
level appears to be an effective means of crisis prevention. Individual central banks do have the capacity

X

for successful and credible counter-attacks when their own currency is under “threat” or pressure to
appreciate. By contrast, they are practically powerless to stabilize an exchange rate that has come
under threat or pressure to depreciate, even if central banks have accumulated huge reserves of inter-
national currency. It would require multilateral cooperation and policy coherence to address this type
of asymmetry. The premature liberalization of capital markets has seriously heightened the vulner-
ability of developing countries to external financial shocks. Moreover, it has become clear that strengthen-
ing domestic financial systems is not enough to significantly reduce that vulnerability.

For a smooth redressing of the global imbalances, it is essential to avoid a recession in developed
countries – where growth has been depending excessively on the United States economy – and a
marked slowdown in developing countries. A scenario which seeks to correct the global imbalances,
and most importantly the external deficit of the United States, through massive exchange rate appre-
ciation and lower domestic absorption in China and other developing countries in Asia, will almost
inevitably have a deflationary impact on the world economy. It will not only jeopardize China’s at-
tempts to integrate a vast pool of rural workers and, more generally, reduce poverty, but will also
adversely affect the efforts of other developing countries towards achieving the MDGs.

By contrast, adjusting the global imbalances will be less deflationary if demand from the euro
area and Japan grows faster. It should not be forgotten that much of the counterpart to the United
States’ external deficit is to be found in the surpluses of other developed countries. The current-account
surpluses of the euro area and Japan with the rest of the world are mushrooming – despite rising
import bills for oil and other primary commodities. Indeed, Japan and Germany together accounted
for $268 billion or about 30 per cent of the combined global current-account surplus in 2004. This
compares with an overall current-account surplus of $193 billion in East and South Asia. China, the
country on which revaluation pressure has been most intense, accounts for just over one third of this
amount, or less than 8 per cent of the combined global surplus.

International initiatives to alleviate poverty and to reach the MDGs should not ignore the impor-
tance of a smooth correction of the global imbalances so as to ensure the sustainability of the “Asian
miracle”. Indeed, further economic catch-up by China and India will have expansionary effects for
most developing countries. Any slowing down or disruption of this process would carry the risk of
intensifying global price competition on the markets for manufactures exported by developing countries,
while weakening the expansionary effects resulting from the growing demand from Asia.

Supachai Panitchpakdi
Secretary-General of UNCTAD

Current Issues in the World Economy 1

The world economy is still growing at a
steady pace but the risk of a relapse hangs in the
balance. The moderate slowdown registered in the
first half of 2005 indicates that the world’s main
engine of growth, the United States economy, may
not be able to drive forward global growth with-
out the support from other parts of the world.
Meanwhile, the euro area is stuck in stagnation,
and Japan’s growth shows a moderate deceleration.

Growth performance in the developing coun-
tries was generally good and the populous East
and South Asian countries, in particular China and
India, acted as the second engine of worldwide
growth. As a result of their vigorous expansion
and their strong demand for imports of raw mate-
rials, many other developing countries have
experienced windfall revenues from rising com-
modity prices and surging demand for intermediate
products. Even Africa posted a growth rate of
about 4.5 per cent in 2004 and it is expected to
expand by close to 5 per cent this year. Although
these growth rates allow for an increase in per
capita income, in sub-Saharan Africa they are still
insufficient to attain the Millennium Development
Goals (MDGs) by 2015. Section B of this chapter
assesses the global growth record and regional
performances.

The sustainability of the present growth path
is facing several threats. Serious multilateral ac-
tion to unwind global current-account imbalances
without endangering the growth process has been
missing. Instead, political pressure on some coun-
tries to take unilateral measures is mounting, as
analysed in section C of this chapter. It is shown
that the European Union, in its own interest,
should do more to accelerate domestic demand
growth and enhance absorption.

Section D of this chapter focuses on the ef-
fects of the oil price hike on the world economy
from a historical perspective. It shows that the
direct impact of quickly rising oil-import bills on
the developed countries has been much less pro-
nounced than in the period which followed the oil
price shocks of the 1970s. Moreover, there are so
far no signs of negative indirect effects on infla-
tion and interest rates. On the other hand, the oil
price hike has had, and continues to have, a sig-
nificant impact on the economies of many
oil-importing developing countries.

Section E examines some aspects of the
present economic expansion in China and India,
and compares it with the rapid growth episodes
experienced by Japan and the Republic of Korea

CURRENT ISSUES IN THE WORLD ECONOMY

Chapter I

A. Introduction

Trade and Development Report, 20052

in the period following the Second World War. It
highlights the role played by profit-investment
linkages, the sectors driving the economy, the need

of establishing a balance between expanding do-
mestic and foreign demand, and the importance
of supportive macroeconomic policies.

B. The world economy: growth performance and prospects

The world economy grew by almost 4 per
cent in 2004, recording its best performance since
2000. Global growth continued into 2005 – albeit
at a slower pace – and is expected to fall to around
3 per cent. Most of this deceleration is attribut-
able to the slowdown in developed economies,
although some developing countries are also
showing signs of losing momentum. Developing
economies as a whole are expected to grow by
5 to 5.5 per cent, down from 6.4 per cent in 2004
(table 1.1).

1. Economic activity in developed
countries

Domestic demand was the main driving force
of growth in the United States in 2004, with pri-
vate domestic investment growing at a two-digit
rate and personal consumption maintaining a sig-
nificant rate of growth, especially in durable
goods. The volume and value of United States
exports grew at a brisk pace in 2004 and the first
months of 2005, in part because of the real depre-
ciation of the dollar. However, imports grew even
faster and, as a consequence, trade contribution
to gross domestic product (GDP) growth continued
to be negative. Trade and current-account deficits
widened, with the latter rising to 6 per cent of GDP
in the last quarter of 2004, raising the question of

what supplementary policies would be needed if
the United States current account is to be signifi-
cantly reduced (see section C).

Annual growth in the United States is fore-
casted to be around 3.5 per cent in 2005 (Klein and
Ozmucur, 2005). Indeed, personal consumption
expenditures and fixed investment have slowed
in the first quarter 2005.1 It is an open question
whether these are the first signs of a persistent
deceleration of growth. On one hand, recent in-
creases in labour income and corporate profits may
support future private expenditure while, on the
other hand, their positive effects may be offset by
slower productivity gains, high energy costs, and
the fading of temporary factors such as tax cuts
and the depreciation of the dollar. Moreover, di-
minishing fiscal and monetary stimulus may
eventually affect domestic demand. Fiscal policy
is set to be less expansive than in previous years,
as it aims to reduce the public deficit from 3.6 per
cent of GDP in 2004 to 1.8 per cent by 2009. This
may require some cutbacks in expenditure, espe-
cially if reforms involving fiscal costs, such as
those associated with the social security system,
are carried out while higher interest rates weigh
on public debt services. Even if interest rates re-
main at historically low levels, rising rates may
have a negative effect on the consumption of du-
rable goods and on fixed investment. More
generally, interest rate movements may have size-
able economic effects, as domestic debt levels in

Current Issues in the World Economy 3

non-financial sectors reached $24.8 trillion at the
end of the first quarter of 2005 – roughly twice the
size of GDP.

Rising interest rates and/or a decline in
housing prices may also affect other developed
countries – such as Australia, Canada and the
United Kingdom – where private consumption has
been partly sustained by booming house prices and
rising household indebtedness. This contribution
to growth is most likely coming to an end as house-
hold saving ratios recover from their current low
levels. Real appreciation has hampered export
volumes and boosted imports in Australia and
Canada, resulting in a negative contribution of net
exports to GDP growth; however, these countries

have benefited from significant gains in terms of
trade, in large part due to their primary commod-
ity exports. Australia, Canada and the United
Kingdom are expected to experience a moderate
decline in their GDP growth in 2005, to a rate close
to 2.5 per cent.

Economic growth in the euro area has slowed
since mid-2004. Most forecasters have reduced the
2005 growth expectations (set in the Autumn of
2004) from 2 per cent to 1.5 per cent or even
slightly below. The economic slowdown was
mainly attributed to a fall in the growth rate of
exports (induced by the appreciation of the euro)
in concert with sluggish domestic demand in many
countries. As pointed out by UNCTAD over the

Table 1.1

WORLD OUTPUT GROWTH, 1990–2005a

(Percentage change over previous year)

1990–
Region/countryb 2000c 1999 2000 2001 2002 2003 2004d 2005e

World 2.7 2.9 4.0 1.3 1.8 2.5 3.8 3.0

Developed countries 2.4 2.7 3.5 1.0 1.3 1.7 3.0 2.3
of which:

Japan 1.4 0.1 2.8 0.4 -0.3 1.4 2.6 1.8
United States 3.4 4.1 3.8 0.3 2.4 3.0 4.4 3.5
European Union 2.1 2.9 3.6 1.7 1.1 0.9 2.1 1.5
of which:

European Union-15 2.1 2.9 3.5 1.6 1.0 0.8 2.0 1.4
Euro area 2.0 2.8 3.5 1.6 0.9 0.5 1.8 1.2

France 1.7 3.2 3.8 2.1 1.2 0.5 2.1 1.5
Germany 1.6 2.0 2.9 0.9 0.2 -0.1 1.0 0.8
Italy 1.6 1.7 3.0 1.8 0.4 0.3 1.0 -0.4

United Kingdom 2.7 2.8 3.8 2.1 1.7 2.2 3.1 2.0

South-East Europe and CIS -4.3 3.4 8.1 5.6 4.9 6.9 7.5 6.0

Developing countries 4.8 3.5 5.4 2.4 3.5 4.7 6.4 5.4

Developing countries, excluding China 4.0 3.0 5.0 1.5 2.7 3.9 5.7 4.6

Source: UNCTAD secretariat calculations, based on UNCTAD Handbook of Statistics 2004; United Nations, Department of
Economic and Social Affairs (UN/DESA), Development Policy and Planning Office, Project Link estimates; national
sources; IMF, World Economic Outlook, April 2005; JP Morgan, Global Data Watch, various issues; Economic Intelligence
Unit (EIU), Country Forecast, various issues; and OECD, Economic Outlook No. 77.

a Calculations are based on GDP in constant market prices based on 1995 dollars.
b Region and country groups correspond to those defined in the UNCTAD Handbook of Statistics 2004.
c Average.
d Preliminary estimates.
e Forecast.

Trade and Development Report, 20054

past three years, the biggest European countries
have not been able to reach a higher and sustain-
able growth path despite receiving enormous
stimulus from the world economy. This inability
is attributed to depressed domestic demand as a
result of a mixture of deflationary wage policies
(i.e. in Germany, where a 0.8 per cent growth rate
expected in 2005) and losses of market shares (i.e.
in Italy, whose GDP is expected to fall in 2005).
France, with a more moderate deflationary policy
than Germany, remains in the middle of the group,
with growth forecasted at around 1.5 per cent.
Spain is estimated to grow at a rate of about 3 per
cent in 2005 owing to sustained domestic demand.
As no fundamental changes in economic policy
within the euro area are foreseen, an acceleration
of growth in the near future cannot be expected.
The 2005 outlook for the ten new members of the
European Union is more upbeat and growth rates
are expected to exceed 4 per cent.

All in all, Europe is not positioned to help
reduce global imbalances in the next two years.
Its overall current-account deficit is rather low
(0.3 per cent of GDP) but the imbalances of coun-
tries inside the European Monetary Union in-
creased dramatically in the last three years. For
example, Germany’s surplus of $110 billion (3.8 per
cent of GDP), forecasted for 2005 by IMF (2005a),
is much larger than China’s surplus.

In 2004, Japan recorded a growth rate of
2.6 per cent, which was driven by private and pub-
lic consumption, non-residential investment and
brisk export performance. Growth was strong in
the first quarter of 2004, but faded in the second
half of the year, as domestic and foreign demand
weakened. In the first months of 2005, high cor-
porate profits and the reversal of the long-lasting
downward trend in employment and wages indi-
cate that the sluggishness of domestic demand in
the second half of 2004 may be over. Recent data
on export performance are, however, less positive.
They show a year-on-year deceleration of exports
in late 2004, due to a slowdown in electronics ex-
ports. This is partly related to rising foreign direct
investment (FDI) and production relocation to
China (see chapter II). As a result, in 2005 trade
is not expected to make a positive contribution to
real GDP growth as it had in 2004. The forecast
for 2005 points to a moderate deceleration in real
growth to 1.8 per cent.

2. Economic activity in developing
countries

In 2004, all developing regions posted sig-
nificantly higher growth rates than in previous
years (table 1.2). With a GDP growth of 4.6 per
cent, Africa continued to grow at the same rate as
in 2003 – the highest level reached in about a dec-
ade. However, the overall figures for the region
mask considerable differences across countries,
with growth rates ranging from an expansion of
31 per cent (Chad) to a contraction of over 8 per
cent (Zimbabwe). The strong growth performance
in Africa was fuelled mainly by higher prices of
primary commodity exports, particularly petro-
leum, on the back of strong global demand.
Economic growth was also supported by greater
political stability and the improved agricultural
performance resulting from favourable weather
conditions. The continued growth in domestic
demand is also credited to increased levels of ex-
ternal resource inflows via aid and debt relief, with
the latter contributing to lower fiscal deficits. The
general level of inflation went down from over
10 per cent to about 8 per cent.

Real GDP growth in 2004 was widespread in
both sub-Saharan Africa and North Africa. High
oil prices underscored output growth in Central
Africa, which recorded the highest subregional
growth rate at just over 7 per cent, and North Af-
rica, with a growth rate of around 5 per cent.
Economic performance in East and West Africa
benefited from a combination of higher agricul-
tural output and rising commodity prices. However,
economic growth in West Africa was subdued, due
to political instability in Côte d’Ivoire and a lo-
cust invasion in Mali, Niger and Senegal. Despite
higher growth in South Africa, the Southern African
region recorded the worst economic performance
of all the African subregions, largely due to the
continued economic contraction experienced by
Zimbabwe as a consequence of drought and eco-
nomic uncertainties.

Twelve African countries posted real output
growth of 6 per cent or more in 2004, eight of
which are either oil exporters (Chad, Equatorial
Guinea, Angola, the Libyan Arab Jamahiriya and
Sudan), or are recovering from a very low base
(Ethiopia, Sierra Leone and the Democratic Re-

Current Issues in the World Economy 5

public of the Congo). Thus, once again, most coun-
tries have fallen short of the 7 per cent annual
growth rate that is needed to attain the MDGs. A
modest improvement is expected in the region’s
economic performance in 2005 on the back of
continuing macroeconomic and political stability
and high commodity prices; although domestic
prices and external accounts in oil-importing coun-
tries will continue to suffer from high oil prices.
However, even in oil-exporting countries that have
been growing at two-digit rates over the past few
years, poverty levels will not be significantly re-
duced unless governments manage to channel a
significant part of the oil revenues into financing
of non-oil economic sectors (including social and
economic infrastructure), where the great major-
ity of population is employed.

West Asia performed strongly in 2004, reach-
ing 6.2 per cent growth in comparison to 5.3 per
cent in the previous year. These performances are
directly related to the massive injection of wind-
fall revenues flowing into oil exporting countries,
which also benefited indirectly most of the other
countries in the region through increased demand
for their exports, capital inflows and workers re-
mittances.

Export revenues of the major oil exporters
in the region (excluding Iraq) reached $292 bil-
lion in 2004,2 32 per cent more than in the previous
year, owing mainly to higher international oil
prices. The volume of oil production also in-
creased (4.2 per cent for the group as a whole),
contributing significantly to real GDP growth.
These additional revenues, on average, repre-
sented 12 per cent of these countries’ GDP, and
boosted domestic expenditure. In particular, govern-
ment revenues augmented significantly, allowing for
an increase in public expenditures and, simulta-
neously, a significant fiscal surplus. Part of the
surplus has been used to accumulate reserves, but
another part was used to reduce indebtedness. As
in some countries (notably Saudi Arabia) the bulk
of public debt is held by nationals, debt repay-
ments have further expanded private liquidity and
demand. Expansionary trends have continued into
2005. Oil prices rose by 30 per cent in the first
half of the year; if such price levels persist, oil
revenues will increase in 2005 at a similar rate as
in the previous year. Oil production is set to in-
crease further in Saudi Arabia and Kuwait, and

will probably be maintained at the current high
levels in the Islamic Republic of Iran, Qatar and
the United Arab Emirates. In addition, several in-
vestment projects are on line, covering the energy
sector (oil, gas and refineries), infrastructure, tele-
communications and real estate. At the same time,
government expenditure is set to continue its up-
ward trend; and it is aimed, in part, at addressing
social problems related to high unemployment.

Other economies within the region, such as
Jordan and Lebanon, also experienced accelerated
growth in 2004, mainly driven by domestic de-
mand that was stimulated by the expansion of
regional tourism and higher workers remittances
(ESCWA, 2005). Also, capital inflows into real
estate investments boosted the construction sec-
tor. These countries managed to expand exports
and profit from higher regional demand, includ-
ing from Iraq. However, imports also expanded
significantly and public debt remains high. These
circumstances limited the room for manoeuvre of
economic policies, making them highly depend-
ent on continued inflows of capital, tourism and
remittances.

Turkey posted a 8.9 per cent growth rate in
2004, propelled by strong domestic demand, in
particular private consumption and fixed invest-
ment. An economic slowdown began in the second
half of that year and extended into the first months
of 2005.3 However, GDP growth in 2005 is estimated
to remain at around 5 per cent. Macroeconomic
policy has to deal with the “twin” deficits prob-
lem. Overall fiscal balance remained negative in
2004, despite a primary surplus of 6.5 per cent of
GDP, due to a public debt stock amounting to three
quarters of GDP and high real interest rates. More-
over, although exports were growing significantly,
the current-account deficit reached 5 per cent of
GDP in 2004, as a result of booming imports and
interest payments. These deficits remain a chal-
lenging issue for the Turkish economy. On the
other hand, the continued reduction of interest
rates by the central bank may play an important
role in the sustainability of public debt and in pre-
venting an excessive economic slowdown.

With 7.1 per cent growth in 2004, East and
South Asia recorded its strongest expansion since
the 1997 financial crisis. China led the boom with
output growing by 9.5 per cent, but growth was

Trade and Development Report, 20056

Table 1.2

GDP GROWTH IN SELECTED DEVELOPING ECONOMIES,
SOUTH-EAST EUROPE AND CIS, 1990–2005a

(Percentage change over previous year)

1990–
Region/economyb 2000c 1999 2000 2001 2002 2003 2004d 2005e

Developing economies 4.8 3.5 5.4 2.4 3.5 4.7 6.4 5.4
Latin America 3.3 0.2 3.8 0.4 -0.6 2.0 5.7 4.2
of which:

Argentina 4.1 -3.4 -0.8 -4.4 -10.9 8.7 9.0 7.5
Bolivia 4.0 0.4 2.3 1.5 2.8 2.9 3.6 3.5
Brazil 2.9 0.8 4.5 1.5 1.5 0.6 4.9 3.0
Chile 6.6 -0.8 4.2 3.1 2.1 3.3 6.1 6.0
Colombia 2.9 -4.2 2.9 1.4 2.5 2.0 4.0 3.5
Ecuador 2.2 -6.3 2.8 5.1 3.8 3.1 6.9 3.0
Mexico 3.1 3.6 6.6 -0.2 0.9 1.3 4.4 3.3
Paraguay 2.2 0.5 -0.4 2.7 -2.3 2.6 4.0 3.0
Peru 4.6 0.9 2.8 0.3 4.9 4.0 4.8 5.5
Uruguay 3.4 -2.4 -1.4 -3.4 -11.2 2.5 12.3 5.5
Venezuela 1.6 -6.1 3.2 2.8 -8.9 -7.5 17.9 8.0

Africa 2.6 3.0 3.5 3.4 2.9 4.7 4.6 4.9
of which:

Algeria 1.9 3.2 2.4 2.1 4.1 6.7 5.8 7.5
Cameroon 1.8 4.2 5.3 4.6 4.0 4.0 4.8 4.5
Cape Verde 6.0 8.6 6.8 3.0 4.6 5.0 4.0 6.0
Côte d’Ivoire 3.3 1.9 -2.7 0.1 -1.2 1.8 -1.0 -1.0
Democratic Republic of the Congo -4.9 -4.3 -6.9 -1.1 3.1 5.0 6.8 7.0
Egypt 4.2 5.4 3.5 3.2 3.1 2.8 3.2 5.0
Ethiopia 3.9 6.3 5.4 7.9 1.2 -3.8 11.6 6.0
Ghana 4.3 4.4 3.7 4.2 4.5 4.7 5.8 5.0
Kenya 2.1 1.3 -0.2 1.1 1.0 1.8 2.6 3.0
Morocco 2.3 -0.1 1.0 6.3 3.2 5.2 3.7 4.0
Nigeria 2.9 2.8 5.8 2.8 1.5 10.7 5.1 4.5
South Africa 2.1 2.0 3.5 2.7 3.6 2.8 3.7 4.0
Tunisia 4.7 6.1 4.7 4.9 1.7 5.6 5.7 5.0
Zimbabwe 2.5 -0.7 -4.9 -8.4 -5.6 -13.2 -8.2 -3.0
Sub-Saharan Africa 2.6 2.9 3.9 3.2 3.0 4.8 4.4 4.4

Asia 6.0 5.3 6.6 3.2 5.5 5.9 6.9 6.0
Asia, excluding China 4.9 4.8 6.2 1.9 4.7 4.8 6.0 4.8

West Asia 3.2 -0.6 4.6 -0.1 4.3 5.3 6.2 5.2
of which:

Iran, Islamic Republic of 3.5 4.2 2.8 3.2 8.0 6.7 5.4 5.5
Jordan 4.6 1.5 2.7 3.5 4.9 3.0 6.2 5.0
Lebanon 6.3 4.0 2.0 1.4 2.0 3.0 4.0 2.0
Saudi Arabia 1.7 -0.8 4.9 1.2 0.1 7.2 5.3 5.5
Turkey 3.8 -4.7 7.4 -7.5 7.8 5.8 8.9 5.0
United Arab Emirates 2.6 2.5 5.4 5.0 1.6 6.3 5.9 6.0
Yemen 5.5 3.7 5.1 3.9 3.3 4.2 2.0 3.0

East and South Asia 6.6 6.5 7.0 3.9 5.7 6.0 7.1 6.1
of which:

China 10.4 7.0 7.9 7.5 8.0 9.1 9.5 9.0
Hong Kong (China) 4.0 3.4 10.2 0.5 2.3 1.5 8.1 5.0
India 6.0 7.1 4.0 5.5 4.3 7.8 6.7 6.5
Indonesia 4.2 0.8 4.9 3.4 4.3 5.0 5.1 6.0
Malaysia 7.0 6.1 8.3 0.5 4.1 5.3 7.1 5.5
Pakistan 3.5 4.3 2.6 2.9 5.8 5.3 6.3 7.5
Philippines 3.3 3.4 6.0 3.0 4.4 4.7 6.1 4.0
Republic of Korea 5.8 10.9 9.3 3.1 6.4 3.1 4.6 3.5
Singapore 7.7 6.4 9.4 -2.4 3.2 1.4 8.4 2.5
Taiwan Province of China 6.3 5.3 5.8 -2.2 3.9 3.3 5.7 3.5
Thailand 4.2 4.4 4.6 1.8 5.4 6.7 6.1 4.0
Viet Nam 7.9 4.8 6.8 6.9 7.0 6.0 7.7 7.0

/...

Current Issues in the World Economy 7

also strong in most other countries in the region
(table 1.2). Economic growth was generally fuelled
by a combination of strong foreign demand and
robust domestic demand. Exports have been a
major driving force: in 2004, exports of goods
from the region grew by 22 per cent in volume
terms (table 1.3). China’s exports led the expan-
sion, with export volume growing by 33 per cent,
but several other countries that participate in re-
gional production networks associated with China
also benefited from its strong export performance.
The region’s exports continued to grow at double-
digit rates in 2004, partly as a result of the dynamism
in the global market for electronics. In general,
exchange rate stability helped to maintain inter-
national competitiveness in most countries, although
in Singapore, Taiwan Province of China and Thai-
land, and recently in China as well, managed
floating led to a moderate appreciation vis-à-vis
the dollar. This softened the impact of the rising
price of primary imports, without leading to a sig-
nificant appreciation of the real effective exchange

rate. Other countries maintained a fixed exchange
rate vis-à-vis the dollar, or even depreciated their
currency as in Indonesia. Only the Republic of
Korea underwent a significant real appreciation
of its currency, but so far this has not restrained
exports from growing briskly.

With the exception of the Republic of Korea
where private demand was constrained by high
indebtedness of households and small firms, do-
mestic demand contributed considerably to the
region’s growth. Private consumption provided a
strong stimulus to growth in China, India, Indo-
nesia, Malaysia, Singapore, Thailand and Viet
Nam, with fixed investment being the main driver
of growth in China and Taiwan Province of China.
Inflation, as measured by consumer prices, showed
a moderate increase in some countries during 2004,
but remained modest in most East and South Asian
countries. Monetary policy maintained an accom-
modative stance and real interest rates have mostly
been declining. On the whole, high income growth

South-East Europe and CIS -4.3 3.4 8.1 5.6 4.9 6.9 7.5 6.0

CIS -5.0 5.6 9.3 5.8 5.0 7.6 7.8 6.3
of which:

Belarus -1.7 3.5 5.8 4.7 5.0 6.8 11.0 7.0
Kazakhstan -4.1 2.7 9.8 13.2 9.9 9.2 9.4 8.5
Russian Federation -4.7 6.4 10.1 5.1 4.7 7.3 7.1 6.0
Ukraine -9.5 -0.2 5.9 9.2 3.6 8.5 12.1 6.5

South-East Europe -1.6 -4.4 3.8 4.6 4.4 4.1 6.4 4.8
of which:

Bulgaria -1.9 2.3 5.4 4.1 4.8 4.8 5.6 5.0
Croatia 0.6 -0.9 2.9 3.8 5.2 4.7 3.8 3.5
Romania -0.6 -1.2 2.1 5.7 4.9 4.8 8.3 5.5

Source: UNCTAD secretariat calculations, based on UNCTAD Handbook of Statistics 2004; UN/DESA, Development Policy
and Planning Office, Project Link estimates; ECLAC, Economic Survey of Latin America and the Caribbean 2004–2005;
ESCAP, Economic and Social Survey of Asia and the Pacific 2005; ESCWA, Survey of Economic and Social Develop-
ments in the ESCWA Region 2005; national sources; IMF, World Economic Outlook, April 2005; JP Morgan, Global
Data Watch, various issues; EIU, Country Forecast, various issues; and OECD, Economic Outlook No. 77.

a Calculations are based on GDP in constant market prices based on 1995 dollars.
b Region and country groups correspond to those defined in the UNCTAD Handbook of Statistics 2004.
c Average.
d Preliminary estimates.
e Forecast.

Table 1.2 (concluded)

GDP GROWTH IN SELECTED DEVELOPING ECONOMIES,
SOUTH-EAST EUROPE AND CIS, 1990–2005a

(Percentage change over previous year)

1990–
Region/economyb 2000c 1999 2000 2001 2002 2003 2004d 2005e

Trade and Development Report, 20058

and good investment performance contributed to a
balanced increase of domestic and foreign demand.

In 2005, economic expansion in East and
South Asia is expected to slow to a growth rate of
slightly above 6 per cent. In particular, the contri-
bution of external trade to growth is diminishing
in several countries in the region, although it re-
mains significant. Global demand for electronics,
especially personal computers and semiconduc-
tors, is growing much slower since the end of
2004, affecting exports from several Asian econo-
mies, such as Japan, Malaysia, Singapore, Taiwan
Province of China and Thailand.

On the other hand, domestic demand has gen-
erally maintained its contribution to growth in the

first months of 2005. Private consumption began
to recover in the Republic of Korea in the last
quarter of 2004, after contracting for almost two
successive years. However, this does not fully
compensate for slowing export growth. As a result,
GDP growth is forecast to decline to 3.5 per cent
(KDI, 2005). Investment has been increasing in
Indonesia and Thailand in 2005, owing to recon-
struction work after the December 2004 tsunami
and the subsequent influx of public investment and
incentives for infrastructure development. In In-
donesia, the tsunami did not cause a significant
impact on economic growth in the first quarter of
2005. On the other hand, economic activity was
more severely affected in Thailand, where the re-
duction of tourism receipts and shrimp production
after the tsunami added to other adverse factors,

Table 1.3

EXPORT AND IMPORT VOLUMES OF GOODS, BY REGION
AND ECONOMIC GROUPING, 1996–2004

(Percentage change over previous year)

Export volume Import volume

1996– 1996–
2000a 2001 2002 2003 2004 2000a 2001 2002 2003 2004

World 7 -1 5 6 13 7 -1 4 7 13

Developed economies 7 -1 2 3 11 8 -1 3 5 11
of which:

Japan 6 -8 8 9 13 4 1 1 6 6
United States 7 -6 -4 3 9 11 -3 4 5 11
Europe 7 2 4 3 12 8 1 2 5 11

Developing economies 8 -2 9 12 16 7 -3 7 10 19
of which:

Africa 2 1 2 11 7 1 5 4 7 26
Latin America 10 1 2 3 10 9 -3 -4 0 13
West Asia 5 0 8 1 3 10 -4 7 -5 35
East and South Asia 10 -3 12 17 22 6 -3 11 15 18
of which:

China 12 9 25 35 33 11 12 23 36 26
India 8 7 17 10 18 5 4 13 9 17

South-East Europe and CIS 1 7 5 9 13 -0 17 10 21 17

Source: UNCTAD secretariat calculations, based on UN COMTRADE; United Nations Statistics Division, United Nations Common
Database (UNCDB); United States Bureau of Labor Statistics, Import/Export Price Indexes database; Japan Customs
Trade Statistics database; UNCTAD, Commodity Price Bulletin, various issues; and other national sources.

a Average.

Current Issues in the World Economy 9

such as high oil prices, drought and outbreaks of
bird flu (NESDB, 2005). As a result, Thailand’s
growth will decelerate in 2005 to a rate of 4 per
cent. In Malaysia, private consumption is expected
to continue growing in 2005, and investment
should increase within a context of low interest
rates and easy credit availability. As Malaysian
exports are highly concentrated in electronics and
electrical machinery, export growth is likely to
slow down. The overall result would be a moder-
ate deceleration of growth to a still strong 5.5 per
cent. Taiwan Province of China, is also experi-
encing slower export growth, while its overall
domestic demand should be sustained by the in-
crease in private consumption, owing to rising real
disposable income and falling unemployment.
These trends show a further rebalancing of growth
in Asia as economies slowly shift their reliance
on export-led growth to internally-generated de-
mand growth (NIESR, 2005: 19). Such a
rebalancing is particularly relevant in light of the
huge global trade imbalances (see section B).

GDP growth in China remained very high in
2004 and the first quarter of 2005 (9.5 per cent).
The tightening measures introduced in the course
of the year have started to have some impact on
investment expansion, even though it is still grow-
ing at a rapid pace.4 Policy measures included the
abandonment of the strict pegging regime with the
dollar, higher bank reserve requirements, moder-
ate increases in interest rates and direct measures
aimed at limiting the financing of construction
projects and industries, such as steel and cement,
that may have been building excessive production
capacities. These measures are likely to influence
not only the amount that is invested, but also its
direction. A reorientation of investment financing
is under way towards areas where bottlenecks have
appeared recently, in particular, energy and infra-
structure. Inflationary pressures have abated
during the first half of 2005, indicating that more
severe monetary tightening is unlikely. Exports
of goods continue to grow at a rapid pace, driven
by the end of textile quotas in developed coun-
tries and the production of past investments in
manufacturing coming on stream. As a result of
these trends, even though it remains a major driv-
ing factor, investment may not be making such a
large contribution to growth as in the past, while
private consumption and net exports are playing
an increasingly important role.

In South Asia, India and Pakistan are experi-
encing high and stable growth rates. India has
undergone significant growth in manufacturing
and exports of IT-related services and business-
process outsourcing. This has helped to off-balance
the adverse impact of a poor monsoon on agricul-
ture. Inflation has been kept in check despite
higher oil and other primary commodity prices.
The fiscal measures taken by the Indian Govern-
ment have so far not led to a substantial reduction
of the fiscal deficit, which remains stable at 4.5 per
cent of GDP. As a consequence, macroeconomic
policy is likely to maintain a rather supportive
stance. In Pakistan, strong GDP growth resulted
from good performances in all sectors; however,
it particularly benefited from an unusual expan-
sion of agricultural output. A rich cotton crop has
also contributed to stronger than expected growth
in the textile sector. Real GDP growth may accel-
erate in 2005, driven by the continued expansion
of manufacturing output and exports, supported
by the phasing out of textile import quotas in Janu-
ary 2005. Domestic demand will sustain present
growth rates, in particular private consumption,
due to continued higher growth of personal dis-
posable income.

Latin American economies showed a remark-
able improvement in 2004, expanding at 5.7 per
cent, following five years of stagnation and cri-
sis. The engines driving this economic recovery
were export expansion and the terms-of-trade im-
provement in most countries in the region (see
chapter III). Gains from terms of trade were very
significant for oil and mining exporters, and lower
but still relevant for agriculture exporters. On the
other hand, some Central American and Caribbean
countries that export labour-intensive manufac-
tures and import oil, suffered terms-of-trade losses.
These countries managed to shoulder the external
burden by increasing the volume of their exports
(owing to expanding imports from the United
States) and receiving substantial remittances from
overseas workers. The external environment led
to an overall surplus in the region’s current ac-
count for the second consecutive year, despite a
significant growth in imports. On the fiscal side,
the last few years showed a moderate reduction
in fiscal deficits and, in several cases, a consider-
able surplus in the primary balance (excluding in-
terest payments). This has been partly the result
of increasing public revenues originated in pri-

Trade and Development Report, 200510

mary commodity exports, either directly – through
State-owned exporting firms – or indirectly,
through rising taxes and royalties. Fiscal expendi-
ture has been allowed to increase in some cases,
although in most countries fiscal policy was more
oriented towards “debt sustainability” rather than
towards the encouragement of economic activity
and investment. For this economic reactivation to
persist, it should rely less on temporary factors,
such as the favourable external environment and
more on a sustained recovery of domestic demand,
including investment. Even though the latter has
improved after reaching record lows in 2003, fixed
investment was only 18.5 per cent of the region’s
GDP in 2004 (ECLAC, 2005).

Preliminary evidence for 2005 points to a
continuation of economic growth, but at a slower
pace. One reason for this slowdown is monetary
tightening in the two biggest Latin American econo-
mies: Brazil and Mexico. In these two countries,
high priority is being placed on inflation targets,
leading to a significant increase in policy interest
rates, especially since the second half of 2004. In
June 2005, the policy rate in Brazil reached a level
close to 20 per cent with the inflation rate remain-
ing at 6 to 7 per cent. As a result, fixed investment
and private consumption slowed down in the last
quarter of 2004 and the first quarter on 2005 (com-
pared with the same period of the previous year),
affecting manufacturing, construction, commerce
and communications. Official forecasts for Brazil
anticipate a recovery in domestic demand in the
second part of the current year in expectation of
lower interest rates and rising minimum wages.
GDP is expected to grow at a rate close to 3 per
cent in 2005, down from 4.9 per cent in 2004
(IPEA, 2005). In Mexico, persistent monetary
tightening has pushed the interbank rate up from
5.3 per cent in January 2004 to 10.1 per cent in
May 2005. Economic activity decelerated in the
first months of 2005, particularly in manufactur-
ing, agriculture and construction, pointing to an
annual growth rate of about 3.3 per cent (com-
pared to 4.4 per cent in 2004).5

Economic activity in Latin America is also
set to slow in 2005 because Argentina, Uruguay
and Venezuela will grow at a less brisk pace. Ac-
cording to some observers the recent rapid growth
just reflects a return to the pre-crisis GDP levels.
However, the driving sectors and the characteris-

tics of this economic growth are radically different
from those prevailing before the crisis. Argentina
and Uruguay are drawing the benefits of restored
competitiveness after shifting relative prices in fa-
vour of tradable goods and services. Moreover,
they have managed to restructure their foreign
debt, particularly Argentina, with a sizeable reduc-
tion in capital and interest rates. Domestic demand
is providing new stimulus through higher domestic
consumption and fixed investment. These countries
have also benefited from improving terms of trade,
with a sizeable impact on domestic income and
fiscal receipts, especially in Venezuela, where am-
bitious social and development programmes have
been launched.

The Andean countries that have gained strong-
ly from oil and mining exports, both in volume
and value terms, such as Bolivia, Chile, Ecuador
and Peru, will continue to grow in 2005. How-
ever, there will not be the same amount of invest-
ment in natural resources and of new production
capacities coming on stream in 2005 as in 2004.
High prices for their exports will continue to pro-
vide a considerable level of revenues for both the
private and the public sector, maintaining a healthy
domestic demand. Central American countries will
keep a moderate growth pace in 2005, with some
export price increases, higher public investment
linked to debt-relief programmes and private con-
sumption sustained by workers’ remittances. Fi-
nally, Caribbean countries, some of which were
hit by natural disasters in the second half of 2004,
should benefit from the recovery of tourism in
2005.

3. Recent developments in world trade
and finance

The strong performance of the global economy
in 2004 brought about an acceleration in world
trade. Total merchandise exports grew by 22.5 per
cent in current dollars. As in 2003, this expansion
was the result of both increasing volume (13 per
cent) and rising dollar prices (9.5 per cent).6 The
latter was partly caused by the depreciation of the
dollar, which increased the value of international
trade in dollar terms within the euro area.

Current Issues in the World Economy 11

The expansion in export volume was associ-
ated with some changes in its geographical com-
position (table 1.3). In comparison with the situation
which prevailed in 2003, the major change was
the strong recovery of export volumes from de-
veloped countries, which grew by 11 per cent in
2004, compared to 3 per cent in the previous year.
There was a widespread acceleration of export
volume growth in Europe, largely due to the speed-
ing up of intraregional trade with the new EU ac-
ceding member countries, and to expanding sales
to East Asia and to oil-exporters in West Asia and
the CIS. Exports from the United States also re-
covered, as a result of a more competitive cur-
rency level, while Japan continued to benefit from
dynamic Asian intraregional trade.

Exports from developing countries continued
their expansion at a very rapid pace in 2004, and
registered a growth rate of 16 per cent in volume
terms. As in previous years, East and South Asia
led this expansion, but Latin America and Africa
also experienced significant increases in export
volumes. As has been usually the case since 1990,
exports increased at higher rates in developing
countries than in the developed world. However,
the revival of exports of developed countries reduced
the relative contribution of developing countries
to global export growth from two thirds in 2003
to an estimated 40–45 per cent in 2004.

Increasing export volume, together with
higher commodity prices provided a boost to the
value of merchandise exports from developing
countries, which grew by 26 per cent in current
dollars. In particular, regions with a large share
of primary commodities in their total exports –
Africa, CIS, South America and West Asia – re-
corded above-average export growth in 2004.
Terms-of-trade gains from in these regions explain
the very rapid growth in import volume, clearly
exceeding that of exports (table 1.3). Among the
manufacturing exporters, East and South Asia also
performed above average, mainly due to strong
export growth from China and India. As a whole,
the share of developing countries in world exports
rose to 33.4 per cent in 2004, compared to 27.7 per
cent ten years earlier. Among developed countries,
the United States have been constantly reducing
their share in world exports from 12 per cent in
the mid-1990s to 9 per cent in 2004, while at the
same time slightly rising their share in world im-

ports, as the economy has increasingly relied on
outsourcing in foreign markets.

World trade in services (transport, travel and
other commercial services) grew by 16 per cent
in dollar terms in 2004 (WTO, 2005a). The expan-
sion of transport services was naturally stimulated
by the strong recovery in trade volume. In par-
ticular, world seaborne trade volume grew by
4.3 per cent in 2004 (after a 5.8 per cent expansion
in 2003), mainly as a result of increased shipments
of primary commodities directed to China and
other countries in East Asia (UNCTAD, 2005a).
Strong demand for transport services has main-
tained freight rates at very high levels, after
soaring in 2003 (see box 4.1 in chapter IV). By
the end of 2004 the level of freight rates in the
main containerized routes – trans-Pacific, trans-
Atlantic and Asia-Europe – were mostly above the
levels that prevailed at the end of 2003.

Travel services recovered markedly from the
2001 downturn. 2004 was an excellent year for
tourism, with international tourist arrivals increas-
ing by 10.7 per cent. Growth in tourism services
rebounded by 28 per cent in Asia and the Pacific,
following the lows of the first half of 2003, which
had been due to SARS. It was also very fast in the
Middle East (21 per cent), while Europe performed
below the world average (with 5 per cent growth
in 2004) as a result of the continued strength of
the euro. International tourism kept growing in the
first four months of 2005, albeit at a slower pace
(7.7 per cent compared to the same period of
2004). Growth rates showed wide disparities, with
very positive results in South America (with a 19 per
cent expansion), Middle East (17 per cent) and
sub-Saharan Africa (15 per cent), and slow growth
rates in Western and Southern Europe (below 3 per
cent). South-East Asia and South Asia experienced
a sudden deceleration in tourist arrivals due to the
tsunami in December 2004 (World Tourism Or-
ganization, 2005: 6–7).7

Given these developments in goods and serv-
ices trade and the growing inflow of workers’
remittances in several countries, all developing
regions posted current-account surpluses in 2004.
Naturally, these regional totals concealed some defi-
cits at the country level, especially in sub-Saharan
Africa, South-East Europe, Central America and
the Caribbean. But, in general, the need for fi-

Trade and Development Report, 200512

nancing the current account was less stringent in
the developing world than in previous years. The
single most important source of external financ-
ing for developing countries was FDI, which
recovered to its 2001 level.8 A large part of the
current-account deficit in several sub-Saharan and
Central American countries is explained by the
expansion of FDI in recent years, which was ac-
companied by an increase in imports of capital
goods and an outflow profit remittances. In other
cases, current-account deficits were financed
through grants or official borrowing. On the other
hand, in several middle-income countries in Asia
(including West Asia) and Latin America current
accounts were in balance or in surplus.

This overall situation had two consequences
for the international financial markets. First, as
the more comfortable balance-of-payments situa-
tion of the “emerging markets” coincided with
high liquidity in developed countries, the spreads
on emerging markets bonds have declined signifi-

cantly. Yet external debt problems have persisted
in some middle-income countries; many of them
have issued new bonds in order to repay those
coming to maturity, and have remained in a vul-
nerable situation. But market conditions were
favourable for a restructuring of external debt at
lower interest rates. They also facilitated the end
of the Argentine debt default through a debt re-
structuring, which included debt stock reduction,
extended maturity and/or lower interest rates. Sec-
ond, there has been a continued accumulation of
international reserves in a number of developing
countries, mainly in East and West Asia. In 2004,
foreign exchange reserves of developing countries
increased by an unprecedented $450 billion (IMF,
2005a). As increasing reserves mainly consist of fi-
nancial assets issued by developed countries (and
particularly those of the United States), they repre-
sent a significant export of capital from developing
to developed countries, and a key element in the cur-
rent phenomenon of global economic imbalances.
This issue is further examined in the next section.

C. The global imbalances and the United States
current-account deficit

The United States current account recorded
a deficit of $666 billion in 2004, which makes it
the counterpart of almost 70 per cent of the aggre-
gated surpluses in the world economy (table 1.4).
This unprecedented size of a deficit and the dim
perspectives of its correction in the foreseeable
future have raised questions about the stability of
the global financial system and the sustainability
of global growth. Warnings abound, as to date no
other major economic power has been prepared

to shoulder part of the adjustment burden. Much
of the world economy continues to depend on the
United States economy, both as the consumer and
the debtor of last resort. Serious policy initiatives
to tackle the problem are missing, and the debate
is now focused on whether dramatic exchange rate
changes are the only way out or whether policies
to stimulate growth in surplus regions, combined
with measures to limit growth in the United States,
could be an alternative.

Current Issues in the World Economy 13

Table 1.4

CURRENT-ACCOUNT BALANCE, SELECTED ECONOMIES, 2000–2004

2000 2001 2002 2003 2004 2000 2001 2002 2003 2004

(As a percentage of total
($ billion) surplus or deficit)

Surplus economies

Japan 119.6 87.8 112.6 136.2 171.8 23.8 21.6 21.9 20.4 19.3
Germany -25.7 1.6 43.1 51.8 96.4 3.9 0.4 8.4 7.8 10.9
China 20.5 17.4 35.4 45.9 70.0 4.1 4.3 6.9 6.9 7.9
Russian Federation 44.6 33.4 30.9 35.4 59.6 8.9 8.2 6.0 5.3 6.7
Saudi Arabia 14.3 9.4 11.9 29.7 49.3 2.9 2.3 2.3 4.4 5.5
Switzerland 30.7 20.0 23.3 42.4 42.9 6.1 4.9 4.5 6.4 4.8
Norway 26.1 26.2 24.4 28.3 34.4 5.2 6.4 4.8 4.2 3.9
Sweden 9.9 9.7 12.1 23.0 28.0 2.0 2.4 2.4 3.4 3.2
Singapore 11.9 14.4 15.7 27.0 27.9 2.4 3.5 3.1 4.0 3.1
Republic of Korea 12.3 8.0 5.4 12.1 26.8 2.4 2.0 1.0 1.8 3.0
Canada 19.7 16.1 14.4 17.0 26.0 3.9 4.0 2.8 2.6 2.9
Netherlands 7.2 9.8 12.8 15.1 19.4 1.4 2.4 2.5 2.3 2.2
Taiwan Province of China 8.9 18.2 25.6 29.3 19.0 1.8 4.5 5.0 4.4 2.1
United Arab Emirates 12.2 6.5 3.5 6.9 16.1 2.4 1.6 0.7 1.0 1.8
Hong Kong (China) 7.1 9.9 12.6 16.2 15.9 1.4 2.4 2.5 2.4 1.8
Malaysia 8.5 7.3 8.0 13.4 15.7 1.7 1.8 1.6 2.0 1.8
Kuwait 14.7 8.3 4.3 7.3 15.1 2.9 2.0 0.8 1.1 1.7
Belgium 9.0 8.9 14.1 13.3 14.9 1.8 2.2 2.8 2.0 1.7
Venezuela 11.9 2.0 7.6 11.4 14.5 2.4 0.5 1.5 1.7 1.6
Qatar 3.2 3.5 3.3 6.8 12.0 0.6 0.9 0.6 1.0 1.3

Total surplus 501.7 406.6 513.7 667.6 888.0

Deficit economies

United States -413.5 -385.7 -473.9 -530.7 -665.9 62.2 67.7 72.5 71.1 69.0
Spain -19.4 -16.4 -15.9 -23.6 -49.2 2.9 2.9 2.4 3.2 5.1
United Kingdom -36.5 -32.2 -26.4 -30.6 -47.0 5.5 5.7 4.0 4.1 4.9
Australia -15.3 -8.2 -16.6 -30.2 -39.4 2.3 1.4 2.5 4.1 4.1
Italy -5.8 -0.7 -6.7 -21.9 -24.8 0.9 0.1 1.0 2.9 2.6
Turkey -9.8 3.4 -1.5 -8.0 -15.6 1.5 0.8 0.2 1.1 1.6
Portugal -11.1 -10.4 -8.9 -8.0 -13.3 1.7 1.8 1.4 1.1 1.4
Hungary -4.0 -3.2 -4.7 -7.5 -8.9 0.6 0.6 0.7 1.0 0.9
Mexico -18.2 -18.2 -13.7 -8.6 -8.7 2.7 3.2 2.1 1.1 0.9
Greece -7.8 -7.7 -9.7 -10.8 -8.4 1.2 1.4 1.5 1.4 0.9
New Zealand -2.5 -1.2 -2.2 -3.3 -6.0 0.4 0.2 0.3 0.4 0.6
Czech Republic -2.7 -3.3 -4.2 -5.6 -5.6 0.4 0.6 0.6 0.7 0.6
France 18.0 21.5 14.5 5.0 -5.4 3.6 5.3 2.8 0.7 0.6
Romania -1.7 -2.6 -2.0 -3.9 -5.4 0.3 0.5 0.3 0.5 0.6
South Africa -0.2 -0.0 0.7 -1.5 -5.3 0.0 0.0 0.1 0.2 0.6
Poland -10.0 -5.4 -5.0 -4.1 -3.6 1.5 0.9 0.8 0.5 0.4
Serbia and Montenegro -0.3 -0.5 -1.4 -1.6 -3.2 0.1 0.1 0.2 0.2 0.3
Lebanon -3.1 -3.8 -2.6 -2.5 -3.1 0.5 0.7 0.4 0.3 0.3
Ireland -0.1 -0.6 -1.5 -2.1 -2.7 0.0 0.1 0.2 0.3 0.3
Azerbaijan -0.2 -0.1 -0.8 -2.0 -2.3 0.0 0.0 0.1 0.3 0.2

Total deficit -664.9 -569.4 -653.7 -746.0 -965.2

Source: IMF, World Economic Outlook, April 2005.
Note: Calculations are based on a total of 180 countries; the sum of total surpluses and deficits is different from zero because

of errors and omissions. Countries are listed according to the levels of their surplus/deficit in 2004.

Trade and Development Report, 200514

1. Twenty-five years of deficits in the
United States

The deficit in the United States current ac-
count is not a new phenomenon. In 1982 the
United States current account fell into a deficit,
which continued to grow until 1987 (fig. 1.1).
Following the Plaza Agreement in 1985 and the
Louvre Accord in 1987, it returned to balance in
1991. However, the current account went into defi-
cit again, and it has since continued to widen in
the context of the long-lasting and strong recov-
ery in the United States. Since 1998, the share of
the deficit in GDP increased from around 2 per
cent to almost 6 per cent in 2004.

These developments are explained by two
major factors. First, the real exchange rate, which

mainly determines the international competitive-
ness of United States producers, rose markedly
during the first half of the 1980s. An overvalued
dollar played a central role in the widening cur-
rent-account deficit. The subsequent reduction of
the deficit was accompanied by a depreciation of
the dollar in the second half of the 1980s. The
second factor is the gap between real GDP growth
in the United States and in the rest of the world.
Relatively fast growth in the United States tends
to exacerbate the current-account deficit via strong
import demand, whereas outright recessions (such
as the one which occurred in 1991) lead to the
opposite result. More recently, however, these fac-
tors seemed to have a weaker influence on the
current account; since 1998 the deficit continued
to increase as a percentage of GDP, even though
the growth gap between the United States and the
rest of the world has almost disappeared since

Figure 1.1

UNITED STATES CURRENT-ACCOUNT BALANCE,a RELATIVE GDP GROWTH
AND REAL EFFECTIVE EXCHANGE RATE, 1980–2004

(Per cent and index numbers, 2000 = 100)

Source: UNCTAD secretariat calculations, based on United States Bureau of Economic Analysis, International Economic Accounts
database; World Bank, World Development Indicators database; and JP Morgan, Effective Exchange Rate Indices
database.

a As a percentage of GDP.

Current Issues in the World Economy 15

2000, and the dollar substantially depreciated in
2003 and 2004. While exports increased in 2004
and in the first few months of 2005, the expan-
sion of imports has continued to outpace them.

Some of the explanations given for the lack
of a rapid response of imports to exchange rate
changes point to temporary factors; for instance,
the unit value of imports rises immediately after a
devaluation, increasing the import value, while im-
port volume takes more time to adjust downward
(the so-called J-curve effect). It has also been sug-
gested that firms exporting to the United States
would be willing to squeeze their profit margin
for some time in order to keep their market shares.
Other interpretations indicate more durable factors,
such as a loss of competitiveness and market shares
of some United States industries and redeployment
of industrial production to Asia (Aglietta, 2004: 31).
It has also been argued that income elasticity for
United States imports is structurally larger than
foreign income elasticity for United States exports,
leading to a tendency towards a trade deficit, even
in the absence of a growth gap.9

These arguments suggest that only a huge
depreciation of the dollar – with all its potential
repercussions on the global financial system –
could reduce the United States trade imbalances
and bring them down to a sustainable level. On
the other hand, an adjustment brought about by a
much lower growth in the United States involves
obvious risks for the world economy. As the value
of the United States imports currently represents
roughly 180 per cent of its exports, the latter will
have to grow much faster than imports for a con-
siderable time for the trade deficit to follow a
downward trend. Box 1.1 presents UNCTAD sec-
retariat’s calculations of the order of magnitude
of the currency depreciation or the growth adjust-
ment required for reducing the current-account
deficit.

These considerations raise a string of questions
about the currencies the dollar should depreciate
against and which countries should either enhance
or dampen economic growth. The increase in the
Unites States deficit in recent years is most pro-
nounced with the EU and Asia (fig. 1.2); however,
the intraregional structure of current-account sur-
pluses and deficits has also to be taken into
account. While China accounts for most of the rise

in the United States current-account deficit in re-
cent years, it has considerable deficits with many
Asian countries as a result of its rapid growth and
its presence at the end of many production chains.
On the other hand, the moderate increase in the
current-account surplus of the EU as a whole hides
the much bigger increases in the surpluses of some
individual countries in the euro area, in particular
Germany.

In addition to such trade balance considera-
tions, a number of authors and organizations have
recently examined how a devaluation of the dol-
lar may modify the terms of the global imbalance
problem if the effects of financial globalization
are taken into account. They have introduced the
“valuation effect”, that is, the role of the actual
valuation of the stock of assets and liabilities and
the changes in their valuation due to asset price
changes and exchange rate changes.

In the United States liabilities are almost ex-
clusively denominated in domestic currency. As
two thirds of United States assets are denominated
in foreign currencies, a depreciation of the dollar
increases the domestic currency value of assets,
while leaving the value of liabilities more or less
unchanged. As a result, the depreciation had a
positive effect on the “net international investment
position” (NIIP) of the United States – i.e. the dif-
ference between the value of the accumulated
stock of assets (domestic claims on foreigners) and
the accumulated stock of liabilities (foreign claims
on residents). This effect did not stop the deterio-
ration of the NIIP in dollar terms (i.e. liabilities
to increase more than assets) due to the persist-
ence of the current-account deficit, but it limited
that deterioration.

Obviously, the opposite valuation effect oc-
curs in those countries, mainly in Europe, that are
facing a currency appreciation vis-à-vis the dol-
lar. This process is interpreted as a burden sharing
among countries and as a facilitation of the glo-
bal adjustment process.

However, the sharp appreciation of the dol-
lar from 1996 to 2002 led to similar valuation
losses for the United States and gains for Europe.
Accordingly, the appreciation of the dollar at that
time had accelerated the deterioration of the in-
vestment position of the United States that is

Trade and Development Report, 200516

decelerated by the depreciation now. Thus, the cur-
rent change in favour of the United States simply
compensates the adverse effect that occurred be-
fore.

Hence, the argument that the sustainable level
of that deficit would increase through the valua-
tion effect because it is easier to finance the deficit
thanks to a higher net value held in the United
States is not convincing. The appreciation of the

dollar that had accelerated the deterioration of the
NIIP of the United States since the mid-1990s did
not prevent the rapid increase of the current-ac-
count deficit. Did the deterioration in the NIIP due
to the negative valuation effect make the access
to external financing more difficult for the United
States at that time? If not, it is difficult to argue
that the positive valuation now makes access of
the United States to financial markets much easier.
If market participants in the financial markets

Box 1.1

PRIMARY TRADE BALANCE EFFECTS OF CHANGES IN THE UNITED STATES
GDP GROWTH AND IN EXCHANGE RATES

UNCTAD secretariat calculated long-term trade elasticities for the estimation of: (i) the impact of
changes in domestic GDP on the United States merchandise trade balance; and (ii) the effect of a
dollar depreciation on the same trade balance. However, it must be kept in mind that, given the
trade deficit at the “initial situation”, exports must grow at least 1.8 times faster than imports to
reduce the merchandise trade deficit.

The table in this box presents the main results. The first exercise supposes that the rest of the word
(ROW) grows at 3.2 per cent, and considers three situations characterized by different GDP growth
in the United States, with the exchange rate remaining unchanged. In scenario 1, the United States
growth rate is the same than in the ROW. In this case, imports continue to grow faster than exports,
and the United States trade deficit would grow by 0.3 per cent of GDP, on top of the existing
5.7 per cent of GDP in 2004. In scenario 2 it is assumed that the trade deficit remains at its 2004
level. In order to achieve that (and assuming that ROW grows at 3.2 per cent), the United States
economy would need to reduce its GDP growth to 1.5 per cent. In this case, import growth would
be lower than in scenario 1, at 3.1 per cent. In scenario 3 the trade deficit is reduced to 5 per cent
of GDP. At constant exchange rate and ROW growth, this would require a negative GDP growth of
1.8 per cent in the United States, which would lead to a contraction in imports of 3.6 per cent.

The table also shows that a 10 per cent appreciation of the currency of one of the main trading
partners of the United States would not improve the imbalance visibly. The highest impact would
come from an appreciation of the Canadian dollar, followed by the euro and the Mexican peso.
Appreciations of the Chinese renminbi and the Japanese yen would have lower impacts, because of
the lower shares of these economies in the United States merchandise exports. According to the
simulation, a 10 per cent general depreciation of the dollar would reduce the trade deficit to 4.5 per
cent of GDP.

Additionally, the table shows the rates to which the main trading partners should appreciate their
currencies to reduce the United States trade deficit to 5 per cent of GDP. In the case of China, given
its low weight in the composition of United States exports, the renminbi would need to appreciate
by 67 per cent, whereas, for the Canadian dollar an appreciation of 26.5 per cent would be suffi-
cient.

Current Issues in the World Economy 17

expect appreciations and depreciations to be
equally distributed over the long term, the short-
term valuation does not change their perception
of a long-lasting current-account deficit.

For most of the developing countries the
valuation effect is felt on both sides of the bal-
ance sheet. The liabilities of developing countries
are normally denominated in foreign currencies.
For these countries, exchange rate movements af-

fect both the domestic value of assets and the do-
mestic value of liabilities. Appreciation of the
national currency of a developing country reduces
the burden of liabilities (denominated in foreign
currencies) and also reduces the value of assets
(denominated in foreign currencies). On the other
side, depreciation increases the burden of liabili-
ties and increases the value of assets. In the past,
in many developing countries with huge stocks of
net foreign debt, depreciation shocks after finan-

EFFECT OF CHANGES IN GDP GROWTH AND IN EXCHANGE RATES
ON THE UNITED STATES TRADE BALANCE

Hypothetical change Outcome

United States Exchange Merchandise
GDP rate Exports Imports trade balance

(Per cent) (Per cent) (Per cent of GDP)

GDP growth changes in the United Statesa

Scenario 1 3.2 - 4.4 6.6 -6.0
Scenario 2 1.5 - 4.4 3.1 -5.7b

Scenario 3 -1.8 - 4.4 -3.6 -5.0

Exchange rate changes

Euro - 10.0 1.5 -0.6 -5.5
Canadian dollar - 10.0 2.3 -0.7 -5.4
Chinese renminbi - 10.0 0.4 -0.6 -5.6
Japanese yen - 10.0 0.6 -0.4 -5.6
Mexican peso - 10.0 1.4 -0.4 -5.5
United States dollar - -10.0 9.9 -4.2 -4.5

Exchange rate changes required for a reduction
of the United States trade deficit to 5 per cent of GDP

Euro - 37.2 5.7 -2.2 -5.0
Canadian dollar - 26.5 6.2 -2.0 -5.0
Chinese renminbi - 67.4 2.9 -3.8 -5.0
Japanese yen - 74.1 4.8 -2.7 -5.0
Mexican peso - 44.9 6.1 -2.0 -5.0
United States dollar - -5.6 5.5 -2.3 -5.0

Source: UNCTAD secretariat calculations, based on United States Bureau of Economic Analysis, International Economic
Accounts database.

a GDP growth in the rest of the world is assumed at 3.2 per cent in all scenarios.
b The deficit of the United States merchandise trade balance as a percentage of GDP in the base year (2004) is

5.67 per cent.

Box 1.1 (concluded)

Trade and Development Report, 200518

cial crises have led to big negative valuation effects
on their liabilities that could not be compensated
by the positive effects on their assets. Argentina
was the most prominent case recently.

Although there is no strict and general ceil-
ing for sustainable external deficits, recent studies
analysing current-account dynamics in industrial
economies conclude that reversals usually take
place as deficits reach about 5 per cent of GDP.10
However, the mechanisms towards such an adjust-
ment may be different for the United States. So
far, the biggest economy in the world has been
able to finance its current-account deficit at rela-
tively low interest rates. An examination of the
economic situation in the surplus regions is nec-
essary to understand this continued easy financing

of the deficit and to assess the chances for a
smooth resolution of global imbalances.

2. The surplus regions

The fact that the current account essentially
corresponds to net foreign investment in finan-
cial assets, reflecting the simple logic that whoever
extends demand beyond means has to raise debt,
has been taken as proof for the willingness of the
rest of the world to provide the United States con-
sumers with “savings” that could not be used
elsewhere. This static logic overlooks the fact that
without the stimulus provided by United States
growth, income and savings in the rest of the world
(and in particular, in surplus countries) would have
been lower. Thus, part of the savings that were
used to finance the current-account deficit of the
United States were generated by the process of
rising demand from the United States. If the sur-
plus regions were to reduce their financing to the
United States, they would not be re-allocating their
“savings” elsewhere, but the process of generat-
ing these savings would itself be at stake. In other
words, the attempt to repatriate funds may have
negative consequences not only in the deficit but
also in the surplus economies. This poses a di-
lemma to surplus regions, in Asia and in particular
in some parts of Europe.

In the aftermath of the currency crises at the
end of the 1990s, Asian economies implicitly or
explicitly pegged their currencies to the dollar at
rather low values. The currency peg has encour-
aged rising exports and has had a positive effect
on growth, profits and jobs in these countries.
Moreover, in Asia imports have been rising rap-
idly, spilling the effects of the Asian boom over
many developing countries. From the point of
view of these countries and their beneficiaries, a
sharp currency appreciation that would markedly
reduce the current-account surplus might jeopard-
ize these positive outcomes on a broad scale.

The members of the euro area as well as those
economies whose currencies are tied to the euro
constitute the third major block in the current im-
balances constellation. As in the case of Asia, this
block has registered external surpluses that rely

Figure 1.2

MERCHANDISE TRADE BALANCE OF THE
UNITED STATES, BY COUNTRY/REGION,

1980–2004
(Billions of dollars)

Source: UNCTAD secretariat calculations, based on UN
COMTRADE; and United States Bureau of Economic
Analysis, International Economic Accounts database.

Note: Asia includes: China, Hong Kong (China), Japan, the
Republic of Korea, Singapore and Taiwan Province
of China.

Current Issues in the World Economy 19

on the United States market, even if their contri-
bution to the United States trade deficit has not
risen as dramatically in recent years. Yet, like Asia,
European authorities have been focusing on ex-
port-led growth strategies, although the European
Central Bank has not pursued an explicit exchange
rate policy. A major reason for the good trade per-
formance has been wage restraint, which has
resulted in stronger international competitiveness,
but also in anaemic growth of private consump-
tion. Thus, in some large member countries,
domestic demand remains weak due to overly
moderate wage increases. The dependency on
foreign demand explains the uneasiness at the
beginning of 2005, when the euro rose to 1.35
against the dollar. In a way, Europe will have the
most to lose if it does not move quickly. If Asian
central banks stick to managing dollar rates while
at the same time diversifying their portfolio by
moving towards the euro, Europe is doomed to
bear the brunt of dollar depreciation.

Overall, none of the three regions analysed
above has an interest in prolonging the current
situation as long-term risks exceed short-term
advantages. As the issuer of the world’s predomi-
nant reserve currency, the United States bears a
special responsibility for financial market stabil-
ity. A further lowering of the dollar exchange rate,
if eventually needed, should take place in an or-
derly adjustment process, in which both, the deficit
and the surplus regions, would act transparently
and effectively.

3. Tailoring policy measures

There can be little doubt that a smooth cor-
rection of global imbalances will have to be
achieved through adjustments in both relative
prices and absorption levels. Obviously, the main
difficulty is the identification of policy measures
tailored to the specific economic circumstances
of certain countries and regions. The examination
of the internal and external performance of the
euro area and the United States leads to relatively
clear policy conclusions.

The United States starts from relatively low
unemployment and high growth. It could use the

currency depreciation already in place, combined
with careful measures to dampen domestic demand.
Monetary policy has already shifted to a more re-
strictive path and some fiscal adjustment is under-
way. However, in light of the dominance of the
United States economy on a global scale, authori-
ties should refrain from excessively curtailing ab-
sorption in order to avoid recessionary tendencies
that could feed back into a worldwide slowdown.

In contrast, the euro area has no reason to
worry about its external balance, but growth is
stalling and in many countries unemployment is
very high or even rising. Consequently, the whole
region would greatly benefit from higher demand
and rising absorption. Thus, the optimal combi-
nation of macroeconomic policies to correct global
imbalances would certainly include a massive
expansion of domestic demand in the euro area. A
coordinated effort of macroeconomic policies is
needed to foster economic growth and to approach
internal and external equilibrium at the same time.
In an environment of negligible inflation rates,
monetary and fiscal policy can actively contrib-
ute to economic recovery by lowering interest
rates and stimulating domestic demand. Finally,
the excessively moderate stance of wage policy
in some member countries should be abandoned
to avoid deflationary spillovers.

Identifying an appropriate approach for sur-
plus countries in Asia is much more complicated
as most countries in the region are already report-
ing rapid and sometimes “neck breaking” growth
rates. Despite the fact that the often-mentioned
danger of overheating – most pronounced in the
non-tradable sectors – does not represent a major
threat to price stability yet, the argument whereby
more growth is needed to increase absorption in
this region is unconvincing. The recommendation
given by many observers to use currency appre-
ciation for creating leeway for monetary authorities
to fight overheating by raising interest rates, would
reduce absorption and imports, and trade surpluses
might thus persist despite currency appreciation.
Consequently, global imbalances would continue
but at a slower rate of GDP growth for the world,
and they would be accompanied by lower demand
for other developing countries primary commodity
exports. Additionally, countries such as China need
to integrate a vast pool of rural workers – unac-
counted for by official unemployment statistics –

Trade and Development Report, 200520

if political and economic stability is to be main-
tained.

As shown before, any bilateral exchange rate
realignment with the dollar will fall short of a sig-
nificant re-equilibrating effect; this could even
have a disruptive effect on the revaluing country
and on the region it is mainly trading with. If ex-
change rate reforms are undertaken in surplus
regions, they will have to involve all regional pro-
tagonists within a multilateral agreement. China’s
move to abandon the peg with the dollar in July
2005 without allowing for a major revaluation could
be a step in the right direction if it forms part of a
concerted action among the global players.

History offers examples of correcting global
imbalances, some of which ended in regional cri-
ses and in an upsurge in protectionism harming
trade, growth and welfare, as was the case for the
Asian episode of 1997–1998. But there are other
examples where crises have been avoided by early
and controlled adjustments of exchange rates, for
example the regional arrangements in Europe that
preceded the European Monetary Union. But even
on a global scale, the current-account reversal that
followed joint political efforts by the major pow-
ers in the late 1980s suggests that an orchestrated
attempt might have a greater chance of succeed-
ing than isolated measures. This may well be the
right time for a global exchange rate agreement.

D. Oil price hikes in perspective

After the relatively low prices seen in the first
half of the 1990s, when the price of crude petro-
leum rarely exceeded $20 per barrel,11 the price
of oil began to rise in 1999 and culminated at
$60 per barrel in mid-2005. This surge in oil prices
worries governments in many oil-importing coun-
tries, who fear the detrimental effects of a sub-
stantial and long-lasting rise in energy prices on
output growth. This is a special concern for many
developing countries which have become increas-
ingly dependent on oil imports as industrializa-
tion has progressed.

Oil price shocks have repeatedly had a nega-
tive aggregate impact on global economic activity.
The reason for this has to be mainly sought in the
response of economic policy in countries affected
by an oil price shock. Inappropriate reactions,
particularly from those responsible for wage and
monetary policies, can aggravate the situation and
lead to losses in economic activity that could oth-
erwise have been avoided.

1. The impact of an oil price shock on
prices and economic activity

The consequences of a rise in oil prices are
usually separated into first- and second-round ef-
fects. Under any normal circumstances, consumer
prices rise (or stop falling) immediately after pe-
troleum products, such as gasoline and heating oil,
become more expensive because the elasticity of
demand is rather low at most stages of the pro-
duction chain. On the other hand, second-round
effects occur if workers try to compensate their
real income loss by bargaining for higher nomi-
nal wages. The occurrence of second-round effects
becomes more likely the larger the impact of first-
round effects of a rise in oil prices – or energy
prices more generally – on the overall price level.
A higher rate of inflation implies a loss of real
income unless nominal wages rise alongside con-
sumer prices. If, however, workers successfully
bargain for higher wages in order to compensate

Current Issues in the World Economy 21

for real income losses, the result is an additional
upward pressure on the price level as firms will
seek to pass rising labour costs on to consumer
prices. Workers may thus find that their recently
negotiated wages do not keep up with the rising
price level, and consequently enter the next round
of wage bargaining with yet augmented aspirations.
In the worst case, such a scenario may lead to a
wage-price spiral resulting in accelerating inflation.
At best, it will still cause inflationary expectations
to become embedded in the economy’s wage bar-
gaining processes, involving a permanently higher
inflation rate compared to the initial situation.

Apart from the consequences on inflation, the
effects of an oil price shock on the overall eco-
nomic activity in importing countries are more
difficult to disentangle. The most obvious impact
stems from the deterioration in the terms of trade.
An oil price increase shifts the terms of trade be-
tween net-importing and net-exporting economies

in favour of the latter. Essentially, this implies a
real income transfer from consuming to produc-
ing countries. Shrinking real incomes in countries
facing larger oil bills, in turn, mean less income
to spend on other products, which translates into
lower domestic demand unless matched by re-
duced domestic savings and/or higher export
demand. To date, the evidence suggests that the
propensities of oil-producing countries to consume
from current income are low relative to consuming
economies. Oil price increases have historically
been accompanied by swelling current-account
surpluses in oil-exporting countries, implying that
the windfall revenue accruing to producers is typi-
cally not immediately spent to its full extent – a
pattern that can also be observed in the current
situation (fig. 1.3).

In this case, cutbacks in output and employ-
ment are the consequence of falling demand
in consuming countries. While macroeconomic

Figure 1.3

CURRENT-ACCOUNT BALANCES OF 10 OPEC COUNTRIESa

(Per cent of GDP)

Source: UNCTAD secretariat calculations, based on UNCTAD Handbook of Statistics 2004; IMF, Balance-of-Payment Statistics
database and International Financial Statistics database; Economist Intelligence Unit, Country Reports; and national
sources.

a Algeria, Ecuador, Gabon, Indonesia, the Islamic Republic of Iran, Kuwait, the Libyan Arab Jamahiriya, Nigeria, Saudi
Arabia and Venezuela.

Trade and Development Report, 200522

studies usually confirm the general effect on the
aggregate level, empirical studies using disaggre-
gated data suggest that demand disturbances of oil
price shocks vary substantially between sectors,
with producers of consumer durables being hit es-
pecially hard during oil-price related recessions
(Bresnahan and Ramey, 1992). To the degree that
firms are able to pass higher costs to market prices
without a subsequent reaction of nominal wages,
the burden of adjustment shifts from producers to
consumers, while the net negative impact remains
identical.

A further effect operates through nominal
interest rates, which may be higher if second-
round effects on inflation are triggered by an oil
price increase. While central banks will find it
difficult to prevent an initial rise in the general

price level due to the change in relative prices
induced by higher energy prices, they will be
alerted by second-round effects and curb persist-
ent inflation through restrictive monetary policy.
With such a move they would add to the restrictive
first-round effects on the real economy to prevent
inflationary expectations from becoming embed-
ded in the system.

2. The 1973–1974 and 1979–1980 oil
price shocks: putting current events
in perspective

By the early 1970s, the price of crude oil had
been declining persistently for about two decades
to reach a level of $2–3 per barrel. This situation
changed dramatically after 1973. Between Novem-
ber 1973 and the first quarter of 1974, the price
increased from $3.3 to $13. Prices remained rela-
tively unchanged for the next four years. In late
1978, OPEC cutbacks triggered the second oil
price shock and oil prices peaked at $39 in No-
vember 1980.

Compared with the two oil price shocks in
the 1970s, the substantial oil price rise between
1998 and mid-2005 presents several features ren-
dering it less dramatic than it seems to be at first
glance. Firstly, the starting point for oil prices
($11 in the beginning of 1999) was an abnormally
low one, following the plummeting of oil prices
that resulted from the Asian financial crisis in
1997–1998. Among informed market participants,
the expectation prevailed that the oil price would
not remain depressed for much longer, but would
soon rise again to previous levels of around $20.
Secondly, recent price increases have been stretched
over five years, and have thus taken the form of a
gradual evolution instead of an explosion. Thus,
the surprise effect of the oil price increase was
milder this time. Thirdly, in real terms, the recent
oil price increase was significantly smaller than
that of the 1970s (fig. 1.4). Measured in today’s
prices, the oil price increases of the 1970s were
considerably more substantial than implied by the
nominal figures.

One obvious reason for current developments
on the oil market being steadier compared to 30 years

Figure 1.4

CRUDE PETROLEUM PRICES,a NOMINAL
AND REAL,b 1970–2005c

(Dollars per barrel)

Source: UNCTAD secretariat calculations, based on UNCTAD,
Commodity Price Bulletin, various issues; and IMF,
International Financial Statistics database.

a Average of Dubai/Brent/Texas equally weighted.
b Deflated by United States Consumer Price Index (CPI)

(2000 = 100).
c 2005 data are estimates.

Current Issues in the World Economy 23

ago is that they were primarily demand-driven,
rather than motivated by supply decisions in oil-
exporting countries. Despite the fact that there
have been several OPEC interventions on oil sup-
ply in recent years, there is little doubt that the
growing demand for oil imports, primarily com-
ing from the United States and the rapidly growing
developing countries in East and South Asia, in
particular China and India, is at the origin of the
oil price hike. On the supply side, OPEC spare
supply capacity almost disappeared in 2004.
OPEC countries had dramatically reduced their
supply in the first half of the 1980s, but their pro-
duction was replaced by new entrants with higher
production costs (such as North Sea producers). In
recent years, however, non-OPEC supply grew at
lower rates, and OPEC countries recovered their
1979 production level. At present, OPEC coun-
tries are not in a position to respond rapidly to a
surge in demand or a disruption in supply in a
major producer. Oil supply is expected to increase
in the coming years, but at a pace that will prob-
ably not exceed that of demand (Kaufmann, 2004).

In the same way as the size of the oil price
increase, its impact has also been much smaller in
this recent episode than in earlier ones. Between
1973 and 1974, oil imports as a percentage of GDP
in eight major industrialized countries increased
from 1.3 to 3.2 per cent, and remained between
2 and 3 per cent for the rest of the decade, before
rising again in 1980–1981 to reach 3.7 per cent of
GDP. The 1999–2000 oil price increase resulted
in a rise of the oil import bill from 0.8 per cent of
GDP in 1999 to 1.4 per cent in 2000, and it went
down again over the subsequent two years. In
2005, assuming that the renewed hike will main-
tain oil prices at an annual average of $50 per
barrel, it may reach 1.9 per cent but even then it
would fall short of the levels attained in 1974 and
the following years (fig. 1.5).

On average, consumer prices in the major
industrialized countries increased by about 10 per
cent in the course of the first and second years of
both oil price crises in the 1970s, and by only
marginally less in the following years. By con-

Figure 1.5

OIL IMPORT BILL, OECD MAJOR OIL-CONSUMING COUNTRIES,a
1973–1978,1979–1983, 1999–2005b

(Per cent of GDP)

Source: UNCTAD secretariat calculations, based on UN COMTRADE; UN National Accounts Main Aggregates database; EIU,
Country Forecast, various issues; and OECD, International Trade by Commodity Statistics database.

a Canada, France, Germany, Italy, Japan, Spain, the United Kingdom and the United States.
b 2005 data are estimates.

Trade and Development Report, 200524

trast, the impact of recent price increases on the
consumer price index is rather negligible (fig.
1.6A). The evolution of unit labour costs in the
industrialized countries during the 1970s and early
1980s demonstrates the role and weight of sec-
ond-round effects. The rise in unit labour costs is
especially marked in the wake of the first shock.
Trade unions were firmly determined to compen-
sate for real income losses, as unit labour costs
grew by 15 per cent in the first year and 12 per
cent in the second year, and subsequently remained
in the neighbourhood of 7 per cent. Increases were
less pronounced during the second crisis, although
they were still quite considerable (fig. 1.6B).

The development of unit labour costs in the
major oil-consuming countries since 2000 indicates
that second-round effects have been practically ab-
sent. Unit labour costs rose by just over 2 per cent
in 2000 and have been growing more slowly ever
since, a fact that is also reflected in the consumer
prices shown in figure 1.6A. Except for the im-
mediate impact of higher energy prices, there is
no sign of inflationary tendencies taking hold as
trade unions have refrained from seeking compen-
sation for real income losses due to energy prices
during wage negotiations.

Nevertheless, central banks in the industri-
alized countries have continued to vehemently
warn against the occurrence of second-round ef-
fects, to which they would react by raising interest
rates in a bid to defend price stability. However,
given the absence of inflationary second-round
effects, central banks have refrained from respond-
ing immediately to slightly higher inflation rates,
focusing instead on “core inflation” indices that
exclude energy prices. Volatility in energy costs
and the concomitant variation of real incomes
have, arguably, come to be seen in the developed
world as something that is outside the control of
consumers, manufacturers and monetary authori-
ties and thus can only be accepted.

The policy responses during the major oil
crisis followed a quite different pattern. That the
two oil price shocks had markedly different reper-
cussions in individual countries is quite instructive
with a view to lessons to be learned by those coun-
tries in the developing world faced by a similar
oil price increase. By the time of the second oil
price shock, all major central banks adopted a re-

Figure 1.6

CHANGES IN CONSUMER PRICES AND UNIT
LABOUR COSTS, OECD MAJOR OIL-CONSUMING

COUNTRIES,a SEVERAL PERIODS

(Per cent)

Source: OECD, Main Economic Indicators database and
Economic Outlook No. 77.

a GDP weighted average of Canada, France, Germany,
Italy, Japan, Spain, the United Kingdom and the
United States.

Current Issues in the World Economy 25

strictive stance, led by the Federal Reserve. The
federal funds rate reached 19 per cent in 1981 and
remained above the 10 per cent mark through late
1982. Even in those countries whose central banks
had pursued a largely accommodative monetary
policy stance throughout the 1970s, such as
France, short-term rates scaled new heights in the
early 1980s. Interest rates increased sharply de-
spite the fact that oil-exporting countries recycled
their windfall oil revenues through the interna-
tional capital markets, rather than to spend them
directly on higher imports. The potentially de-
creasing impact on interest rates of these capital
flows reaching the international capital markets
was overlaid by the concerted action to curb
inflation carried out by central banks of the in-
dustrialized countries after 1979.

Many developing countries, in particular in
Latin America, were caught in this high interest
rate trap with disastrous results for their overall
economic development and their foreign indebt-
edness. Servicing the existing debt became more
difficult in an environment of climbing interna-
tional interest rates and, eventually, plunged many
developing economies into severe economic cri-
ses during the 1980s.

The repercussions from current price devel-
opments in the oil market will much less likely
produce the kind of dramatic impact seen during
the 1970s, particularly in the absence of compa-
rable interest rate reactions in developed countries.

Moreover, the impact on consumer prices is
much weaker as increased efficiency in energy use
over the past few decades has contributed to a
decline in the share of energy products in the con-
sumer price index. The effect is further mitigated
by the presence of higher indirect taxes on energy
consumption, particularly on gasoline. In the euro
area, about two thirds of the price for transport
fuels and lubricants are made up by taxes, mean-
ing that a price increase only works on one-third
of the overall price. The respective tax burden is
smaller in the United States and slightly larger in
Japan. Moreover, the use of other energy sources
has also contributed to the reduction in the share
of oil in total energy consumption.12

Furthermore, in addition to greater efficiency
in the use of energy for final consumption, there

has also been a decline in energy intensity of pro-
duction.13 The overall economic structure of
developed economies has changed over the past
30 years. It has become more service-oriented and
less reliant on industrial production, which fur-
ther reduces the likely role of an oil price rise as
an impending disturbance. The combination of
these various factors explains why the average oil
bill of the major economies (as depicted in fig-
ure 1.5) has declined to about 0.8 per cent of GDP
in 1999, and why present inflation did not pick up
in the same way it did during the 1970s.

3. The impact on oil-importing
developing economies

Exposure of oil-importing developing coun-
tries to oil price hikes frequently differs from that
of the developed world. First-round effects on
prices and balance of payments tend to be more
severe, as the energy and oil intensities are gener-
ally higher in these countries. Taking the OECD
countries level as 100, oil intensity (e.g. primary
oil consumption per unit of GDP) in 2002 was
142 in Brazil, 232 in China, 237 in Thailand and
288 in India (IEA, 2004b: 11). Moreover, the share
of taxes in the final price of fuels is usually much
lower in developing than in most developed coun-
tries, and in a number of them, these prices are
subsidized. As a consequence, the cost of crude
has a more direct impact in developing countries,
either on the final consumer price or on fiscal ac-
counts. If these impacts are seen as a threat to the
control of inflation or to fiscal consolidation, they
would call for policy adjustments with all the at-
tendant effects these have on growth. Finally,
developing countries could also feel another indi-
rect effect, stemming from policy reactions in the
developed countries, in the form of lower exports
and tighter conditions in international financial
markets.

In contrast to the substantial reduction of oil
dependency in developed countries, reliance on
oil imports has increased in the developing word,
as a result of industrialization and urbanization.
In 1972, the oil import bill in developing coun-
tries (excluding OPEC) represented 0.8 per cent

Trade and Development Report, 200526

of current GDP, and it climbed to 2.3 per cent in
1975–1976 and 3.4 per cent in 1980. In 1998–1999
this share was 1.7 per cent of GDP, and it rose to
2.7 per cent in 2000–2003. In 2004–2005 it has
probably exceeded 3.5 per cent, roughly twice the
oil import bill paid in the main OECD countries.14
As a result, the increased cost in oil imports in
developing countries clearly exceeds those faced
by developed regions and more closely resembles
the experience of the oil shocks of the 1970s.

Latin America (excluding the oil-exporting
countries of Ecuador and Venezuela) shows the
lowest exposure among developing regions, with
the share of oil imports rising from 0.8 per cent of
GDP in 1998 to 1.3 per cent in 2003. This has
been, in particular, the result of active Brazilian
policies aimed at substituting oil with national
energy sources (hydroelectricity and alcohol) and
at increasing the domestic production of hydro-
carbons. However, oil imports account for a
significant proportion of GDP in Chile (4.7 per
cent in 2003), Central America (4.9 per cent on
average for Costa Rica, El Salvador, Guatemala,
Honduras, Nicaragua and Panama) and the Carib-
bean, with particularly high shares in Guyana,
Jamaica, Belize and Barbados.

Asia (excluding OPEC) accounts for roughly
80 per cent of oil imports from developing coun-
tries, and is also the region where the ratio of oil
imports to GDP remains the highest. The main rea-
son for this is the deepening of industrialization
in East and South Asian countries. In 2003, the
share of oil imports in GDP was 5 per cent or more
in Singapore, the Republic of Korea, Thailand,
Taiwan Province of China and the Philippines, and
more than 4 per cent in Pakistan and Sri Lanka; in
India, which is relatively less advanced in indus-
trialization than other countries in the region, this
share amounted to 3.8 per cent.

In Africa, the situation is very heterogene-
ous as the region comprises several major oil
exporters, but also a number of countries that are
heavily dependent on oil imports, particularly
among sub-Saharan countries. This subregion as
a whole (excluding Nigeria and South Africa)
presents levels of oil dependency close to those
found in East and South Asian countries (3.5 per
cent of GDP in 2000–2003), despite the much
lower level of industrialization.

Summing up, oil prices have had, and con-
tinue to have, an impact on the import expenditure
of a significant number of developing countries
which is comparable to the one subsequent to the
1970s oil shocks. However, in many cases their
negative impact on the trade balance has been
compensated, either by a parallel increase in the
price of other exported primary commodities or
by expanding volumes of manufactured exports;
the first case was especially relevant in several
South-American and sub-Saharan countries, while
the second explains the solid trade performance
in East and South Asia, despite high oil prices.
Other oil-importing countries, however, face se-
vere financial strain.

In some developing countries, high commod-
ity prices (including oil) have caused concern about
inflationary pressures, and prompted a tightening
of monetary policies in order to prevent second-
round effects on prices. This is in stark contrast
to the reaction in developed economies. There the
lesson has been learned that monetary policy
instruments, which almost exclusively operate
through the impact on aggregate demand and the
absolute price level, should not be used to abate
price increases originating in changes of relative
prices.

Indeed developing countries have taken dif-
ferent approaches. For example, monetary policy
was tightened in Brazil and Mexico in 2004 in
order to prevent second-round effects, even though
it was recognized that higher-than-expected infla-
tion was mainly related to supply-side factors,
including energy prices (IPEA, 2005: 7–9; Banco
de México, 2005: 2). The policy response in other
Latin American and most East Asian countries was
more flexible. In order to avoid negative effects
on growth, monetary policy was not used to curb
inflation forced by higher oil prices (fig. 1.7). For
instance, economic policy in Argentina tried to
avoid high real interest rates and currency ap-
preciation as ways to fight against accelerating
inflation in early 2005. The latter was considered
to be largely due to temporary factors, and the
current levels of real exchange and interest rates
are central policy instruments for maintaining eco-
nomic growth and competitiveness. Similarly, in
most East and South-East Asian countries, supply-
side driven inflation pressures have not led to
sharp interest rates increases, which could have

Current Issues in the World Economy 27

Figure 1.7

REAL INTEREST RATES AND REAL EFFECTIVE EXCHANGE RATES,
SELECTED ASIAN AND LATIN AMERICAN COUNTRIES, 2003–2005

Source: UNCTAD secretariat calculations, based on Thomson Financial Datastream; national sources; and JP Morgan, Effective
Exchange Rate Indices database.

a Interbank rates deflated by CPI changes.

Trade and Development Report, 200528

undermined economic growth and the recovery of
their financial systems from the 1997–1998 crisis.
For the Malaysian monetary authorities, for in-
stance, price pressures have been contained by
improvements in labour productivity and capacity
expansion, enabling monetary policy to remain sup-
portive to growth (Bank Negara Malaysia, 2005).

Several countries have also tried to isolate
domestic from international oil prices. In Latin
America, this has been the traditional approach in
Venezuela (see also annex to chapter III), but also
in a number of Asian countries, including oil-pro-
ducing countries, such as Viet Nam and Malaysia,
and countries dependent on oil imports. In India,
for example, the government resorts to subsidies
in the order of 0.5 per cent of GDP for specific
petroleum products largely used by the rural poor.
In Thailand, such subsidies reached 1.3 per cent
of GDP in 2004, and in Indonesia they amounted
to 2.5 per cent of GDP in the same year. In the

latter countries, these policies have recently been
revised, leading to an increase in oil prices (Chan-
nel News Asia, 2005).

In conclusion, the chances of an oil price hike
plunging the global economy into a recession com-
parable to the ones of the 1970s and 1980s appear
to be small. In the major developed countries, oil
prices have considerably lost significance for the
evolution of GDP. First- and second-round effects
have not led to inflationary pressures that would
have prompted a restrictive stance in monetary
policy. Naturally, the higher cost for energy had
an impact on price indices, but the monetary au-
thorities have learned from the previous oil price
hikes that monetary tightening is not a proper re-
sponse to this challenge. However, oil dependency
remains high in many developing countries and
the prospect of permanently higher oil prices is
especially disturbing for those countries that are
not benefiting from higher prices for their exports.

Asia has been a remarkably dynamic region
over the past four decades, with different econo-
mies in the region experiencing rapid growth and
catching up. Following Japan’s economic catch-
ing up episode between the 1950s and the 1980s,
the fast pace of economic growth, industrializa-
tion and growth of manufactured exports in the
Republic of Korea, as well as in other Asian newly
industrializing economies (NIEs) – Hong Kong
(China), Singapore and Taiwan Province of China
– awarded these countries, and by extension the
region, with the distinction of forming the “East
Asian miracle”. China and India have entered this
process most recently.

E. Rapid growth in China and India and
the profit-investment nexus

In spite of their rapid growth over a number
of years, both China and India still have relatively
low levels of per capita income (table 1.5). How-
ever, due to the two countries’ size and the fact
that, together, they account for about two fifths
of the world population and one fifth of global
income (measured in terms of purchasing power
parity, PPP), their economic performance has al-
ready a sizeable impact on international trade
patterns, global output growth, and the economic
prospects of other developing countries, includ-
ing their progress towards achieving the MDGs.
In 2003, China ranked second and India fourth in
the world in terms of absolute purchasing power,

Current Issues in the World Economy 29

their respective ranks being sixth and twelfth in
terms of real GDP. Moreover, as the third largest
importer and exporter in the world in 2004, China’s
growth dynamics significantly influence commod-
ity prices and the prices of some traded manufactures
such as textiles, as discussed in subsequent chap-
ters of this Report.

This section addresses selected issues that are
of crucial importance for the sustainability of rapid
economic growth in China and India in the me-
dium and long term. In particular, investment plays
a key role in the expansion of productive capacity
and productivity growth (TDR 2003). UNCTAD’s
analysis has shown that the catching up process
in the NIEs was based on the so-called profit-
investment nexus (TDR 1996, chap. II, TDR 2003,
chap. IV), in which savings created by profits in a
process of rapid capital accumulation, technologi-
cal progress and structural change constitute the
basis for sustained productivity growth, rising liv-
ing standards and successful integration into the
international economy. Investment plays the cru-
cial role due to its ability to simultaneously create
income, develop productive capacities, and trans-
mit technological progress; moreover, investment

supports the upgrading of skills as well as institu-
tional deepening.

A macroeconomic environment which both
supports and encourages investors is required for
domestic and foreign investment to become a
source of growth and development. The profit-
investment nexus emphasizes that profits, the sav-
ings accrued at companies, are the dominant
source of financing. Rising profits can create a
virtuous circle whereby the profits stemming from
investment increase the incentives for companies
to invest, thereby raising the capacity for financing
new and additional investment.15 For this to happen
on an economy-wide scale, access to reliable, ad-
equate and cheap sources of financing is an impor-
tant precondition. The stance of domestic monetary
policy is of crucial importance to initiate a process
that will become self-supporting once profits have
started to create the savings necessary to finance
additional investments. Overly restrictive monetary
policy may lead investors to prefer investing in fi-
nancial assets over extending productive capacity.

Together with the interest rate, the exchange
rate level is the other crucial macroeconomic price.

Table 1.5

REAL GDP PER CAPITA AND GDP GROWTH IN CHINA, INDIA, JAPAN AND
THE REPUBLIC OF KOREA DURING THEIR RAPID GROWTH PERIODS

Real GDP per capita (dollars) Average growth rate (per cent)

Market pricesa PPPb

Year Year Year Year Year Year 1st 2nd 3rd 4th 1st 20
1 10 20 2003 1 10 20 2000 decade decade decade decade years

China (1979) 163 347 752 1 067 1 023 1 752 3 276 3 747 8.6 8.1 . . 8.3

Abstract: IEEE Std 896.1-1991 provides a set of tools with which to implement a Futurebus+architecture with performance and cost scalability over time, for multiple generations of single- and multiple-bus multiprocessor systems. Although this specification is principally intended for 64-bit address and data operation, a fully compatible 32-bit subset is provided, along with compatible extensions to support 128- and 256-bit data highways. Allocation of bus bandwidth to competing modules is provided by either a fast centralized arbiter, or a fully distributed, one or two pass, parallel contention arbiter. Bus allocation rules are provided to suit the needs of both real-time (priority based) and fairness (equal opportunity access based) configurations. Transmission of data over the multiplexed address/data highway is governed by one of two intercompatible transmission methods: (1) a technology-independent, compelled-protocol, supporting broadcast, broadcall, and transfer intervention (the minimum requirement for all Futurebus+systems), and (2) a configurable transfer-rate, source-synchronized protocol supporting only block transfers and source-synchronized broadcast for systems requiring the highest possible performance.

Article #:

Date of Publication: 10 March 1992

UNITED NATIONS CONFERENCE ON TRADE AND DEVELOPMENT
GENEVA

TRADE AND DEVELOPMENT
REPORT, 2005

Report by the secretariat of the
United Nations Conference on Trade and Development

UNITED NATIONS
New York and Geneva, 2005

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document number. A copy of the publication
containing the quotation or reprint should be
sent to the UNCTAD secretariat.

Sales No. E.05.II.D.13

ISBN 92-1-112673-8
ISSN 0255-4607

Note

UNITED NATIONS PUBLICATION

Copyright © United Nations, 2005
All rights reserved

UNCTAD/TDR/2005

FOREWORD

Kofi A. Annan
Secretary-General of the United Nations

This year’s Trade and Development Report demonstrates that the conditions for achieving
the Millennium Development Goal of halving extreme poverty by 2015 have improved
considerably over the past three years, as economic growth in the developing world has become
more broad-based and embraced many of the poorest countries.

At a time when the forces of economic expansion in some major developed countries
have been slackening, China and India have become major engines of growth for the world
economy as a whole. Rapid economic development in both countries has helped reduce levels
of extreme poverty at home, by generating employment and boosting incomes. It has also had
positive effects beyond the two countries’ borders, in particular in many other developing
countries.

However, the Report stresses that progress remains far too slow in certain regions. In
sub-Saharan Africa, which has the highest proportion of people living in extreme poverty, per
capita income growth is still too low to make decisive progress. This only underscores the
need for further action by the international community to achieve and maintain strong global
growth dynamics with broad-based participation.

The recent rise in the prices of many primary commodities has provided some economic
breathing space in commodity-dependent economies, but this must not lead to complacency.
On the contrary, this breathing space should be viewed as an opportunity for many developing
countries to accelerate the process of structural change and capital accumulation, and indeed
to reduce their dependence on exports of such commodities. This would boost progress towards
all development goals, and have positive effects in countries with more advanced manufacturing
sectors that provide the machinery and equipment needed for such change.

Our challenge is to sustain the recent positive developments. The Report argues that it is
important not only that the fast-growing Asian countries make the right policy choices, but
also that developed countries take appropriate policy measures to overcome the persistent
imbalances and inequities in the international trading system. A global approach, based on
international action with the effective participation of developing countries in global policy
coordination, is in the interest of all, developed and developing countries alike.

The Goals can still be reached – worldwide and in most, or even all, individual countries
– but only if we break with business as usual. The information and analysis contained in this
Report should contribute to the debate about how best to make the global partnership for
development a reality – and how to help many millions of people realize their long-standing
hopes to live in dignity and peace. In that hopeful spirit, I recommend this volume to a wide
global audience.

v

Contents

FOREWORD ............................................................................................................................................... iii
Explanatory notes .................................................................................................................................... xiii
Abbreviations ............................................................................................................................................ xiv
OVERVIEW ............................................................................................................................................... I-X

Page

Trade and Development Report, 2005

Chapter I

CURRENT ISSUES IN THE WORLD ECONOMY ........................................................................... 1

A. Introduction ......................................................................................................................................... 1

B. The world economy: growth performance and prospects ........................................................... 2
1. Economic activity in developed countries ..................................................................................... 2
2. Economic activity in developing countries ................................................................................... 4
3. Recent developments in world trade and finance ....................................................................... 10

C. The global imbalances and the United States current-account deficit .................................... 12
1. Twenty-five years of deficits in the United States ...................................................................... 14
2. The surplus regions ........................................................................................................................ 18
3. Tailoring policy measures ............................................................................................................. 19

D. Oil price hikes in perspective .......................................................................................................... 20
1. The impact of an oil price shock on prices and economic activity ........................................... 20
2. The 1973–1974 and 1979–1980 oil price shocks: putting current events in perspective ........ 22
3. The impact on oil-importing developing economies .................................................................. 25

E. Rapid growth in China and India and the profit-investment nexus ........................................ 28
1. The sectors driving economic growth .......................................................................................... 30
2. Stable and balanced demand growth as a condition for sustained rapid growth ..................... 33
3. Policy conditions underlying the Asian catching up processes ................................................. 35
4. Challenges for sustained growth in China and India .................................................................. 38

Notes .......................................................................................................................................................... 39

vi

Page

Chapter II

INCOME GROWTH AND SHIFTING TRADE PATTERNS IN ASIA ......................................... 41

A. Introduction ....................................................................................................................................... 41

B. Evolving demand and trade patterns in Asia: a comparative perspective ............................. 44
1. Changing patterns of food consumption ...................................................................................... 44
2. Intensity of metal and energy use ................................................................................................. 46

C. Domestic resource constraints and the balance-of-payments constraint ................................ 51
1. Relative resource constraints and country size ........................................................................... 52
2. Shifts in trade composition: experiences of Asian industrialization ......................................... 54

D. World market shares and prices .................................................................................................... 70
1. The growing impact of China and India on global primary commodity markets .................... 70
2. The role of textile and clothing exports ....................................................................................... 77

Notes .......................................................................................................................................................... 82

Chapter III

EVOLUTION IN THE TERMS OF TRADE AND ITS IMPACT
ON DEVELOPING COUNTRIES ........................................................................................................ 85

A. Introduction ....................................................................................................................................... 85

B. The terms-of-trade problem revisited ........................................................................................... 87

C. Recent trends in the terms of trade ............................................................................................... 92

D. Effects of terms-of-trade changes on domestic income ............................................................ 101

E. The distribution of gains or losses from terms of trade ........................................................... 103

F. The distribution of export income and rent from extractive industries ............................... 108

Notes ........................................................................................................................................................ 114

Annex to chapter III

Distribution of Oil and Mining Rent:
Some Evidence from Latin America, 1999–2004 ............................................................................. 117

vii

Page

Chapter IV

TOWARDS A NEW FORM OF GLOBAL INTERDEPENDENCE ............................................. 129

A. Introduction ..................................................................................................................................... 129

B. The growing importance of developing countries in global markets .................................... 132

C. Shifts in the composition of developing-country exports ......................................................... 146

D. What has changed? An assessment ............................................................................................. 153

E. Policies for managing the new forms of global interdependence ........................................... 155

Notes ........................................................................................................................................................ 160

REFERENCES ...................................................................................................................................... 163

viii

List of tables

Table Page

1.1 World output growth, 1990–2005 ............................................................................................... 3
1.2 GDP growth in selected developing economies, South-East Europe and CIS, 1990–2005 ..... 6
1.3 Export and import volumes of goods, by region and economic grouping, 1996–2004.......... 8
1.4 Current-account balance, selected economies, 2000–2004 .................................................... 13
1.5 Real GDP per capita and GDP growth in China, India, Japan and the Republic of Korea

during their rapid growth periods ................................................................................................. 29
1.6 Contribution of consumption, investment and trade to GDP growth

in China, India, Japan and the Republic of Korea ................................................................... 34
2.1 Dietary composition in China and India, 1994 and 2002 ....................................................... 46
2.2 Per capita metal consumption, selected countries, 2003 ......................................................... 47
2.3 Food self-sufficiency ratios in China and India, selected products, 1994–2002 .................. 57
2.4 China’s agricultural trade by major product category, 1980–2003 ........................................ 58
2.5 Product structure of imports of selected Asian countries, 1965–2003 .................................. 61
2.6 Magnitude of change in selected raw material imports by Japan, the Republic of Korea,

China and India, selected periods ............................................................................................. 64
2.7 Product structure of exports from selected Asian countries, 1965–2003 .............................. 66
2.8 World primary commodity prices, 1999–2004......................................................................... 72
2.9 Shares in world exports of manufactures of selected Asian developing economies and

major developed countries, 1962–2003 .................................................................................... 78
2.10 United States apparel imports from selected sources,

market shares and unit values, 1995–2005 ............................................................................... 80
3.1 Export structure of developing countries, by region and by broad product category,

1980–2003 ................................................................................................................................... 91
3.2 Distribution of developing countries by their dominant export category, 2003 ................... 91
3.3 Sensitivity of developing countries to terms-of-trade changes,

by broad product category and by region, 1996–2004 .......................................................... 102
3.4 Impact of changes in terms of trade and net income payments on

national income, selected economies, 2002–2004 ................................................................. 106
3.5 Government revenue from international trade and extractive industries,

selected developing countries .................................................................................................. 112
3.6 Government revenue from fuel industry in selected developing countries ......................... 113
3.A1 Argentina: estimate of oil rent, 1999–2004 ............................................................................ 118
3.A2 Argentina: estimate of government revenue from oil rent, 1999–2004 ............................... 118
3.A3 Ecuador: estimate of oil rent, 1999–2004 .............................................................................. 119
3.A4 Ecuador: estimate of the distribution of oil rent, 1999–2003 ............................................... 120
3.A5 Mexico: estimate of oil rent, 1999–2004 ................................................................................ 120
3.A6 Venezuela: estimate of oil rent, 1999–2004 ........................................................................... 121
3.A7 Venezuela: estimate of the distribution of oil rent, 1999–2004............................................ 122
3.A8 Venezuela: composition of government revenues from oil, 1999–2004 .............................. 122
3.A9 Chile: estimate of copper rent, 1999–2004 ............................................................................ 124

ix

Table Page

List of tables (concluded)

3.A10 Chile: estimate of government revenue from copper rent, 1999–2004................................ 124
3.A11 Peru: estimate of gold rent, 1999–2004 .................................................................................. 125
3.A12 Peru: estimate of copper rent, 1999–2004 .............................................................................. 126
3.A13 Peru: estimate of government revenue from gold rent, 1999–2004 ..................................... 126
3.A14 Peru: estimate of government revenue from copper rent, 1999–2004 ................................. 127
4.1 Matrix of world merchandise trade by major product category,

1965, 1985 and 2003 ................................................................................................................ 131
4.2 The origin and destination of merchandise trade, 1970–2003.............................................. 133
4.3 South-South trade in world trade, 1970–2003 ....................................................................... 134
4.4 South-South merchandise exports, by geographical region, 1970–2003............................. 140
4.5 Top 10 economies in South-South trade, 2003 ...................................................................... 141
4.6 Importance of South-South trade for developing economies, 1990–2003 .......................... 142
4.7 Export value growth and share in total South-South exports

of the 30 most dynamic products, 1990–2003 ....................................................................... 149
4.8 Composition of developing-economy exports to developed countries,

by broad product categories, 1980–2003................................................................................ 150
4.9 Composition of trade among developing economies,

by broad product categories, 1980–2003................................................................................ 152

x

1.1 United States current-account balance, relative GDP growth and
real effective exchange rate, 1980–2004 .................................................................................. 14

1.2 Merchandise trade balance of the United States, by country/region, 1980–2004 ................ 18
1.3 Current-account balances of 10 OPEC countries ..................................................................... 21
1.4 Crude petroleum prices, nominal and real, 1970–2005 .......................................................... 22
1.5 Oil import bill, OECD major oil-consuming countries, 1973–1978,

1979–1983, 1999–2005 .............................................................................................................. 23
1.6 Changes in consumer prices and unit labour costs, OECD major oil-consuming

countries, selected periods ......................................................................................................... 24
1.7 Real interest rates and real effective exchange rates, selected Asian and

Latin American countries, 2003–2005 ...................................................................................... 27
1.8 Productivity in the manufacturing and services sectors compared to

overall productivity in China (1984–1993, 1993–2002) and India (1991–2000) ................. 31
1.9 Productivity in the manufacturing sector in China (1984–1993, 1993–2002)

and in the manufacturing and services sectors in India (1991–2000) .................................... 32
1.10 Evolution of private consumption in China, India, Japan and the Republic of Korea ......... 35
1.11 Real interest rates in China and India, 1980–2004 .................................................................. 37
2.1 Intensity of metal use, selected metals and countries, 1960–2003 ........................................ 48
2.2 Stylized representation of the relationship between intensity of metal use and

per capita income ........................................................................................................................ 50
2.3 Intensity of energy use, selected countries, 1965–2003.......................................................... 50
2.4 Resource combinations of countries/regions, 1960–2000 (at 5-year intervals) .................... 53
2.5 China: consumption and production of oil and coal, 1965–2004 ........................................... 60
2.6 Non-fuel primary commodity prices, nominal and real, by commodity group, 1960–2004 ...... 71
2.7 Shares in world imports of selected primary commodities,

China and India, 1990 and 2003................................................................................................ 74
2.8 Net trade by China and India and world prices, selected primary commodities,

1990–2004 ................................................................................................................................... 75
3.1 United States import and export price indices for selected electronics products, 1980–2004 .. 89
3.2 Terms of trade, export volumes and purchasing power of exports

in developing economies, by region, 1980–2004 .................................................................... 93
3.3 Terms of trade of selected developing economies, by dominant export category, 2000–2004 .. 96
3.4 Contribution of different product groups to terms-of-trade changes,

selected developing economies, 2000–2004 ............................................................................ 98
3.5 Changes in gross domestic product, gross domestic income, gross national income

and terms-of-trade indices, selected developing countries, 1996–2004 .............................. 105
4.1 Schematic illustration of the impact of production-sharing on the statistically

recorded value of South-South trade ...................................................................................... 138
4.2 Triangular trade in manufactures between East Asia and the United States, 1990–2003 .... 139
4.3 Evolution of developing-country exports, by broad product category, 1976–2003 ........... 148

Figure Page

List of figures

xi

List of boxes

Box Page

1.1 Primary trade balance effects of changes in the United States GDP growth
and in exchange rates ................................................................................................................. 16

1.2 Income disparities in China and India ...................................................................................... 36
3.1 State income from extractive industries: a historical perspective ........................................ 110
4.1 Towards a new structure of global maritime trade ................................................................ 144

xiii

Explanatory notes

Classification by country or commodity group
The classification of countries in this Report has been adopted solely for the purposes of statistical or
analytical convenience and does not necessarily imply any judgement concerning the stage of devel-
opment of a particular country or area.

The major country groupings used in this report follow the reclassification by the United Nations
Statistical Office (UNSO). They are distinguished as:

» Developed or industrial(ized) countries: in general the countries members of OECD (other than
Mexico, the Republic of Korea and Turkey) plus the new EU member countries which are not
OECD members (Cyprus, Estonia, Latvia, Lithuania, Malta and Slovenia).

» The category South-East Europe and Commonwealth of Independent States (CIS) replaces what
was formerly referred to as “transition economies”.

» Developing countries: all countries, territories or areas not specified above.

The terms “country” / “economy” refer, as appropriate, also to territories or areas.

References to “Latin America” in the text or tables include the Caribbean countries unless otherwise
indicated.

Unless otherwise stated, the classification by commodity group used in this Report follows generally
that employed in the UNCTAD Handbook of Statistics 2004 (United Nations publication, sales no.
E/F.05.II.D.2).

Other notes
References in the text to TDR are to the Trade and Development Report (of a particular year). For
example, TDR 2004 refers to Trade and Development Report, 2004 (United Nations publication, sales
no. E.04.II.D.29).

The term “dollar” ($) refers to United States dollars, unless otherwise stated.

The term “billion” signifies 1,000 million.

The term “tons” refers to metric tons.

Annual rates of growth and change refer to compound rates.

Exports are valued FOB and imports CIF, unless otherwise specified.

Use of a dash (–) between dates representing years, e.g. 1988–1990, signifies the full period
involved, including the initial and final years.

An oblique stroke (/) between two years, e.g. 2000/01, signifies a fiscal or crop year.

A dot (.) indicates that the item is not applicable.

Two dots (..) indicate that the data are not available, or are not separately reported.

A dash (-) or a zero (0) indicates that the amount is nil or negligible.

A plus sign (+) before a figure indicates an increase; a minus sign (-) before a figure indicates a
decrease.

Details and percentages do not necessarily add up to totals because of rounding.

xiv

Abbreviations

ATC Agreement on Textiles and Clothing
ASEAN Association of Southeast Asian Nations
bpd barrels per day
CIS Commonwealth of Independent States
CPI Consumer Price Index
ECLAC Economic Commission for Latin America and the Caribbean
EIA Energy Information Administration (United States)
EIU Economist Intelligence Unit
ESCAP Economic and Social Commission for Asia and the Pacific
ESCWA Economic and Social Commission for Western Asia
EU European Union
FAO Food and Agriculture Organization of the United Nations
FDI foreign direct investment
FFE foreign funded enterprise
f.o.b. free on board
GDI gross domestic income
GDP gross domestic product
GFCF gross fixed capital formation
GNI gross national income
GSTP Global System of Trade Preferences
GTAP Global Trade Analysis Project (model)
ICT information and communication technology
IEA International Energy Agency
IMF International Monetary Fund
IT information technology
LDC least developed country
MDG Millennium Development Goal
MERCOSUR Southern Common Market
MFA Multi-Fibre Arrangement
NBTT net barter terms of trade

xv

NIE newly industrializing economy
NIIP net international investment position
NPL non-performing loan
OECD Organisation for Economic Co-operation and Development
OEM original equipment manufacturing
OPEC Organization of the Petroleum Exporting Countries
PPP purchasing power parity
R&D research and development
RCA revealed comparative advantage
REER real effective exchange rate
RTA regional trade arrangement
ROW rest of the world
SARS Severe Acute Respiratory Syndrome
SITC Standard International Trade Classification
SME small and medium-sized enterprise
SOE State-owned enterprise
SPS sanitary and phytosanitary
TDR Trade and Development Report
TNC transnational corporation
TRIPS trade-related aspects of intellectual property rights (also TRIPS Agreement)
UN United Nations
UN COMTRADE United Nations Commodity Trade Statistics Database
UN/DESA United Nations, Department of Economic and Social Affairs
UNESCO United Nations Educational, Scientific and Cultural Organization
UNCDB United Nations Common Database
UNCTAD United Nations Conference on Trade and Development
VER voluntary export restraint
WTI West Texas Intermediate (price – reference price for standard crude oil)
WTO World Trade Organization
Y2K year 2000

Looking at recent trends in the world economy from the perspective of the
Millennium Development Goals (MDGs), the good news is that in 2004 growth
in the developing countries was rapid and more broad-based than it had been
for many years. Strong per capita income growth continued in China and
India, the two countries with the largest number of people living in absolute
poverty. Latin America has seen a rebound from its deep economic crisis, and
a return to faster growth, fuelled by export expansion. Africa again reached a
growth rate of more than 4.5 per cent in 2004. Moreover, relatively strong
growth in many African countries is envisaged in the short-term, owing to
continuing strong demand for a number of their primary commodities. The
bad news is that even growth rates of close to 5 per cent in sub-Saharan
Africa are insufficient to attain the MDGs, and that the outlook for 2005,
overshadowed by increasing global imbalances, is for slower growth in the
developed countries with attendant effects on the developing countries.

Since the beginning of the new millennium, the performance of the world
economy has been shaped by the increasingly important role of China and
India. Rapid growth in these two large economies has spilled over to many
other developing countries and has established East and South Asia as a new
growth pole in the world economy. Their ascent has been accompanied by
new features of global interdependence, such as a brighter outlook for ex-
porters of primary commodities, rising trade among developing countries,
increasing exports of capital from the developing to the developed countries,
but also intensified competition on the global markets for certain types of
manufactures.

OVERVIEW

II

Global prospects and imbalances

The slowdown in global output growth in 2005 is mainly due to a deceleration in the major
developed economies and some emerging economies in Latin America and East Asia. The temporary
weakness in the United States economy has not been compensated by stronger growth performance in
the euro area and in Japan. Both continue to lack the dynamism needed to redress domestic imbalances
and to contribute to an adjustment of the global trade imbalance. Indeed, beginning in the second half
of 2004, output growth in the euro area and Japan has slowed down markedly, causing forecasts for
2005 to be revised downwards. While greatly benefiting from the global expansion over the past three
years, and especially the Asian boom, neither the euro area nor Japan has managed to revive domestic
demand.

Another reason for concern about global economic prospects is the increase in oil prices, which
have doubled since mid-2002, to reach $58 per barrel in July 2005, despite flexible supply adjust-
ments on the part of oil producers. However, the much feared shock of surging oil prices on economic
activity and inflation in developed countries, an impact of the kind witnessed in the 1970s, has so far
not occurred, for two reasons. First, developed countries have become less oil dependent, as energy is
being used more efficiently. At the same time, the share of services in their GDP has gained in impor-
tance at the expense of industry, where more energy is used per unit of output. Second, the recent oil
price increase was not the result of a big supply shock, but of a gradual increase in demand. Under
these conditions, the wage and monetary policy responses in the developed countries have been meas-
ured, and have not jeopardized price stability or output growth.

The recent surge in oil prices has a stronger impact on oil-importing developing economies,
especially in countries where industrialization has led to greater dependence on oil imports. In Brazil,
for example, the oil intensity of domestic production is 40 per cent higher than the OECD average; in
China and Thailand it is more than twice as high, and in India almost three times as high as in the
OECD countries. Therefore, it is primarily in developing countries where inflationary pressures
resulting from further rising oil prices imply risks for the sustainability of the growth process. Even
though inflation has so far been modest, monetary policy has already been tightened in some coun-
tries.

On the other side, not only oil exporters but also many developing countries exporting non-oil
primary commodities benefited from increased demand and rising prices for their exports. Since 2002,
strong demand from East and South Asia, in particular China and India, has been the main factor
behind the hike in commodity prices. In the markets for some primary commodities, emerging supply
constraints have also contributed to the strong price reaction. Asian demand for primary commodities,
particularly for oil and minerals such as copper, iron ore and nickel, as well as for natural rubber and
soybeans, is likely to remain strong, boosting the earnings of the exporters of these products. But
further developments on the markets for primary commodities will also critically depend on how

III

much additional supply capacity will be created by recent new investments, how fast this capacity will
go on-stream, and how commodity demand from developed countries will be affected by the need to
correct the existing trade imbalances.

Despite the increasing importance of the fast growing developing countries for international com-
modity markets, developed countries, which still account for two thirds of global non-fuel commodity
imports, will continue to play an important role. It is unlikely that the growing imports of primary
commodities by China and India alone will bring about a permanent reversal of the declining trend in
real commodity prices. Indeed, in real terms, commodity prices are still more than one third below
their 1960–1985 average. Moreover, the sharp fluctuations in commodity prices constrain the ability
of many developing countries to attain a path of stable and sustained growth and employment creation
that could benefit all segments of their population and allow them to reach the MDGs.

The large global current-account imbalances represent the greatest short-term risk for stable growth
in the world economy. The United States trade deficit has continued to grow despite the depreciation
of the dollar: it has lost 18 per cent of its value on a trade-weighted basis since February 2002. And the
United States current-account deficit accounts for two thirds of the combined global surpluses. The
deficit has increased in recent years vis-à-vis virtually all its trading partners; the increase has been
the most pronounced in trade with Western Europe and China. On the other hand, China’s trade is in
surplus not only with the United States but also with many other developed countries. However, despite
these surpluses, China’s imports from these countries have also increased rapidly, as have its imports from
neighbouring countries and other developing countries.

A well coordinated international macroeconomic approach would considerably enhance the chances
of the poorer countries to consolidate the recent improvements in their growth performance. Such an
approach would also have to involve the major developing countries and aim at avoiding deflationary
adjustments to the global imbalances.

East and South Asia as a new growth pole

Asia has been a region of economic dynamism over the past four decades, with different econo-
mies in the region successively experiencing rapid growth. The large size of the countries that entered
this process most recently, China and India, has established the East and South Asian region as a new
growth pole in the world economy. Due to the high dependence of these large Asian economies on
imports of primary commodities for industrial output growth, in particular fuels and industrial raw
materials, and the resulting linkages with other developing countries, variations in their growth per-
formance will have strong repercussions on the terms of trade and export earnings of other developing
countries. This inevitably raises the question of the sustainability of the pace of growth of these two
economic powers in the medium and long term.

In terms of per capita GDP, both China and India still have a long way to go to approach the
levels of the leading economies. Their potential for catching up is enormous. To realize this potential,
it will be crucial for both countries to achieve further productivity gains in manufacturing activities

IV

and ensure that all segments of their population participate in income growth. Broad-based income
growth is essential for accelerating the eradication of poverty and gaining widespread social accept-
ance of the required structural changes; but wage increases throughout the economy in line with rising
productivity are also a central pillar for the expansion of domestic consumption and, thus, the
sustainability and stability of output growth. Fixed capital formation depends on favourable demand
expectations in general, and not just on exports, which are subject to the vagaries of the world market
and to changes in international competitiveness.

Shifting trade patterns in China and India

Sustained rapid growth and rising living standards in China and India have been accompanied by
a dramatic increase in Asia’s shares of world exports and raw material consumption. Given the large
size of the Chinese and Indian economies and their specific patterns of demand, changes in their
structure of supply and demand have a much larger impact on the composition of world trade than did
those of other late industrializers in Asia during their economic ascent. The impact of China’s growth
on international product markets and global trade flows is already apparent. India’s merchandise trade
structure may follow a sequence of changes similar to that of China, with a lag of one or two decades,
if industrialization in India gains the same importance in its further economic ascent as it did in the
other fast growing Asian economies.

Metal use in China – and to a lesser extent in India – has strongly increased over the past few
decades, particularly since the mid-1990s. In China, growth in the use of aluminium, copper, nickel
and steel now exceeds that of GDP. Part of this recent increase coincides with very high rates of
investment, especially in infrastructure. However, this recent rapid rise in China’s intensity of metal
use, and the concomitant increase in its imports of minerals and mining products, may well slow down
once investment growth, especially in construction and infrastructure, decelerates. By contrast, India’s
intensity of metal use has remained fairly stable over the past four decades, reflecting the country’s
slower pace of industrialization and the relatively small share of investment in infrastructure in its
GDP.

China’s energy use has steadily increased since the 1960s, but at a slower rate than its GDP. Its
future energy use will depend on how opposing trends play out: on the one hand, continued rapid
industrialization, higher living standards and improved transport infrastructure will tend to further
increase energy use; on the other hand, there remains considerable potential for the adoption of energy-
saving technologies. In either case, China’s energy demand is likely to continue to outpace the future
growth of domestic supply.

Agricultural imports will be determined by a number of factors. To the extent that imports of raw
materials for industrial use are needed as production inputs for the expanding domestic market, import
demand will grow further. This is likely to be the case for rubber and wood. On the other hand, imports
of cotton, which to a large extent have depended on the production of textiles and clothing for export,

V

can be expected to slow down as the composition of exports shifts to more technology-intensive
products.

A continuous increase in average living standards and further progress in poverty reduction in
China will also lead to higher demand for food and to a change in its dietary composition. So far,
China has remained largely self-sufficient in all major food items. But with increasing consumption it
is likely to become more dependent on food imports in the future, notwithstanding possible productivity
and output growth in its domestic agricultural sector as a result of recent agricultural policy reforms.
Given the size of its economy, even small changes in self-sufficiency ratios can have a considerable
impact on China’s agricultural imports.

Since the mid-1980s China has substantially upgraded its export basket, in which labour- and
resource-intensive manufactures and, increasingly, electronics, have become dominant. China’s ex-
ports still have a relatively high import content, but there are indications of a rise in the share of
domestic value added in China’s processing trade, particularly in the electronics sector. India has not
experienced the kind of manufacturing export boom that has characterized the other rapidly growing
economies in Asia. It has become a leading exporter of software and IT-enabled services, particularly
to the United States, but it is highly uncertain whether their share in India’s export earnings can rise
much further. Over the next few years, the absolute value of these services’ exports may continue to
grow, but export dynamism in manufacturing is likely to become stronger.

The growth dynamics in China and other Asian economies have positive effects for many devel-
oped and developing countries. This is true for those countries that benefit directly from the surge in
import demand from the fast growing Asian economies. It is also true for those that benefit indirectly
through the positive growth effects in the economies of their main trading partners. Still others have
achieved higher export and income growth as a result of the rise in commodity prices, even though
their exports to the fast growing Asian economies are relatively small. But it also has to be recognized
that China’s increasing participation in international trade poses new challenges for many countries.
Its weight in international markets due to the very large size of its economy may contribute to a fall in
the export prices of manufactures that it produces and exports along with other developing countries,
such as clothing, footwear and certain types of information and communication technology products.
The rise of China’s clothing exports, in particular, occurred at a time when several developing coun-
tries had adopted more outward-oriented development strategies, and many had developed production
and export activities in the clothing sector partly in response to the quota regulations under the Multi-
Fibre Arrangement.

There is little doubt that the pace of development in the populous Asian economies, and espe-
cially in China, requires accelerated structural change in many other countries – developing and
developed alike. In some sectors, such as the clothing industry and, more generally, in activities at the
low-skill end of the economy, the adjustment pressure is stronger than in others where there is less
competition from low-wage producers with relatively high productivity. There are widespread fears in
many countries that the pace of structural change could result in higher unemployment and lower
output. Paradoxically, among the developed countries, those with large deficits in their trade balance,
such as Australia, Spain, the United Kingdom and the United States, have performed much better in
terms of domestic growth and employment than countries that have been recording large trade sur-
pluses and greater competitiveness, such as Germany and Japan. Challenging the commitment of all
countries to develop a global partnership for development and responding to the integration of large
and poor countries by giving in to protectionist pressures would be counterproductive: most of the
earnings of developing countries from their exports to the developed countries are translated into
higher import demand for advanced industrial products, and thus flow back, directly or indirectly, to
the latter.

VI

The growing importance of South-South trade

Trade among developing countries has sometimes been promoted as an alternative to the tradi-
tional trade pattern where developing-country trade relies mainly on primary commodity exports to
developed countries in exchange for imports of manufactures. The rapid rise in the importance of
South-South trade, particularly over the past two decades, reflects a number of factors. First, there has
been an upswing following the downturn of such trade during the 1980s. Second, the move towards
the adoption of more outward-oriented development strategies, along with trade reform and regional
trade agreements, in a wide range of developing countries has significantly improved access to their
markets, including for imports from other developing countries. But the most important reason for the
rapid growth of South-South trade is that output growth in some large developing economies, particu-
larly China, has been much faster than in the developed countries. Moreover, these countries’ buoyant
growth performance has been closely linked with increasing intraregional specialization and production-
sharing.

While increased South-South trade is a fact, recent developments in the developing countries as
a whole require a careful assessment of the statistical data. Indeed, such an assessment calls for a
number of qualifications to the prima facie impression that trade among developing countries has
grown massively over the past decade or so, and that exports of manufactures account for much of that
rise.

The growing role of developing countries in world trade flows appears to be the result, above all,
of the above-average growth performance of a few Asian economies, and the associated shifts in the
level and composition of their external trade. A substantial part of the statistical increase in South-
South trade in manufactures is due to double-counting associated with intraregional production-sharing
in East Asia for products eventually destined for export to developed countries. It is also due to double-
counting associated with the function of Hong Kong (China) and Singapore as transhipment ports or
regional hub ports. The important role of triangular trade in the measured rise of South-South trade in
manufactures implies that the bulk of such trade has not reduced the dependence of developing countries’
manufactured exports on aggregate demand in developed-country markets. As long as final demand
from developed countries – notably the United States, which is East Asia’s most important export
market – remains high for products for which production-sharing within East Asia plays an important
role, triangular trade and, thus, South-South trade, will remain strong. On the other hand, the economic
rebound in Latin America has improved the prospects for South-South trade in manufactures that is
not related to triangular trade.

The rise of South-South trade in primary commodities appears more modest in trade statistics.
However, it has involved a larger number of countries than the strong rise of South-South trade in
manufactures. It has allowed Africa, as well as Latin America and the Caribbean to recoup some of the
market shares in total South-South trade that they had lost in the 1980s. Indeed, the rise in South-

VII

South exports of primary commodities to the rapidly growing Asian developing countries is likely to
evolve into the most resilient feature of what has come to be called the “new geography of trade”.

The promotion of South-South trade remains a desirable objective for a variety of reasons. First,
sluggish growth in developed countries and their continued trade barriers against products of export
interest to developing countries implies that developing countries need to give greater attention to
each other’s markets to promote export growth in order to achieve their economic growth targets.
Second, the vast size of the rapidly growing Asian economies reduces the need for developing coun-
tries to seek developed-country markets in order to benefit from economies of scale. Third, continued
dependence on developed-country markets exposes developing countries to possible pressure that
links better access to those markets with binding commitments to rapid trade and financial liberaliza-
tion, protection of intellectual property and an open-door policy for FDI. More generally, it also en-
tails the risk of increasingly narrowing the policy space for developing countries.

Terms of trade revisited

The recent and ongoing changes in international trade, with respect to both product composition
and direction of trade, is affecting developing countries in different ways, depending on the product
composition of their exports and imports. On the export side, the impact differs according to the
shares of manufactures and primary commodities, and on the import side, it is especially the depend-
ence on fuels and industrial raw materials that determines the outcome for individual countries.

The same factors that improved the terms of trade of some groups of countries, especially the
higher prices of oil and minerals and mining products, led to a worsening of the terms of trade in
others. In some countries, particularly in Latin America, but also in Africa, the positive effect of price
movements on the purchasing power of exports was reinforced by an increase in export volumes;
whereas in others, gains from higher export unit values were compensated, or even over-compensated,
by higher import prices. Since 2002, economies with a high share of oil and minerals and mining
products in their total merchandise exports have gained the most from recent developments in interna-
tional product markets. The terms of trade of countries with a dominant share of oil exports increased by
almost 30 per cent between 2002 and 2004, and those of countries with a dominant share of minerals
and mining products in their exports increased by about 15 per cent. Terms-of-trade developments
have varied the most among economies where agricultural commodities have dominated total mer-
chandise exports. This reflects large differences in the movement of prices for specific products within
this category, differences in the shares of other primary commodities in their exports and the share of
oil in their merchandise imports.

Developing countries for which manufactures are the dominant category of exports, and which
are at the same time net importers of oil and minerals and metals have seen a deterioration in their
terms of trade in the past two or three years. The deterioration, due to the combined effects of rising
prices of imported primary commodities and stagnating or falling prices of their manufactured exports,
could well become a longer term feature in their external trade. There are two reasons for this: first,
there are indications that the prices for their manufactured exports are falling relative to the prices of

VIII

the manufactures they are importing from the developed countries; second, prices for primary com-
modities are likely to remain strong as long as industrial growth remains vigorous in the large Asian
economies and the imbalances in the developed world can be settled without entering into a recession.

Indeed, the terms-of-trade losses of exporters of manufactures among the developing countries
are partly explained by the pace of the catch-up process in some of these countries, particularly in
China and India. This process has been driven by higher productivity in the export sectors, which has
given them a competitive edge and led to higher import demand. The variations in the global pattern
of demand and their impact on individual countries have resulted in a redistribution of income, not
only between developed and developing countries, but also, and to an increasing extent, between
different groups of developing countries. However, it is important to recognize that a change in the
distribution of real income does not necessarily imply absolute losses. As long as output growth is
strong enough, all countries can gain in terms of real income, with some gaining more than others,
depending on the structure of their exports and the international competitiveness of their producers: a
terms-of-trade deterioration can be compensated by rising export volume. The probability for this to
happen is much greater if exports consist of manufactures, for which the price elasticity of demand is
high, than if they consist of primary commodities.

The productivity gains in Asia have led not only to higher company profits, but also to higher
wages; they have also benefited consumers at home and abroad through lower prices. Higher export
earnings, despite lower export prices, have enabled Asian countries to pay higher prices for imported
inputs, which, in turn, has represented terms-of-trade gains for many primary commodity exporters.
Moreover, exports from Asia also benefit from rising demand in those developing countries that have
seen their export earnings rise thanks to growing Asian demand for their commodities.

Policies for managing the new forms
of global interdependence

Although continuing growth in East and South Asia and recovery in other regions of the developing
world are likely to sustain the demand for primary commodities, the basic problem of instability in
these prices and their long-term tendency to deteriorate in real terms vis-à-vis the prices of manufactures,
especially those exported by developed countries, remains unresolved. Therefore, it is imperative for
developing countries not to become complacent about industrialization and diversification. There is a
risk that the recent recovery of primary commodity markets could lead to a shift away from invest-
ment – both domestic and foreign – in the nascent manufacturing sectors of commodity-exporting coun-
tries in favour of extractive industries. While higher investment in that area may be beneficial in terms
of creating additional supply capacity and raising productivity, this should not be at the expense of
investment in manufacturing. Exporters of primary commodities that have recently benefited from
higher prices and, in some cases, from higher export volumes, have to continue their efforts towards
greater diversification within the primary commodity sector, as well as upgrading their manufacturing
and services sectors. The recent windfall gains from higher primary commodity earnings provide an
opportunity to step up investment in infrastructure and productive capacity – both essential for boosting
development.

IX

At the national level, this raises the question of the sharing of export revenues from extractive
industries, which has always been a central concern in development strategy. Higher global demand
and international prices for fuels and mining products have been attracting additional FDI to these
sectors in a number of developing countries, and this may increase the scope in these countries for
mobilizing additional resources for development. However, government revenues from taxes on profits
in these sectors have typically been very low, partly due to a policy since the beginning of the 1990s
of attracting FDI through the offer of fiscal incentives. Such a policy risks engaging potential host
countries in “a race to the bottom” which, clearly, should be avoided.

Additional sources of fiscal revenue from primary export-oriented activities may be royalties,
the conclusion of joint ventures or full public ownership of the operating firms. However, efforts to
obtain adequate fiscal revenue should not deprive the operators, private or public, of the financial
resources they need to increase their productivity and supply capacity, or their international competi-
tiveness. Recent upward trends in world market prices of fuels and minerals and mining products as a
result of growing demand from East and South Asia provide an opportunity to review the existing
fiscal and ownership regimes. Such a review – which is already under way in several countries – and
possible strategic policy adjustments could be more effective if oil and mineral exporting countries
would cooperate in the formulation of some generally agreed principles relating to the fiscal treatment
of foreign investors. Moreover, a higher share of the public sector or consumers in the rent generated
by extractive industries does not automatically enhance development and progress towards the MDGs;
it has to be accompanied by strategic use of the proceeds for investment that would enhance productive
capacity in other sectors, as well as in education, health and infrastructure.

At the international level, recent increases in the prices of some primary commodities and im-
provements in the terms of trade of a number of developing countries may not have changed the long-
term trend in real commodity prices or altered the problem of their volatility. Wide fluctuations in
primary commodity prices are not in the interest of either producers or consumers. This has also been
recognized by the IMF’s International Monetary and Financial Committee, which, at its April 2005
meeting, inter alia, underscored “the importance of stability in oil markets for global prosperity” and
encouraged “closer dialogue between oil exporters and importers”. Although primary commodities
other than oil may be less important for the developed countries, they are nevertheless equally, if not
more important for those developing countries that depend on exports of such commodities. And since
in many of the latter countries extreme poverty is a pressing problem, the issue of commodity price
stability is of crucial importance not only for the achievement of the MDGs but also for global pros-
perity in general. Consequently, in the spirit of a global partnership for development, the international
community might consider reviewing mechanisms at the global or regional level that could serve to
reduce the instability of prices of a wider range of commodities, not just oil, to mitigate its impact on
the national incomes of exporting countries.

In the short term, however, the central policy issue concerns the correction of existing global
trade imbalances. It is often argued that the decision of central banks in the developing world, and in
particular in Asia, to intervene in the currency market is the main reason for these imbalances. Indeed,
most of the intervening countries explicitly try to avoid currency appreciation that could result from
speculative capital inflows, in order to ensure that the international competitiveness of the majority of
their producers is not put at risk. Most of the East Asian countries adopted a system of unilateral fixing
of their exchange rates following the Asian financial crisis, while most Latin American turned to
managed floating. In both cases, the aim has been to maintain the real exchange rate at a competitive
level while gaining a certain degree of independence from international capital markets.

In the absence of a multilateral exchange rate system that takes account of the concerns of small
and open developing economies, such unilateral stabilization of the exchange rate at a competitive
level appears to be an effective means of crisis prevention. Individual central banks do have the capacity

X

for successful and credible counter-attacks when their own currency is under “threat” or pressure to
appreciate. By contrast, they are practically powerless to stabilize an exchange rate that has come
under threat or pressure to depreciate, even if central banks have accumulated huge reserves of inter-
national currency. It would require multilateral cooperation and policy coherence to address this type
of asymmetry. The premature liberalization of capital markets has seriously heightened the vulner-
ability of developing countries to external financial shocks. Moreover, it has become clear that strengthen-
ing domestic financial systems is not enough to significantly reduce that vulnerability.

For a smooth redressing of the global imbalances, it is essential to avoid a recession in developed
countries – where growth has been depending excessively on the United States economy – and a
marked slowdown in developing countries. A scenario which seeks to correct the global imbalances,
and most importantly the external deficit of the United States, through massive exchange rate appre-
ciation and lower domestic absorption in China and other developing countries in Asia, will almost
inevitably have a deflationary impact on the world economy. It will not only jeopardize China’s at-
tempts to integrate a vast pool of rural workers and, more generally, reduce poverty, but will also
adversely affect the efforts of other developing countries towards achieving the MDGs.

By contrast, adjusting the global imbalances will be less deflationary if demand from the euro
area and Japan grows faster. It should not be forgotten that much of the counterpart to the United
States’ external deficit is to be found in the surpluses of other developed countries. The current-account
surpluses of the euro area and Japan with the rest of the world are mushrooming – despite rising
import bills for oil and other primary commodities. Indeed, Japan and Germany together accounted
for $268 billion or about 30 per cent of the combined global current-account surplus in 2004. This
compares with an overall current-account surplus of $193 billion in East and South Asia. China, the
country on which revaluation pressure has been most intense, accounts for just over one third of this
amount, or less than 8 per cent of the combined global surplus.

International initiatives to alleviate poverty and to reach the MDGs should not ignore the impor-
tance of a smooth correction of the global imbalances so as to ensure the sustainability of the “Asian
miracle”. Indeed, further economic catch-up by China and India will have expansionary effects for
most developing countries. Any slowing down or disruption of this process would carry the risk of
intensifying global price competition on the markets for manufactures exported by developing countries,
while weakening the expansionary effects resulting from the growing demand from Asia.

Supachai Panitchpakdi
Secretary-General of UNCTAD

Current Issues in the World Economy 1

The world economy is still growing at a
steady pace but the risk of a relapse hangs in the
balance. The moderate slowdown registered in the
first half of 2005 indicates that the world’s main
engine of growth, the United States economy, may
not be able to drive forward global growth with-
out the support from other parts of the world.
Meanwhile, the euro area is stuck in stagnation,
and Japan’s growth shows a moderate deceleration.

Growth performance in the developing coun-
tries was generally good and the populous East
and South Asian countries, in particular China and
India, acted as the second engine of worldwide
growth. As a result of their vigorous expansion
and their strong demand for imports of raw mate-
rials, many other developing countries have
experienced windfall revenues from rising com-
modity prices and surging demand for intermediate
products. Even Africa posted a growth rate of
about 4.5 per cent in 2004 and it is expected to
expand by close to 5 per cent this year. Although
these growth rates allow for an increase in per
capita income, in sub-Saharan Africa they are still
insufficient to attain the Millennium Development
Goals (MDGs) by 2015. Section B of this chapter
assesses the global growth record and regional
performances.

The sustainability of the present growth path
is facing several threats. Serious multilateral ac-
tion to unwind global current-account imbalances
without endangering the growth process has been
missing. Instead, political pressure on some coun-
tries to take unilateral measures is mounting, as
analysed in section C of this chapter. It is shown
that the European Union, in its own interest,
should do more to accelerate domestic demand
growth and enhance absorption.

Section D of this chapter focuses on the ef-
fects of the oil price hike on the world economy
from a historical perspective. It shows that the
direct impact of quickly rising oil-import bills on
the developed countries has been much less pro-
nounced than in the period which followed the oil
price shocks of the 1970s. Moreover, there are so
far no signs of negative indirect effects on infla-
tion and interest rates. On the other hand, the oil
price hike has had, and continues to have, a sig-
nificant impact on the economies of many
oil-importing developing countries.

Section E examines some aspects of the
present economic expansion in China and India,
and compares it with the rapid growth episodes
experienced by Japan and the Republic of Korea

CURRENT ISSUES IN THE WORLD ECONOMY

Chapter I

A. Introduction

Trade and Development Report, 20052

in the period following the Second World War. It
highlights the role played by profit-investment
linkages, the sectors driving the economy, the need

of establishing a balance between expanding do-
mestic and foreign demand, and the importance
of supportive macroeconomic policies.

B. The world economy: growth performance and prospects

The world economy grew by almost 4 per
cent in 2004, recording its best performance since
2000. Global growth continued into 2005 – albeit
at a slower pace – and is expected to fall to around
3 per cent. Most of this deceleration is attribut-
able to the slowdown in developed economies,
although some developing countries are also
showing signs of losing momentum. Developing
economies as a whole are expected to grow by
5 to 5.5 per cent, down from 6.4 per cent in 2004
(table 1.1).

1. Economic activity in developed
countries

Domestic demand was the main driving force
of growth in the United States in 2004, with pri-
vate domestic investment growing at a two-digit
rate and personal consumption maintaining a sig-
nificant rate of growth, especially in durable
goods. The volume and value of United States
exports grew at a brisk pace in 2004 and the first
months of 2005, in part because of the real depre-
ciation of the dollar. However, imports grew even
faster and, as a consequence, trade contribution
to gross domestic product (GDP) growth continued
to be negative. Trade and current-account deficits
widened, with the latter rising to 6 per cent of GDP
in the last quarter of 2004, raising the question of

what supplementary policies would be needed if
the United States current account is to be signifi-
cantly reduced (see section C).

Annual growth in the United States is fore-
casted to be around 3.5 per cent in 2005 (Klein and
Ozmucur, 2005). Indeed, personal consumption
expenditures and fixed investment have slowed
in the first quarter 2005.1 It is an open question
whether these are the first signs of a persistent
deceleration of growth. On one hand, recent in-
creases in labour income and corporate profits may
support future private expenditure while, on the
other hand, their positive effects may be offset by
slower productivity gains, high energy costs, and
the fading of temporary factors such as tax cuts
and the depreciation of the dollar. Moreover, di-
minishing fiscal and monetary stimulus may
eventually affect domestic demand. Fiscal policy
is set to be less expansive than in previous years,
as it aims to reduce the public deficit from 3.6 per
cent of GDP in 2004 to 1.8 per cent by 2009. This
may require some cutbacks in expenditure, espe-
cially if reforms involving fiscal costs, such as
those associated with the social security system,
are carried out while higher interest rates weigh
on public debt services. Even if interest rates re-
main at historically low levels, rising rates may
have a negative effect on the consumption of du-
rable goods and on fixed investment. More
generally, interest rate movements may have size-
able economic effects, as domestic debt levels in

Current Issues in the World Economy 3

non-financial sectors reached $24.8 trillion at the
end of the first quarter of 2005 – roughly twice the
size of GDP.

Rising interest rates and/or a decline in
housing prices may also affect other developed
countries – such as Australia, Canada and the
United Kingdom – where private consumption has
been partly sustained by booming house prices and
rising household indebtedness. This contribution
to growth is most likely coming to an end as house-
hold saving ratios recover from their current low
levels. Real appreciation has hampered export
volumes and boosted imports in Australia and
Canada, resulting in a negative contribution of net
exports to GDP growth; however, these countries

have benefited from significant gains in terms of
trade, in large part due to their primary commod-
ity exports. Australia, Canada and the United
Kingdom are expected to experience a moderate
decline in their GDP growth in 2005, to a rate close
to 2.5 per cent.

Economic growth in the euro area has slowed
since mid-2004. Most forecasters have reduced the
2005 growth expectations (set in the Autumn of
2004) from 2 per cent to 1.5 per cent or even
slightly below. The economic slowdown was
mainly attributed to a fall in the growth rate of
exports (induced by the appreciation of the euro)
in concert with sluggish domestic demand in many
countries. As pointed out by UNCTAD over the

Table 1.1

WORLD OUTPUT GROWTH, 1990–2005a

(Percentage change over previous year)

1990–
Region/countryb 2000c 1999 2000 2001 2002 2003 2004d 2005e

World 2.7 2.9 4.0 1.3 1.8 2.5 3.8 3.0

Developed countries 2.4 2.7 3.5 1.0 1.3 1.7 3.0 2.3
of which:

Japan 1.4 0.1 2.8 0.4 -0.3 1.4 2.6 1.8
United States 3.4 4.1 3.8 0.3 2.4 3.0 4.4 3.5
European Union 2.1 2.9 3.6 1.7 1.1 0.9 2.1 1.5
of which:

European Union-15 2.1 2.9 3.5 1.6 1.0 0.8 2.0 1.4
Euro area 2.0 2.8 3.5 1.6 0.9 0.5 1.8 1.2

France 1.7 3.2 3.8 2.1 1.2 0.5 2.1 1.5
Germany 1.6 2.0 2.9 0.9 0.2 -0.1 1.0 0.8
Italy 1.6 1.7 3.0 1.8 0.4 0.3 1.0 -0.4

United Kingdom 2.7 2.8 3.8 2.1 1.7 2.2 3.1 2.0

South-East Europe and CIS -4.3 3.4 8.1 5.6 4.9 6.9 7.5 6.0

Developing countries 4.8 3.5 5.4 2.4 3.5 4.7 6.4 5.4

Developing countries, excluding China 4.0 3.0 5.0 1.5 2.7 3.9 5.7 4.6

Source: UNCTAD secretariat calculations, based on UNCTAD Handbook of Statistics 2004; United Nations, Department of
Economic and Social Affairs (UN/DESA), Development Policy and Planning Office, Project Link estimates; national
sources; IMF, World Economic Outlook, April 2005; JP Morgan, Global Data Watch, various issues; Economic Intelligence
Unit (EIU), Country Forecast, various issues; and OECD, Economic Outlook No. 77.

a Calculations are based on GDP in constant market prices based on 1995 dollars.
b Region and country groups correspond to those defined in the UNCTAD Handbook of Statistics 2004.
c Average.
d Preliminary estimates.
e Forecast.

Trade and Development Report, 20054

past three years, the biggest European countries
have not been able to reach a higher and sustain-
able growth path despite receiving enormous
stimulus from the world economy. This inability
is attributed to depressed domestic demand as a
result of a mixture of deflationary wage policies
(i.e. in Germany, where a 0.8 per cent growth rate
expected in 2005) and losses of market shares (i.e.
in Italy, whose GDP is expected to fall in 2005).
France, with a more moderate deflationary policy
than Germany, remains in the middle of the group,
with growth forecasted at around 1.5 per cent.
Spain is estimated to grow at a rate of about 3 per
cent in 2005 owing to sustained domestic demand.
As no fundamental changes in economic policy
within the euro area are foreseen, an acceleration
of growth in the near future cannot be expected.
The 2005 outlook for the ten new members of the
European Union is more upbeat and growth rates
are expected to exceed 4 per cent.

All in all, Europe is not positioned to help
reduce global imbalances in the next two years.
Its overall current-account deficit is rather low
(0.3 per cent of GDP) but the imbalances of coun-
tries inside the European Monetary Union in-
creased dramatically in the last three years. For
example, Germany’s surplus of $110 billion (3.8 per
cent of GDP), forecasted for 2005 by IMF (2005a),
is much larger than China’s surplus.

In 2004, Japan recorded a growth rate of
2.6 per cent, which was driven by private and pub-
lic consumption, non-residential investment and
brisk export performance. Growth was strong in
the first quarter of 2004, but faded in the second
half of the year, as domestic and foreign demand
weakened. In the first months of 2005, high cor-
porate profits and the reversal of the long-lasting
downward trend in employment and wages indi-
cate that the sluggishness of domestic demand in
the second half of 2004 may be over. Recent data
on export performance are, however, less positive.
They show a year-on-year deceleration of exports
in late 2004, due to a slowdown in electronics ex-
ports. This is partly related to rising foreign direct
investment (FDI) and production relocation to
China (see chapter II). As a result, in 2005 trade
is not expected to make a positive contribution to
real GDP growth as it had in 2004. The forecast
for 2005 points to a moderate deceleration in real
growth to 1.8 per cent.

2. Economic activity in developing
countries

In 2004, all developing regions posted sig-
nificantly higher growth rates than in previous
years (table 1.2). With a GDP growth of 4.6 per
cent, Africa continued to grow at the same rate as
in 2003 – the highest level reached in about a dec-
ade. However, the overall figures for the region
mask considerable differences across countries,
with growth rates ranging from an expansion of
31 per cent (Chad) to a contraction of over 8 per
cent (Zimbabwe). The strong growth performance
in Africa was fuelled mainly by higher prices of
primary commodity exports, particularly petro-
leum, on the back of strong global demand.
Economic growth was also supported by greater
political stability and the improved agricultural
performance resulting from favourable weather
conditions. The continued growth in domestic
demand is also credited to increased levels of ex-
ternal resource inflows via aid and debt relief, with
the latter contributing to lower fiscal deficits. The
general level of inflation went down from over
10 per cent to about 8 per cent.

Real GDP growth in 2004 was widespread in
both sub-Saharan Africa and North Africa. High
oil prices underscored output growth in Central
Africa, which recorded the highest subregional
growth rate at just over 7 per cent, and North Af-
rica, with a growth rate of around 5 per cent.
Economic performance in East and West Africa
benefited from a combination of higher agricul-
tural output and rising commodity prices. However,
economic growth in West Africa was subdued, due
to political instability in Côte d’Ivoire and a lo-
cust invasion in Mali, Niger and Senegal. Despite
higher growth in South Africa, the Southern African
region recorded the worst economic performance
of all the African subregions, largely due to the
continued economic contraction experienced by
Zimbabwe as a consequence of drought and eco-
nomic uncertainties.

Twelve African countries posted real output
growth of 6 per cent or more in 2004, eight of
which are either oil exporters (Chad, Equatorial
Guinea, Angola, the Libyan Arab Jamahiriya and
Sudan), or are recovering from a very low base
(Ethiopia, Sierra Leone and the Democratic Re-

Current Issues in the World Economy 5

public of the Congo). Thus, once again, most coun-
tries have fallen short of the 7 per cent annual
growth rate that is needed to attain the MDGs. A
modest improvement is expected in the region’s
economic performance in 2005 on the back of
continuing macroeconomic and political stability
and high commodity prices; although domestic
prices and external accounts in oil-importing coun-
tries will continue to suffer from high oil prices.
However, even in oil-exporting countries that have
been growing at two-digit rates over the past few
years, poverty levels will not be significantly re-
duced unless governments manage to channel a
significant part of the oil revenues into financing
of non-oil economic sectors (including social and
economic infrastructure), where the great major-
ity of population is employed.

West Asia performed strongly in 2004, reach-
ing 6.2 per cent growth in comparison to 5.3 per
cent in the previous year. These performances are
directly related to the massive injection of wind-
fall revenues flowing into oil exporting countries,
which also benefited indirectly most of the other
countries in the region through increased demand
for their exports, capital inflows and workers re-
mittances.

Export revenues of the major oil exporters
in the region (excluding Iraq) reached $292 bil-
lion in 2004,2 32 per cent more than in the previous
year, owing mainly to higher international oil
prices. The volume of oil production also in-
creased (4.2 per cent for the group as a whole),
contributing significantly to real GDP growth.
These additional revenues, on average, repre-
sented 12 per cent of these countries’ GDP, and
boosted domestic expenditure. In particular, govern-
ment revenues augmented significantly, allowing for
an increase in public expenditures and, simulta-
neously, a significant fiscal surplus. Part of the
surplus has been used to accumulate reserves, but
another part was used to reduce indebtedness. As
in some countries (notably Saudi Arabia) the bulk
of public debt is held by nationals, debt repay-
ments have further expanded private liquidity and
demand. Expansionary trends have continued into
2005. Oil prices rose by 30 per cent in the first
half of the year; if such price levels persist, oil
revenues will increase in 2005 at a similar rate as
in the previous year. Oil production is set to in-
crease further in Saudi Arabia and Kuwait, and

will probably be maintained at the current high
levels in the Islamic Republic of Iran, Qatar and
the United Arab Emirates. In addition, several in-
vestment projects are on line, covering the energy
sector (oil, gas and refineries), infrastructure, tele-
communications and real estate. At the same time,
government expenditure is set to continue its up-
ward trend; and it is aimed, in part, at addressing
social problems related to high unemployment.

Other economies within the region, such as
Jordan and Lebanon, also experienced accelerated
growth in 2004, mainly driven by domestic de-
mand that was stimulated by the expansion of
regional tourism and higher workers remittances
(ESCWA, 2005). Also, capital inflows into real
estate investments boosted the construction sec-
tor. These countries managed to expand exports
and profit from higher regional demand, includ-
ing from Iraq. However, imports also expanded
significantly and public debt remains high. These
circumstances limited the room for manoeuvre of
economic policies, making them highly depend-
ent on continued inflows of capital, tourism and
remittances.

Turkey posted a 8.9 per cent growth rate in
2004, propelled by strong domestic demand, in
particular private consumption and fixed invest-
ment. An economic slowdown began in the second
half of that year and extended into the first months
of 2005.3 However, GDP growth in 2005 is estimated
to remain at around 5 per cent. Macroeconomic
policy has to deal with the “twin” deficits prob-
lem. Overall fiscal balance remained negative in
2004, despite a primary surplus of 6.5 per cent of
GDP, due to a public debt stock amounting to three
quarters of GDP and high real interest rates. More-
over, although exports were growing significantly,
the current-account deficit reached 5 per cent of
GDP in 2004, as a result of booming imports and
interest payments. These deficits remain a chal-
lenging issue for the Turkish economy. On the
other hand, the continued reduction of interest
rates by the central bank may play an important
role in the sustainability of public debt and in pre-
venting an excessive economic slowdown.

With 7.1 per cent growth in 2004, East and
South Asia recorded its strongest expansion since
the 1997 financial crisis. China led the boom with
output growing by 9.5 per cent, but growth was

Trade and Development Report, 20056

Table 1.2

GDP GROWTH IN SELECTED DEVELOPING ECONOMIES,
SOUTH-EAST EUROPE AND CIS, 1990–2005a

(Percentage change over previous year)

1990–
Region/economyb 2000c 1999 2000 2001 2002 2003 2004d 2005e

Developing economies 4.8 3.5 5.4 2.4 3.5 4.7 6.4 5.4
Latin America 3.3 0.2 3.8 0.4 -0.6 2.0 5.7 4.2
of which:

Argentina 4.1 -3.4 -0.8 -4.4 -10.9 8.7 9.0 7.5
Bolivia 4.0 0.4 2.3 1.5 2.8 2.9 3.6 3.5
Brazil 2.9 0.8 4.5 1.5 1.5 0.6 4.9 3.0
Chile 6.6 -0.8 4.2 3.1 2.1 3.3 6.1 6.0
Colombia 2.9 -4.2 2.9 1.4 2.5 2.0 4.0 3.5
Ecuador 2.2 -6.3 2.8 5.1 3.8 3.1 6.9 3.0
Mexico 3.1 3.6 6.6 -0.2 0.9 1.3 4.4 3.3
Paraguay 2.2 0.5 -0.4 2.7 -2.3 2.6 4.0 3.0
Peru 4.6 0.9 2.8 0.3 4.9 4.0 4.8 5.5
Uruguay 3.4 -2.4 -1.4 -3.4 -11.2 2.5 12.3 5.5
Venezuela 1.6 -6.1 3.2 2.8 -8.9 -7.5 17.9 8.0

Africa 2.6 3.0 3.5 3.4 2.9 4.7 4.6 4.9
of which:

Algeria 1.9 3.2 2.4 2.1 4.1 6.7 5.8 7.5
Cameroon 1.8 4.2 5.3 4.6 4.0 4.0 4.8 4.5
Cape Verde 6.0 8.6 6.8 3.0 4.6 5.0 4.0 6.0
Côte d’Ivoire 3.3 1.9 -2.7 0.1 -1.2 1.8 -1.0 -1.0
Democratic Republic of the Congo -4.9 -4.3 -6.9 -1.1 3.1 5.0 6.8 7.0
Egypt 4.2 5.4 3.5 3.2 3.1 2.8 3.2 5.0
Ethiopia 3.9 6.3 5.4 7.9 1.2 -3.8 11.6 6.0
Ghana 4.3 4.4 3.7 4.2 4.5 4.7 5.8 5.0
Kenya 2.1 1.3 -0.2 1.1 1.0 1.8 2.6 3.0
Morocco 2.3 -0.1 1.0 6.3 3.2 5.2 3.7 4.0
Nigeria 2.9 2.8 5.8 2.8 1.5 10.7 5.1 4.5
South Africa 2.1 2.0 3.5 2.7 3.6 2.8 3.7 4.0
Tunisia 4.7 6.1 4.7 4.9 1.7 5.6 5.7 5.0
Zimbabwe 2.5 -0.7 -4.9 -8.4 -5.6 -13.2 -8.2 -3.0
Sub-Saharan Africa 2.6 2.9 3.9 3.2 3.0 4.8 4.4 4.4

Asia 6.0 5.3 6.6 3.2 5.5 5.9 6.9 6.0
Asia, excluding China 4.9 4.8 6.2 1.9 4.7 4.8 6.0 4.8

West Asia 3.2 -0.6 4.6 -0.1 4.3 5.3 6.2 5.2
of which:

Iran, Islamic Republic of 3.5 4.2 2.8 3.2 8.0 6.7 5.4 5.5
Jordan 4.6 1.5 2.7 3.5 4.9 3.0 6.2 5.0
Lebanon 6.3 4.0 2.0 1.4 2.0 3.0 4.0 2.0
Saudi Arabia 1.7 -0.8 4.9 1.2 0.1 7.2 5.3 5.5
Turkey 3.8 -4.7 7.4 -7.5 7.8 5.8 8.9 5.0
United Arab Emirates 2.6 2.5 5.4 5.0 1.6 6.3 5.9 6.0
Yemen 5.5 3.7 5.1 3.9 3.3 4.2 2.0 3.0

East and South Asia 6.6 6.5 7.0 3.9 5.7 6.0 7.1 6.1
of which:

China 10.4 7.0 7.9 7.5 8.0 9.1 9.5 9.0
Hong Kong (China) 4.0 3.4 10.2 0.5 2.3 1.5 8.1 5.0
India 6.0 7.1 4.0 5.5 4.3 7.8 6.7 6.5
Indonesia 4.2 0.8 4.9 3.4 4.3 5.0 5.1 6.0
Malaysia 7.0 6.1 8.3 0.5 4.1 5.3 7.1 5.5
Pakistan 3.5 4.3 2.6 2.9 5.8 5.3 6.3 7.5
Philippines 3.3 3.4 6.0 3.0 4.4 4.7 6.1 4.0
Republic of Korea 5.8 10.9 9.3 3.1 6.4 3.1 4.6 3.5
Singapore 7.7 6.4 9.4 -2.4 3.2 1.4 8.4 2.5
Taiwan Province of China 6.3 5.3 5.8 -2.2 3.9 3.3 5.7 3.5
Thailand 4.2 4.4 4.6 1.8 5.4 6.7 6.1 4.0
Viet Nam 7.9 4.8 6.8 6.9 7.0 6.0 7.7 7.0

/...

Current Issues in the World Economy 7

also strong in most other countries in the region
(table 1.2). Economic growth was generally fuelled
by a combination of strong foreign demand and
robust domestic demand. Exports have been a
major driving force: in 2004, exports of goods
from the region grew by 22 per cent in volume
terms (table 1.3). China’s exports led the expan-
sion, with export volume growing by 33 per cent,
but several other countries that participate in re-
gional production networks associated with China
also benefited from its strong export performance.
The region’s exports continued to grow at double-
digit rates in 2004, partly as a result of the dynamism
in the global market for electronics. In general,
exchange rate stability helped to maintain inter-
national competitiveness in most countries, although
in Singapore, Taiwan Province of China and Thai-
land, and recently in China as well, managed
floating led to a moderate appreciation vis-à-vis
the dollar. This softened the impact of the rising
price of primary imports, without leading to a sig-
nificant appreciation of the real effective exchange

rate. Other countries maintained a fixed exchange
rate vis-à-vis the dollar, or even depreciated their
currency as in Indonesia. Only the Republic of
Korea underwent a significant real appreciation
of its currency, but so far this has not restrained
exports from growing briskly.

With the exception of the Republic of Korea
where private demand was constrained by high
indebtedness of households and small firms, do-
mestic demand contributed considerably to the
region’s growth. Private consumption provided a
strong stimulus to growth in China, India, Indo-
nesia, Malaysia, Singapore, Thailand and Viet
Nam, with fixed investment being the main driver
of growth in China and Taiwan Province of China.
Inflation, as measured by consumer prices, showed
a moderate increase in some countries during 2004,
but remained modest in most East and South Asian
countries. Monetary policy maintained an accom-
modative stance and real interest rates have mostly
been declining. On the whole, high income growth

South-East Europe and CIS -4.3 3.4 8.1 5.6 4.9 6.9 7.5 6.0

CIS -5.0 5.6 9.3 5.8 5.0 7.6 7.8 6.3
of which:

Belarus -1.7 3.5 5.8 4.7 5.0 6.8 11.0 7.0
Kazakhstan -4.1 2.7 9.8 13.2 9.9 9.2 9.4 8.5
Russian Federation -4.7 6.4 10.1 5.1 4.7 7.3 7.1 6.0
Ukraine -9.5 -0.2 5.9 9.2 3.6 8.5 12.1 6.5

South-East Europe -1.6 -4.4 3.8 4.6 4.4 4.1 6.4 4.8
of which:

Bulgaria -1.9 2.3 5.4 4.1 4.8 4.8 5.6 5.0
Croatia 0.6 -0.9 2.9 3.8 5.2 4.7 3.8 3.5
Romania -0.6 -1.2 2.1 5.7 4.9 4.8 8.3 5.5

Source: UNCTAD secretariat calculations, based on UNCTAD Handbook of Statistics 2004; UN/DESA, Development Policy
and Planning Office, Project Link estimates; ECLAC, Economic Survey of Latin America and the Caribbean 2004–2005;
ESCAP, Economic and Social Survey of Asia and the Pacific 2005; ESCWA, Survey of Economic and Social Develop-
ments in the ESCWA Region 2005; national sources; IMF, World Economic Outlook, April 2005; JP Morgan, Global
Data Watch, various issues; EIU, Country Forecast, various issues; and OECD, Economic Outlook No. 77.

a Calculations are based on GDP in constant market prices based on 1995 dollars.
b Region and country groups correspond to those defined in the UNCTAD Handbook of Statistics 2004.
c Average.
d Preliminary estimates.
e Forecast.

Table 1.2 (concluded)

GDP GROWTH IN SELECTED DEVELOPING ECONOMIES,
SOUTH-EAST EUROPE AND CIS, 1990–2005a

(Percentage change over previous year)

1990–
Region/economyb 2000c 1999 2000 2001 2002 2003 2004d 2005e

Trade and Development Report, 20058

and good investment performance contributed to a
balanced increase of domestic and foreign demand.

In 2005, economic expansion in East and
South Asia is expected to slow to a growth rate of
slightly above 6 per cent. In particular, the contri-
bution of external trade to growth is diminishing
in several countries in the region, although it re-
mains significant. Global demand for electronics,
especially personal computers and semiconduc-
tors, is growing much slower since the end of
2004, affecting exports from several Asian econo-
mies, such as Japan, Malaysia, Singapore, Taiwan
Province of China and Thailand.

On the other hand, domestic demand has gen-
erally maintained its contribution to growth in the

first months of 2005. Private consumption began
to recover in the Republic of Korea in the last
quarter of 2004, after contracting for almost two
successive years. However, this does not fully
compensate for slowing export growth. As a result,
GDP growth is forecast to decline to 3.5 per cent
(KDI, 2005). Investment has been increasing in
Indonesia and Thailand in 2005, owing to recon-
struction work after the December 2004 tsunami
and the subsequent influx of public investment and
incentives for infrastructure development. In In-
donesia, the tsunami did not cause a significant
impact on economic growth in the first quarter of
2005. On the other hand, economic activity was
more severely affected in Thailand, where the re-
duction of tourism receipts and shrimp production
after the tsunami added to other adverse factors,

Table 1.3

EXPORT AND IMPORT VOLUMES OF GOODS, BY REGION
AND ECONOMIC GROUPING, 1996–2004

(Percentage change over previous year)

Export volume Import volume

1996– 1996–
2000a 2001 2002 2003 2004 2000a 2001 2002 2003 2004

World 7 -1 5 6 13 7 -1 4 7 13

Developed economies 7 -1 2 3 11 8 -1 3 5 11
of which:

Japan 6 -8 8 9 13 4 1 1 6 6
United States 7 -6 -4 3 9 11 -3 4 5 11
Europe 7 2 4 3 12 8 1 2 5 11

Developing economies 8 -2 9 12 16 7 -3 7 10 19
of which:

Africa 2 1 2 11 7 1 5 4 7 26
Latin America 10 1 2 3 10 9 -3 -4 0 13
West Asia 5 0 8 1 3 10 -4 7 -5 35
East and South Asia 10 -3 12 17 22 6 -3 11 15 18
of which:

China 12 9 25 35 33 11 12 23 36 26
India 8 7 17 10 18 5 4 13 9 17

South-East Europe and CIS 1 7 5 9 13 -0 17 10 21 17

Source: UNCTAD secretariat calculations, based on UN COMTRADE; United Nations Statistics Division, United Nations Common
Database (UNCDB); United States Bureau of Labor Statistics, Import/Export Price Indexes database; Japan Customs
Trade Statistics database; UNCTAD, Commodity Price Bulletin, various issues; and other national sources.

a Average.

Current Issues in the World Economy 9

such as high oil prices, drought and outbreaks of
bird flu (NESDB, 2005). As a result, Thailand’s
growth will decelerate in 2005 to a rate of 4 per
cent. In Malaysia, private consumption is expected
to continue growing in 2005, and investment
should increase within a context of low interest
rates and easy credit availability. As Malaysian
exports are highly concentrated in electronics and
electrical machinery, export growth is likely to
slow down. The overall result would be a moder-
ate deceleration of growth to a still strong 5.5 per
cent. Taiwan Province of China, is also experi-
encing slower export growth, while its overall
domestic demand should be sustained by the in-
crease in private consumption, owing to rising real
disposable income and falling unemployment.
These trends show a further rebalancing of growth
in Asia as economies slowly shift their reliance
on export-led growth to internally-generated de-
mand growth (NIESR, 2005: 19). Such a
rebalancing is particularly relevant in light of the
huge global trade imbalances (see section B).

GDP growth in China remained very high in
2004 and the first quarter of 2005 (9.5 per cent).
The tightening measures introduced in the course
of the year have started to have some impact on
investment expansion, even though it is still grow-
ing at a rapid pace.4 Policy measures included the
abandonment of the strict pegging regime with the
dollar, higher bank reserve requirements, moder-
ate increases in interest rates and direct measures
aimed at limiting the financing of construction
projects and industries, such as steel and cement,
that may have been building excessive production
capacities. These measures are likely to influence
not only the amount that is invested, but also its
direction. A reorientation of investment financing
is under way towards areas where bottlenecks have
appeared recently, in particular, energy and infra-
structure. Inflationary pressures have abated
during the first half of 2005, indicating that more
severe monetary tightening is unlikely. Exports
of goods continue to grow at a rapid pace, driven
by the end of textile quotas in developed coun-
tries and the production of past investments in
manufacturing coming on stream. As a result of
these trends, even though it remains a major driv-
ing factor, investment may not be making such a
large contribution to growth as in the past, while
private consumption and net exports are playing
an increasingly important role.

In South Asia, India and Pakistan are experi-
encing high and stable growth rates. India has
undergone significant growth in manufacturing
and exports of IT-related services and business-
process outsourcing. This has helped to off-balance
the adverse impact of a poor monsoon on agricul-
ture. Inflation has been kept in check despite
higher oil and other primary commodity prices.
The fiscal measures taken by the Indian Govern-
ment have so far not led to a substantial reduction
of the fiscal deficit, which remains stable at 4.5 per
cent of GDP. As a consequence, macroeconomic
policy is likely to maintain a rather supportive
stance. In Pakistan, strong GDP growth resulted
from good performances in all sectors; however,
it particularly benefited from an unusual expan-
sion of agricultural output. A rich cotton crop has
also contributed to stronger than expected growth
in the textile sector. Real GDP growth may accel-
erate in 2005, driven by the continued expansion
of manufacturing output and exports, supported
by the phasing out of textile import quotas in Janu-
ary 2005. Domestic demand will sustain present
growth rates, in particular private consumption,
due to continued higher growth of personal dis-
posable income.

Latin American economies showed a remark-
able improvement in 2004, expanding at 5.7 per
cent, following five years of stagnation and cri-
sis. The engines driving this economic recovery
were export expansion and the terms-of-trade im-
provement in most countries in the region (see
chapter III). Gains from terms of trade were very
significant for oil and mining exporters, and lower
but still relevant for agriculture exporters. On the
other hand, some Central American and Caribbean
countries that export labour-intensive manufac-
tures and import oil, suffered terms-of-trade losses.
These countries managed to shoulder the external
burden by increasing the volume of their exports
(owing to expanding imports from the United
States) and receiving substantial remittances from
overseas workers. The external environment led
to an overall surplus in the region’s current ac-
count for the second consecutive year, despite a
significant growth in imports. On the fiscal side,
the last few years showed a moderate reduction
in fiscal deficits and, in several cases, a consider-
able surplus in the primary balance (excluding in-
terest payments). This has been partly the result
of increasing public revenues originated in pri-

Trade and Development Report, 200510

mary commodity exports, either directly – through
State-owned exporting firms – or indirectly,
through rising taxes and royalties. Fiscal expendi-
ture has been allowed to increase in some cases,
although in most countries fiscal policy was more
oriented towards “debt sustainability” rather than
towards the encouragement of economic activity
and investment. For this economic reactivation to
persist, it should rely less on temporary factors,
such as the favourable external environment and
more on a sustained recovery of domestic demand,
including investment. Even though the latter has
improved after reaching record lows in 2003, fixed
investment was only 18.5 per cent of the region’s
GDP in 2004 (ECLAC, 2005).

Preliminary evidence for 2005 points to a
continuation of economic growth, but at a slower
pace. One reason for this slowdown is monetary
tightening in the two biggest Latin American econo-
mies: Brazil and Mexico. In these two countries,
high priority is being placed on inflation targets,
leading to a significant increase in policy interest
rates, especially since the second half of 2004. In
June 2005, the policy rate in Brazil reached a level
close to 20 per cent with the inflation rate remain-
ing at 6 to 7 per cent. As a result, fixed investment
and private consumption slowed down in the last
quarter of 2004 and the first quarter on 2005 (com-
pared with the same period of the previous year),
affecting manufacturing, construction, commerce
and communications. Official forecasts for Brazil
anticipate a recovery in domestic demand in the
second part of the current year in expectation of
lower interest rates and rising minimum wages.
GDP is expected to grow at a rate close to 3 per
cent in 2005, down from 4.9 per cent in 2004
(IPEA, 2005). In Mexico, persistent monetary
tightening has pushed the interbank rate up from
5.3 per cent in January 2004 to 10.1 per cent in
May 2005. Economic activity decelerated in the
first months of 2005, particularly in manufactur-
ing, agriculture and construction, pointing to an
annual growth rate of about 3.3 per cent (com-
pared to 4.4 per cent in 2004).5

Economic activity in Latin America is also
set to slow in 2005 because Argentina, Uruguay
and Venezuela will grow at a less brisk pace. Ac-
cording to some observers the recent rapid growth
just reflects a return to the pre-crisis GDP levels.
However, the driving sectors and the characteris-

tics of this economic growth are radically different
from those prevailing before the crisis. Argentina
and Uruguay are drawing the benefits of restored
competitiveness after shifting relative prices in fa-
vour of tradable goods and services. Moreover,
they have managed to restructure their foreign
debt, particularly Argentina, with a sizeable reduc-
tion in capital and interest rates. Domestic demand
is providing new stimulus through higher domestic
consumption and fixed investment. These countries
have also benefited from improving terms of trade,
with a sizeable impact on domestic income and
fiscal receipts, especially in Venezuela, where am-
bitious social and development programmes have
been launched.

The Andean countries that have gained strong-
ly from oil and mining exports, both in volume
and value terms, such as Bolivia, Chile, Ecuador
and Peru, will continue to grow in 2005. How-
ever, there will not be the same amount of invest-
ment in natural resources and of new production
capacities coming on stream in 2005 as in 2004.
High prices for their exports will continue to pro-
vide a considerable level of revenues for both the
private and the public sector, maintaining a healthy
domestic demand. Central American countries will
keep a moderate growth pace in 2005, with some
export price increases, higher public investment
linked to debt-relief programmes and private con-
sumption sustained by workers’ remittances. Fi-
nally, Caribbean countries, some of which were
hit by natural disasters in the second half of 2004,
should benefit from the recovery of tourism in
2005.

3. Recent developments in world trade
and finance

The strong performance of the global economy
in 2004 brought about an acceleration in world
trade. Total merchandise exports grew by 22.5 per
cent in current dollars. As in 2003, this expansion
was the result of both increasing volume (13 per
cent) and rising dollar prices (9.5 per cent).6 The
latter was partly caused by the depreciation of the
dollar, which increased the value of international
trade in dollar terms within the euro area.

Current Issues in the World Economy 11

The expansion in export volume was associ-
ated with some changes in its geographical com-
position (table 1.3). In comparison with the situation
which prevailed in 2003, the major change was
the strong recovery of export volumes from de-
veloped countries, which grew by 11 per cent in
2004, compared to 3 per cent in the previous year.
There was a widespread acceleration of export
volume growth in Europe, largely due to the speed-
ing up of intraregional trade with the new EU ac-
ceding member countries, and to expanding sales
to East Asia and to oil-exporters in West Asia and
the CIS. Exports from the United States also re-
covered, as a result of a more competitive cur-
rency level, while Japan continued to benefit from
dynamic Asian intraregional trade.

Exports from developing countries continued
their expansion at a very rapid pace in 2004, and
registered a growth rate of 16 per cent in volume
terms. As in previous years, East and South Asia
led this expansion, but Latin America and Africa
also experienced significant increases in export
volumes. As has been usually the case since 1990,
exports increased at higher rates in developing
countries than in the developed world. However,
the revival of exports of developed countries reduced
the relative contribution of developing countries
to global export growth from two thirds in 2003
to an estimated 40–45 per cent in 2004.

Increasing export volume, together with
higher commodity prices provided a boost to the
value of merchandise exports from developing
countries, which grew by 26 per cent in current
dollars. In particular, regions with a large share
of primary commodities in their total exports –
Africa, CIS, South America and West Asia – re-
corded above-average export growth in 2004.
Terms-of-trade gains from in these regions explain
the very rapid growth in import volume, clearly
exceeding that of exports (table 1.3). Among the
manufacturing exporters, East and South Asia also
performed above average, mainly due to strong
export growth from China and India. As a whole,
the share of developing countries in world exports
rose to 33.4 per cent in 2004, compared to 27.7 per
cent ten years earlier. Among developed countries,
the United States have been constantly reducing
their share in world exports from 12 per cent in
the mid-1990s to 9 per cent in 2004, while at the
same time slightly rising their share in world im-

ports, as the economy has increasingly relied on
outsourcing in foreign markets.

World trade in services (transport, travel and
other commercial services) grew by 16 per cent
in dollar terms in 2004 (WTO, 2005a). The expan-
sion of transport services was naturally stimulated
by the strong recovery in trade volume. In par-
ticular, world seaborne trade volume grew by
4.3 per cent in 2004 (after a 5.8 per cent expansion
in 2003), mainly as a result of increased shipments
of primary commodities directed to China and
other countries in East Asia (UNCTAD, 2005a).
Strong demand for transport services has main-
tained freight rates at very high levels, after
soaring in 2003 (see box 4.1 in chapter IV). By
the end of 2004 the level of freight rates in the
main containerized routes – trans-Pacific, trans-
Atlantic and Asia-Europe – were mostly above the
levels that prevailed at the end of 2003.

Travel services recovered markedly from the
2001 downturn. 2004 was an excellent year for
tourism, with international tourist arrivals increas-
ing by 10.7 per cent. Growth in tourism services
rebounded by 28 per cent in Asia and the Pacific,
following the lows of the first half of 2003, which
had been due to SARS. It was also very fast in the
Middle East (21 per cent), while Europe performed
below the world average (with 5 per cent growth
in 2004) as a result of the continued strength of
the euro. International tourism kept growing in the
first four months of 2005, albeit at a slower pace
(7.7 per cent compared to the same period of
2004). Growth rates showed wide disparities, with
very positive results in South America (with a 19 per
cent expansion), Middle East (17 per cent) and
sub-Saharan Africa (15 per cent), and slow growth
rates in Western and Southern Europe (below 3 per
cent). South-East Asia and South Asia experienced
a sudden deceleration in tourist arrivals due to the
tsunami in December 2004 (World Tourism Or-
ganization, 2005: 6–7).7

Given these developments in goods and serv-
ices trade and the growing inflow of workers’
remittances in several countries, all developing
regions posted current-account surpluses in 2004.
Naturally, these regional totals concealed some defi-
cits at the country level, especially in sub-Saharan
Africa, South-East Europe, Central America and
the Caribbean. But, in general, the need for fi-

Trade and Development Report, 200512

nancing the current account was less stringent in
the developing world than in previous years. The
single most important source of external financ-
ing for developing countries was FDI, which
recovered to its 2001 level.8 A large part of the
current-account deficit in several sub-Saharan and
Central American countries is explained by the
expansion of FDI in recent years, which was ac-
companied by an increase in imports of capital
goods and an outflow profit remittances. In other
cases, current-account deficits were financed
through grants or official borrowing. On the other
hand, in several middle-income countries in Asia
(including West Asia) and Latin America current
accounts were in balance or in surplus.

This overall situation had two consequences
for the international financial markets. First, as
the more comfortable balance-of-payments situa-
tion of the “emerging markets” coincided with
high liquidity in developed countries, the spreads
on emerging markets bonds have declined signifi-

cantly. Yet external debt problems have persisted
in some middle-income countries; many of them
have issued new bonds in order to repay those
coming to maturity, and have remained in a vul-
nerable situation. But market conditions were
favourable for a restructuring of external debt at
lower interest rates. They also facilitated the end
of the Argentine debt default through a debt re-
structuring, which included debt stock reduction,
extended maturity and/or lower interest rates. Sec-
ond, there has been a continued accumulation of
international reserves in a number of developing
countries, mainly in East and West Asia. In 2004,
foreign exchange reserves of developing countries
increased by an unprecedented $450 billion (IMF,
2005a). As increasing reserves mainly consist of fi-
nancial assets issued by developed countries (and
particularly those of the United States), they repre-
sent a significant export of capital from developing
to developed countries, and a key element in the cur-
rent phenomenon of global economic imbalances.
This issue is further examined in the next section.

C. The global imbalances and the United States
current-account deficit

The United States current account recorded
a deficit of $666 billion in 2004, which makes it
the counterpart of almost 70 per cent of the aggre-
gated surpluses in the world economy (table 1.4).
This unprecedented size of a deficit and the dim
perspectives of its correction in the foreseeable
future have raised questions about the stability of
the global financial system and the sustainability
of global growth. Warnings abound, as to date no
other major economic power has been prepared

to shoulder part of the adjustment burden. Much
of the world economy continues to depend on the
United States economy, both as the consumer and
the debtor of last resort. Serious policy initiatives
to tackle the problem are missing, and the debate
is now focused on whether dramatic exchange rate
changes are the only way out or whether policies
to stimulate growth in surplus regions, combined
with measures to limit growth in the United States,
could be an alternative.

Current Issues in the World Economy 13

Table 1.4

CURRENT-ACCOUNT BALANCE, SELECTED ECONOMIES, 2000–2004

2000 2001 2002 2003 2004 2000 2001 2002 2003 2004

(As a percentage of total
($ billion) surplus or deficit)

Surplus economies

Japan 119.6 87.8 112.6 136.2 171.8 23.8 21.6 21.9 20.4 19.3
Germany -25.7 1.6 43.1 51.8 96.4 3.9 0.4 8.4 7.8 10.9
China 20.5 17.4 35.4 45.9 70.0 4.1 4.3 6.9 6.9 7.9
Russian Federation 44.6 33.4 30.9 35.4 59.6 8.9 8.2 6.0 5.3 6.7
Saudi Arabia 14.3 9.4 11.9 29.7 49.3 2.9 2.3 2.3 4.4 5.5
Switzerland 30.7 20.0 23.3 42.4 42.9 6.1 4.9 4.5 6.4 4.8
Norway 26.1 26.2 24.4 28.3 34.4 5.2 6.4 4.8 4.2 3.9
Sweden 9.9 9.7 12.1 23.0 28.0 2.0 2.4 2.4 3.4 3.2
Singapore 11.9 14.4 15.7 27.0 27.9 2.4 3.5 3.1 4.0 3.1
Republic of Korea 12.3 8.0 5.4 12.1 26.8 2.4 2.0 1.0 1.8 3.0
Canada 19.7 16.1 14.4 17.0 26.0 3.9 4.0 2.8 2.6 2.9
Netherlands 7.2 9.8 12.8 15.1 19.4 1.4 2.4 2.5 2.3 2.2
Taiwan Province of China 8.9 18.2 25.6 29.3 19.0 1.8 4.5 5.0 4.4 2.1
United Arab Emirates 12.2 6.5 3.5 6.9 16.1 2.4 1.6 0.7 1.0 1.8
Hong Kong (China) 7.1 9.9 12.6 16.2 15.9 1.4 2.4 2.5 2.4 1.8
Malaysia 8.5 7.3 8.0 13.4 15.7 1.7 1.8 1.6 2.0 1.8
Kuwait 14.7 8.3 4.3 7.3 15.1 2.9 2.0 0.8 1.1 1.7
Belgium 9.0 8.9 14.1 13.3 14.9 1.8 2.2 2.8 2.0 1.7
Venezuela 11.9 2.0 7.6 11.4 14.5 2.4 0.5 1.5 1.7 1.6
Qatar 3.2 3.5 3.3 6.8 12.0 0.6 0.9 0.6 1.0 1.3

Total surplus 501.7 406.6 513.7 667.6 888.0

Deficit economies

United States -413.5 -385.7 -473.9 -530.7 -665.9 62.2 67.7 72.5 71.1 69.0
Spain -19.4 -16.4 -15.9 -23.6 -49.2 2.9 2.9 2.4 3.2 5.1
United Kingdom -36.5 -32.2 -26.4 -30.6 -47.0 5.5 5.7 4.0 4.1 4.9
Australia -15.3 -8.2 -16.6 -30.2 -39.4 2.3 1.4 2.5 4.1 4.1
Italy -5.8 -0.7 -6.7 -21.9 -24.8 0.9 0.1 1.0 2.9 2.6
Turkey -9.8 3.4 -1.5 -8.0 -15.6 1.5 0.8 0.2 1.1 1.6
Portugal -11.1 -10.4 -8.9 -8.0 -13.3 1.7 1.8 1.4 1.1 1.4
Hungary -4.0 -3.2 -4.7 -7.5 -8.9 0.6 0.6 0.7 1.0 0.9
Mexico -18.2 -18.2 -13.7 -8.6 -8.7 2.7 3.2 2.1 1.1 0.9
Greece -7.8 -7.7 -9.7 -10.8 -8.4 1.2 1.4 1.5 1.4 0.9
New Zealand -2.5 -1.2 -2.2 -3.3 -6.0 0.4 0.2 0.3 0.4 0.6
Czech Republic -2.7 -3.3 -4.2 -5.6 -5.6 0.4 0.6 0.6 0.7 0.6
France 18.0 21.5 14.5 5.0 -5.4 3.6 5.3 2.8 0.7 0.6
Romania -1.7 -2.6 -2.0 -3.9 -5.4 0.3 0.5 0.3 0.5 0.6
South Africa -0.2 -0.0 0.7 -1.5 -5.3 0.0 0.0 0.1 0.2 0.6
Poland -10.0 -5.4 -5.0 -4.1 -3.6 1.5 0.9 0.8 0.5 0.4
Serbia and Montenegro -0.3 -0.5 -1.4 -1.6 -3.2 0.1 0.1 0.2 0.2 0.3
Lebanon -3.1 -3.8 -2.6 -2.5 -3.1 0.5 0.7 0.4 0.3 0.3
Ireland -0.1 -0.6 -1.5 -2.1 -2.7 0.0 0.1 0.2 0.3 0.3
Azerbaijan -0.2 -0.1 -0.8 -2.0 -2.3 0.0 0.0 0.1 0.3 0.2

Total deficit -664.9 -569.4 -653.7 -746.0 -965.2

Source: IMF, World Economic Outlook, April 2005.
Note: Calculations are based on a total of 180 countries; the sum of total surpluses and deficits is different from zero because

of errors and omissions. Countries are listed according to the levels of their surplus/deficit in 2004.

Trade and Development Report, 200514

1. Twenty-five years of deficits in the
United States

The deficit in the United States current ac-
count is not a new phenomenon. In 1982 the
United States current account fell into a deficit,
which continued to grow until 1987 (fig. 1.1).
Following the Plaza Agreement in 1985 and the
Louvre Accord in 1987, it returned to balance in
1991. However, the current account went into defi-
cit again, and it has since continued to widen in
the context of the long-lasting and strong recov-
ery in the United States. Since 1998, the share of
the deficit in GDP increased from around 2 per
cent to almost 6 per cent in 2004.

These developments are explained by two
major factors. First, the real exchange rate, which

mainly determines the international competitive-
ness of United States producers, rose markedly
during the first half of the 1980s. An overvalued
dollar played a central role in the widening cur-
rent-account deficit. The subsequent reduction of
the deficit was accompanied by a depreciation of
the dollar in the second half of the 1980s. The
second factor is the gap between real GDP growth
in the United States and in the rest of the world.
Relatively fast growth in the United States tends
to exacerbate the current-account deficit via strong
import demand, whereas outright recessions (such
as the one which occurred in 1991) lead to the
opposite result. More recently, however, these fac-
tors seemed to have a weaker influence on the
current account; since 1998 the deficit continued
to increase as a percentage of GDP, even though
the growth gap between the United States and the
rest of the world has almost disappeared since

Figure 1.1

UNITED STATES CURRENT-ACCOUNT BALANCE,a RELATIVE GDP GROWTH
AND REAL EFFECTIVE EXCHANGE RATE, 1980–2004

(Per cent and index numbers, 2000 = 100)

Source: UNCTAD secretariat calculations, based on United States Bureau of Economic Analysis, International Economic Accounts
database; World Bank, World Development Indicators database; and JP Morgan, Effective Exchange Rate Indices
database.

a As a percentage of GDP.

Current Issues in the World Economy 15

2000, and the dollar substantially depreciated in
2003 and 2004. While exports increased in 2004
and in the first few months of 2005, the expan-
sion of imports has continued to outpace them.

Some of the explanations given for the lack
of a rapid response of imports to exchange rate
changes point to temporary factors; for instance,
the unit value of imports rises immediately after a
devaluation, increasing the import value, while im-
port volume takes more time to adjust downward
(the so-called J-curve effect). It has also been sug-
gested that firms exporting to the United States
would be willing to squeeze their profit margin
for some time in order to keep their market shares.
Other interpretations indicate more durable factors,
such as a loss of competitiveness and market shares
of some United States industries and redeployment
of industrial production to Asia (Aglietta, 2004: 31).
It has also been argued that income elasticity for
United States imports is structurally larger than
foreign income elasticity for United States exports,
leading to a tendency towards a trade deficit, even
in the absence of a growth gap.9

These arguments suggest that only a huge
depreciation of the dollar – with all its potential
repercussions on the global financial system –
could reduce the United States trade imbalances
and bring them down to a sustainable level. On
the other hand, an adjustment brought about by a
much lower growth in the United States involves
obvious risks for the world economy. As the value
of the United States imports currently represents
roughly 180 per cent of its exports, the latter will
have to grow much faster than imports for a con-
siderable time for the trade deficit to follow a
downward trend. Box 1.1 presents UNCTAD sec-
retariat’s calculations of the order of magnitude
of the currency depreciation or the growth adjust-
ment required for reducing the current-account
deficit.

These considerations raise a string of questions
about the currencies the dollar should depreciate
against and which countries should either enhance
or dampen economic growth. The increase in the
Unites States deficit in recent years is most pro-
nounced with the EU and Asia (fig. 1.2); however,
the intraregional structure of current-account sur-
pluses and deficits has also to be taken into
account. While China accounts for most of the rise

in the United States current-account deficit in re-
cent years, it has considerable deficits with many
Asian countries as a result of its rapid growth and
its presence at the end of many production chains.
On the other hand, the moderate increase in the
current-account surplus of the EU as a whole hides
the much bigger increases in the surpluses of some
individual countries in the euro area, in particular
Germany.

In addition to such trade balance considera-
tions, a number of authors and organizations have
recently examined how a devaluation of the dol-
lar may modify the terms of the global imbalance
problem if the effects of financial globalization
are taken into account. They have introduced the
“valuation effect”, that is, the role of the actual
valuation of the stock of assets and liabilities and
the changes in their valuation due to asset price
changes and exchange rate changes.

In the United States liabilities are almost ex-
clusively denominated in domestic currency. As
two thirds of United States assets are denominated
in foreign currencies, a depreciation of the dollar
increases the domestic currency value of assets,
while leaving the value of liabilities more or less
unchanged. As a result, the depreciation had a
positive effect on the “net international investment
position” (NIIP) of the United States – i.e. the dif-
ference between the value of the accumulated
stock of assets (domestic claims on foreigners) and
the accumulated stock of liabilities (foreign claims
on residents). This effect did not stop the deterio-
ration of the NIIP in dollar terms (i.e. liabilities
to increase more than assets) due to the persist-
ence of the current-account deficit, but it limited
that deterioration.

Obviously, the opposite valuation effect oc-
curs in those countries, mainly in Europe, that are
facing a currency appreciation vis-à-vis the dol-
lar. This process is interpreted as a burden sharing
among countries and as a facilitation of the glo-
bal adjustment process.

However, the sharp appreciation of the dol-
lar from 1996 to 2002 led to similar valuation
losses for the United States and gains for Europe.
Accordingly, the appreciation of the dollar at that
time had accelerated the deterioration of the in-
vestment position of the United States that is

Trade and Development Report, 200516

decelerated by the depreciation now. Thus, the cur-
rent change in favour of the United States simply
compensates the adverse effect that occurred be-
fore.

Hence, the argument that the sustainable level
of that deficit would increase through the valua-
tion effect because it is easier to finance the deficit
thanks to a higher net value held in the United
States is not convincing. The appreciation of the

dollar that had accelerated the deterioration of the
NIIP of the United States since the mid-1990s did
not prevent the rapid increase of the current-ac-
count deficit. Did the deterioration in the NIIP due
to the negative valuation effect make the access
to external financing more difficult for the United
States at that time? If not, it is difficult to argue
that the positive valuation now makes access of
the United States to financial markets much easier.
If market participants in the financial markets

Box 1.1

PRIMARY TRADE BALANCE EFFECTS OF CHANGES IN THE UNITED STATES
GDP GROWTH AND IN EXCHANGE RATES

UNCTAD secretariat calculated long-term trade elasticities for the estimation of: (i) the impact of
changes in domestic GDP on the United States merchandise trade balance; and (ii) the effect of a
dollar depreciation on the same trade balance. However, it must be kept in mind that, given the
trade deficit at the “initial situation”, exports must grow at least 1.8 times faster than imports to
reduce the merchandise trade deficit.

The table in this box presents the main results. The first exercise supposes that the rest of the word
(ROW) grows at 3.2 per cent, and considers three situations characterized by different GDP growth
in the United States, with the exchange rate remaining unchanged. In scenario 1, the United States
growth rate is the same than in the ROW. In this case, imports continue to grow faster than exports,
and the United States trade deficit would grow by 0.3 per cent of GDP, on top of the existing
5.7 per cent of GDP in 2004. In scenario 2 it is assumed that the trade deficit remains at its 2004
level. In order to achieve that (and assuming that ROW grows at 3.2 per cent), the United States
economy would need to reduce its GDP growth to 1.5 per cent. In this case, import growth would
be lower than in scenario 1, at 3.1 per cent. In scenario 3 the trade deficit is reduced to 5 per cent
of GDP. At constant exchange rate and ROW growth, this would require a negative GDP growth of
1.8 per cent in the United States, which would lead to a contraction in imports of 3.6 per cent.

The table also shows that a 10 per cent appreciation of the currency of one of the main trading
partners of the United States would not improve the imbalance visibly. The highest impact would
come from an appreciation of the Canadian dollar, followed by the euro and the Mexican peso.
Appreciations of the Chinese renminbi and the Japanese yen would have lower impacts, because of
the lower shares of these economies in the United States merchandise exports. According to the
simulation, a 10 per cent general depreciation of the dollar would reduce the trade deficit to 4.5 per
cent of GDP.

Additionally, the table shows the rates to which the main trading partners should appreciate their
currencies to reduce the United States trade deficit to 5 per cent of GDP. In the case of China, given
its low weight in the composition of United States exports, the renminbi would need to appreciate
by 67 per cent, whereas, for the Canadian dollar an appreciation of 26.5 per cent would be suffi-
cient.

Current Issues in the World Economy 17

expect appreciations and depreciations to be
equally distributed over the long term, the short-
term valuation does not change their perception
of a long-lasting current-account deficit.

For most of the developing countries the
valuation effect is felt on both sides of the bal-
ance sheet. The liabilities of developing countries
are normally denominated in foreign currencies.
For these countries, exchange rate movements af-

fect both the domestic value of assets and the do-
mestic value of liabilities. Appreciation of the
national currency of a developing country reduces
the burden of liabilities (denominated in foreign
currencies) and also reduces the value of assets
(denominated in foreign currencies). On the other
side, depreciation increases the burden of liabili-
ties and increases the value of assets. In the past,
in many developing countries with huge stocks of
net foreign debt, depreciation shocks after finan-

EFFECT OF CHANGES IN GDP GROWTH AND IN EXCHANGE RATES
ON THE UNITED STATES TRADE BALANCE

Hypothetical change Outcome

United States Exchange Merchandise
GDP rate Exports Imports trade balance

(Per cent) (Per cent) (Per cent of GDP)

GDP growth changes in the United Statesa

Scenario 1 3.2 - 4.4 6.6 -6.0
Scenario 2 1.5 - 4.4 3.1 -5.7b

Scenario 3 -1.8 - 4.4 -3.6 -5.0

Exchange rate changes

Euro - 10.0 1.5 -0.6 -5.5
Canadian dollar - 10.0 2.3 -0.7 -5.4
Chinese renminbi - 10.0 0.4 -0.6 -5.6
Japanese yen - 10.0 0.6 -0.4 -5.6
Mexican peso - 10.0 1.4 -0.4 -5.5
United States dollar - -10.0 9.9 -4.2 -4.5

Exchange rate changes required for a reduction
of the United States trade deficit to 5 per cent of GDP

Euro - 37.2 5.7 -2.2 -5.0
Canadian dollar - 26.5 6.2 -2.0 -5.0
Chinese renminbi - 67.4 2.9 -3.8 -5.0
Japanese yen - 74.1 4.8 -2.7 -5.0
Mexican peso - 44.9 6.1 -2.0 -5.0
United States dollar - -5.6 5.5 -2.3 -5.0

Source: UNCTAD secretariat calculations, based on United States Bureau of Economic Analysis, International Economic
Accounts database.

a GDP growth in the rest of the world is assumed at 3.2 per cent in all scenarios.
b The deficit of the United States merchandise trade balance as a percentage of GDP in the base year (2004) is

5.67 per cent.

Box 1.1 (concluded)

Trade and Development Report, 200518

cial crises have led to big negative valuation effects
on their liabilities that could not be compensated
by the positive effects on their assets. Argentina
was the most prominent case recently.

Although there is no strict and general ceil-
ing for sustainable external deficits, recent studies
analysing current-account dynamics in industrial
economies conclude that reversals usually take
place as deficits reach about 5 per cent of GDP.10
However, the mechanisms towards such an adjust-
ment may be different for the United States. So
far, the biggest economy in the world has been
able to finance its current-account deficit at rela-
tively low interest rates. An examination of the
economic situation in the surplus regions is nec-
essary to understand this continued easy financing

of the deficit and to assess the chances for a
smooth resolution of global imbalances.

2. The surplus regions

The fact that the current account essentially
corresponds to net foreign investment in finan-
cial assets, reflecting the simple logic that whoever
extends demand beyond means has to raise debt,
has been taken as proof for the willingness of the
rest of the world to provide the United States con-
sumers with “savings” that could not be used
elsewhere. This static logic overlooks the fact that
without the stimulus provided by United States
growth, income and savings in the rest of the world
(and in particular, in surplus countries) would have
been lower. Thus, part of the savings that were
used to finance the current-account deficit of the
United States were generated by the process of
rising demand from the United States. If the sur-
plus regions were to reduce their financing to the
United States, they would not be re-allocating their
“savings” elsewhere, but the process of generat-
ing these savings would itself be at stake. In other
words, the attempt to repatriate funds may have
negative consequences not only in the deficit but
also in the surplus economies. This poses a di-
lemma to surplus regions, in Asia and in particular
in some parts of Europe.

In the aftermath of the currency crises at the
end of the 1990s, Asian economies implicitly or
explicitly pegged their currencies to the dollar at
rather low values. The currency peg has encour-
aged rising exports and has had a positive effect
on growth, profits and jobs in these countries.
Moreover, in Asia imports have been rising rap-
idly, spilling the effects of the Asian boom over
many developing countries. From the point of
view of these countries and their beneficiaries, a
sharp currency appreciation that would markedly
reduce the current-account surplus might jeopard-
ize these positive outcomes on a broad scale.

The members of the euro area as well as those
economies whose currencies are tied to the euro
constitute the third major block in the current im-
balances constellation. As in the case of Asia, this
block has registered external surpluses that rely

Figure 1.2

MERCHANDISE TRADE BALANCE OF THE
UNITED STATES, BY COUNTRY/REGION,

1980–2004
(Billions of dollars)

Source: UNCTAD secretariat calculations, based on UN
COMTRADE; and United States Bureau of Economic
Analysis, International Economic Accounts database.

Note: Asia includes: China, Hong Kong (China), Japan, the
Republic of Korea, Singapore and Taiwan Province
of China.

Current Issues in the World Economy 19

on the United States market, even if their contri-
bution to the United States trade deficit has not
risen as dramatically in recent years. Yet, like Asia,
European authorities have been focusing on ex-
port-led growth strategies, although the European
Central Bank has not pursued an explicit exchange
rate policy. A major reason for the good trade per-
formance has been wage restraint, which has
resulted in stronger international competitiveness,
but also in anaemic growth of private consump-
tion. Thus, in some large member countries,
domestic demand remains weak due to overly
moderate wage increases. The dependency on
foreign demand explains the uneasiness at the
beginning of 2005, when the euro rose to 1.35
against the dollar. In a way, Europe will have the
most to lose if it does not move quickly. If Asian
central banks stick to managing dollar rates while
at the same time diversifying their portfolio by
moving towards the euro, Europe is doomed to
bear the brunt of dollar depreciation.

Overall, none of the three regions analysed
above has an interest in prolonging the current
situation as long-term risks exceed short-term
advantages. As the issuer of the world’s predomi-
nant reserve currency, the United States bears a
special responsibility for financial market stabil-
ity. A further lowering of the dollar exchange rate,
if eventually needed, should take place in an or-
derly adjustment process, in which both, the deficit
and the surplus regions, would act transparently
and effectively.

3. Tailoring policy measures

There can be little doubt that a smooth cor-
rection of global imbalances will have to be
achieved through adjustments in both relative
prices and absorption levels. Obviously, the main
difficulty is the identification of policy measures
tailored to the specific economic circumstances
of certain countries and regions. The examination
of the internal and external performance of the
euro area and the United States leads to relatively
clear policy conclusions.

The United States starts from relatively low
unemployment and high growth. It could use the

currency depreciation already in place, combined
with careful measures to dampen domestic demand.
Monetary policy has already shifted to a more re-
strictive path and some fiscal adjustment is under-
way. However, in light of the dominance of the
United States economy on a global scale, authori-
ties should refrain from excessively curtailing ab-
sorption in order to avoid recessionary tendencies
that could feed back into a worldwide slowdown.

In contrast, the euro area has no reason to
worry about its external balance, but growth is
stalling and in many countries unemployment is
very high or even rising. Consequently, the whole
region would greatly benefit from higher demand
and rising absorption. Thus, the optimal combi-
nation of macroeconomic policies to correct global
imbalances would certainly include a massive
expansion of domestic demand in the euro area. A
coordinated effort of macroeconomic policies is
needed to foster economic growth and to approach
internal and external equilibrium at the same time.
In an environment of negligible inflation rates,
monetary and fiscal policy can actively contrib-
ute to economic recovery by lowering interest
rates and stimulating domestic demand. Finally,
the excessively moderate stance of wage policy
in some member countries should be abandoned
to avoid deflationary spillovers.

Identifying an appropriate approach for sur-
plus countries in Asia is much more complicated
as most countries in the region are already report-
ing rapid and sometimes “neck breaking” growth
rates. Despite the fact that the often-mentioned
danger of overheating – most pronounced in the
non-tradable sectors – does not represent a major
threat to price stability yet, the argument whereby
more growth is needed to increase absorption in
this region is unconvincing. The recommendation
given by many observers to use currency appre-
ciation for creating leeway for monetary authorities
to fight overheating by raising interest rates, would
reduce absorption and imports, and trade surpluses
might thus persist despite currency appreciation.
Consequently, global imbalances would continue
but at a slower rate of GDP growth for the world,
and they would be accompanied by lower demand
for other developing countries primary commodity
exports. Additionally, countries such as China need
to integrate a vast pool of rural workers – unac-
counted for by official unemployment statistics –

Trade and Development Report, 200520

if political and economic stability is to be main-
tained.

As shown before, any bilateral exchange rate
realignment with the dollar will fall short of a sig-
nificant re-equilibrating effect; this could even
have a disruptive effect on the revaluing country
and on the region it is mainly trading with. If ex-
change rate reforms are undertaken in surplus
regions, they will have to involve all regional pro-
tagonists within a multilateral agreement. China’s
move to abandon the peg with the dollar in July
2005 without allowing for a major revaluation could
be a step in the right direction if it forms part of a
concerted action among the global players.

History offers examples of correcting global
imbalances, some of which ended in regional cri-
ses and in an upsurge in protectionism harming
trade, growth and welfare, as was the case for the
Asian episode of 1997–1998. But there are other
examples where crises have been avoided by early
and controlled adjustments of exchange rates, for
example the regional arrangements in Europe that
preceded the European Monetary Union. But even
on a global scale, the current-account reversal that
followed joint political efforts by the major pow-
ers in the late 1980s suggests that an orchestrated
attempt might have a greater chance of succeed-
ing than isolated measures. This may well be the
right time for a global exchange rate agreement.

D. Oil price hikes in perspective

After the relatively low prices seen in the first
half of the 1990s, when the price of crude petro-
leum rarely exceeded $20 per barrel,11 the price
of oil began to rise in 1999 and culminated at
$60 per barrel in mid-2005. This surge in oil prices
worries governments in many oil-importing coun-
tries, who fear the detrimental effects of a sub-
stantial and long-lasting rise in energy prices on
output growth. This is a special concern for many
developing countries which have become increas-
ingly dependent on oil imports as industrializa-
tion has progressed.

Oil price shocks have repeatedly had a nega-
tive aggregate impact on global economic activity.
The reason for this has to be mainly sought in the
response of economic policy in countries affected
by an oil price shock. Inappropriate reactions,
particularly from those responsible for wage and
monetary policies, can aggravate the situation and
lead to losses in economic activity that could oth-
erwise have been avoided.

1. The impact of an oil price shock on
prices and economic activity

The consequences of a rise in oil prices are
usually separated into first- and second-round ef-
fects. Under any normal circumstances, consumer
prices rise (or stop falling) immediately after pe-
troleum products, such as gasoline and heating oil,
become more expensive because the elasticity of
demand is rather low at most stages of the pro-
duction chain. On the other hand, second-round
effects occur if workers try to compensate their
real income loss by bargaining for higher nomi-
nal wages. The occurrence of second-round effects
becomes more likely the larger the impact of first-
round effects of a rise in oil prices – or energy
prices more generally – on the overall price level.
A higher rate of inflation implies a loss of real
income unless nominal wages rise alongside con-
sumer prices. If, however, workers successfully
bargain for higher wages in order to compensate

Current Issues in the World Economy 21

for real income losses, the result is an additional
upward pressure on the price level as firms will
seek to pass rising labour costs on to consumer
prices. Workers may thus find that their recently
negotiated wages do not keep up with the rising
price level, and consequently enter the next round
of wage bargaining with yet augmented aspirations.
In the worst case, such a scenario may lead to a
wage-price spiral resulting in accelerating inflation.
At best, it will still cause inflationary expectations
to become embedded in the economy’s wage bar-
gaining processes, involving a permanently higher
inflation rate compared to the initial situation.

Apart from the consequences on inflation, the
effects of an oil price shock on the overall eco-
nomic activity in importing countries are more
difficult to disentangle. The most obvious impact
stems from the deterioration in the terms of trade.
An oil price increase shifts the terms of trade be-
tween net-importing and net-exporting economies

in favour of the latter. Essentially, this implies a
real income transfer from consuming to produc-
ing countries. Shrinking real incomes in countries
facing larger oil bills, in turn, mean less income
to spend on other products, which translates into
lower domestic demand unless matched by re-
duced domestic savings and/or higher export
demand. To date, the evidence suggests that the
propensities of oil-producing countries to consume
from current income are low relative to consuming
economies. Oil price increases have historically
been accompanied by swelling current-account
surpluses in oil-exporting countries, implying that
the windfall revenue accruing to producers is typi-
cally not immediately spent to its full extent – a
pattern that can also be observed in the current
situation (fig. 1.3).

In this case, cutbacks in output and employ-
ment are the consequence of falling demand
in consuming countries. While macroeconomic

Figure 1.3

CURRENT-ACCOUNT BALANCES OF 10 OPEC COUNTRIESa

(Per cent of GDP)

Source: UNCTAD secretariat calculations, based on UNCTAD Handbook of Statistics 2004; IMF, Balance-of-Payment Statistics
database and International Financial Statistics database; Economist Intelligence Unit, Country Reports; and national
sources.

a Algeria, Ecuador, Gabon, Indonesia, the Islamic Republic of Iran, Kuwait, the Libyan Arab Jamahiriya, Nigeria, Saudi
Arabia and Venezuela.

Trade and Development Report, 200522

studies usually confirm the general effect on the
aggregate level, empirical studies using disaggre-
gated data suggest that demand disturbances of oil
price shocks vary substantially between sectors,
with producers of consumer durables being hit es-
pecially hard during oil-price related recessions
(Bresnahan and Ramey, 1992). To the degree that
firms are able to pass higher costs to market prices
without a subsequent reaction of nominal wages,
the burden of adjustment shifts from producers to
consumers, while the net negative impact remains
identical.

A further effect operates through nominal
interest rates, which may be higher if second-
round effects on inflation are triggered by an oil
price increase. While central banks will find it
difficult to prevent an initial rise in the general

price level due to the change in relative prices
induced by higher energy prices, they will be
alerted by second-round effects and curb persist-
ent inflation through restrictive monetary policy.
With such a move they would add to the restrictive
first-round effects on the real economy to prevent
inflationary expectations from becoming embed-
ded in the system.

2. The 1973–1974 and 1979–1980 oil
price shocks: putting current events
in perspective

By the early 1970s, the price of crude oil had
been declining persistently for about two decades
to reach a level of $2–3 per barrel. This situation
changed dramatically after 1973. Between Novem-
ber 1973 and the first quarter of 1974, the price
increased from $3.3 to $13. Prices remained rela-
tively unchanged for the next four years. In late
1978, OPEC cutbacks triggered the second oil
price shock and oil prices peaked at $39 in No-
vember 1980.

Compared with the two oil price shocks in
the 1970s, the substantial oil price rise between
1998 and mid-2005 presents several features ren-
dering it less dramatic than it seems to be at first
glance. Firstly, the starting point for oil prices
($11 in the beginning of 1999) was an abnormally
low one, following the plummeting of oil prices
that resulted from the Asian financial crisis in
1997–1998. Among informed market participants,
the expectation prevailed that the oil price would
not remain depressed for much longer, but would
soon rise again to previous levels of around $20.
Secondly, recent price increases have been stretched
over five years, and have thus taken the form of a
gradual evolution instead of an explosion. Thus,
the surprise effect of the oil price increase was
milder this time. Thirdly, in real terms, the recent
oil price increase was significantly smaller than
that of the 1970s (fig. 1.4). Measured in today’s
prices, the oil price increases of the 1970s were
considerably more substantial than implied by the
nominal figures.

One obvious reason for current developments
on the oil market being steadier compared to 30 years

Figure 1.4

CRUDE PETROLEUM PRICES,a NOMINAL
AND REAL,b 1970–2005c

(Dollars per barrel)

Source: UNCTAD secretariat calculations, based on UNCTAD,
Commodity Price Bulletin, various issues; and IMF,
International Financial Statistics database.

a Average of Dubai/Brent/Texas equally weighted.
b Deflated by United States Consumer Price Index (CPI)

(2000 = 100).
c 2005 data are estimates.

Current Issues in the World Economy 23

ago is that they were primarily demand-driven,
rather than motivated by supply decisions in oil-
exporting countries. Despite the fact that there
have been several OPEC interventions on oil sup-
ply in recent years, there is little doubt that the
growing demand for oil imports, primarily com-
ing from the United States and the rapidly growing
developing countries in East and South Asia, in
particular China and India, is at the origin of the
oil price hike. On the supply side, OPEC spare
supply capacity almost disappeared in 2004.
OPEC countries had dramatically reduced their
supply in the first half of the 1980s, but their pro-
duction was replaced by new entrants with higher
production costs (such as North Sea producers). In
recent years, however, non-OPEC supply grew at
lower rates, and OPEC countries recovered their
1979 production level. At present, OPEC coun-
tries are not in a position to respond rapidly to a
surge in demand or a disruption in supply in a
major producer. Oil supply is expected to increase
in the coming years, but at a pace that will prob-
ably not exceed that of demand (Kaufmann, 2004).

In the same way as the size of the oil price
increase, its impact has also been much smaller in
this recent episode than in earlier ones. Between
1973 and 1974, oil imports as a percentage of GDP
in eight major industrialized countries increased
from 1.3 to 3.2 per cent, and remained between
2 and 3 per cent for the rest of the decade, before
rising again in 1980–1981 to reach 3.7 per cent of
GDP. The 1999–2000 oil price increase resulted
in a rise of the oil import bill from 0.8 per cent of
GDP in 1999 to 1.4 per cent in 2000, and it went
down again over the subsequent two years. In
2005, assuming that the renewed hike will main-
tain oil prices at an annual average of $50 per
barrel, it may reach 1.9 per cent but even then it
would fall short of the levels attained in 1974 and
the following years (fig. 1.5).

On average, consumer prices in the major
industrialized countries increased by about 10 per
cent in the course of the first and second years of
both oil price crises in the 1970s, and by only
marginally less in the following years. By con-

Figure 1.5

OIL IMPORT BILL, OECD MAJOR OIL-CONSUMING COUNTRIES,a
1973–1978,1979–1983, 1999–2005b

(Per cent of GDP)

Source: UNCTAD secretariat calculations, based on UN COMTRADE; UN National Accounts Main Aggregates database; EIU,
Country Forecast, various issues; and OECD, International Trade by Commodity Statistics database.

a Canada, France, Germany, Italy, Japan, Spain, the United Kingdom and the United States.
b 2005 data are estimates.

Trade and Development Report, 200524

trast, the impact of recent price increases on the
consumer price index is rather negligible (fig.
1.6A). The evolution of unit labour costs in the
industrialized countries during the 1970s and early
1980s demonstrates the role and weight of sec-
ond-round effects. The rise in unit labour costs is
especially marked in the wake of the first shock.
Trade unions were firmly determined to compen-
sate for real income losses, as unit labour costs
grew by 15 per cent in the first year and 12 per
cent in the second year, and subsequently remained
in the neighbourhood of 7 per cent. Increases were
less pronounced during the second crisis, although
they were still quite considerable (fig. 1.6B).

The development of unit labour costs in the
major oil-consuming countries since 2000 indicates
that second-round effects have been practically ab-
sent. Unit labour costs rose by just over 2 per cent
in 2000 and have been growing more slowly ever
since, a fact that is also reflected in the consumer
prices shown in figure 1.6A. Except for the im-
mediate impact of higher energy prices, there is
no sign of inflationary tendencies taking hold as
trade unions have refrained from seeking compen-
sation for real income losses due to energy prices
during wage negotiations.

Nevertheless, central banks in the industri-
alized countries have continued to vehemently
warn against the occurrence of second-round ef-
fects, to which they would react by raising interest
rates in a bid to defend price stability. However,
given the absence of inflationary second-round
effects, central banks have refrained from respond-
ing immediately to slightly higher inflation rates,
focusing instead on “core inflation” indices that
exclude energy prices. Volatility in energy costs
and the concomitant variation of real incomes
have, arguably, come to be seen in the developed
world as something that is outside the control of
consumers, manufacturers and monetary authori-
ties and thus can only be accepted.

The policy responses during the major oil
crisis followed a quite different pattern. That the
two oil price shocks had markedly different reper-
cussions in individual countries is quite instructive
with a view to lessons to be learned by those coun-
tries in the developing world faced by a similar
oil price increase. By the time of the second oil
price shock, all major central banks adopted a re-

Figure 1.6

CHANGES IN CONSUMER PRICES AND UNIT
LABOUR COSTS, OECD MAJOR OIL-CONSUMING

COUNTRIES,a SEVERAL PERIODS

(Per cent)

Source: OECD, Main Economic Indicators database and
Economic Outlook No. 77.

a GDP weighted average of Canada, France, Germany,
Italy, Japan, Spain, the United Kingdom and the
United States.

Current Issues in the World Economy 25

strictive stance, led by the Federal Reserve. The
federal funds rate reached 19 per cent in 1981 and
remained above the 10 per cent mark through late
1982. Even in those countries whose central banks
had pursued a largely accommodative monetary
policy stance throughout the 1970s, such as
France, short-term rates scaled new heights in the
early 1980s. Interest rates increased sharply de-
spite the fact that oil-exporting countries recycled
their windfall oil revenues through the interna-
tional capital markets, rather than to spend them
directly on higher imports. The potentially de-
creasing impact on interest rates of these capital
flows reaching the international capital markets
was overlaid by the concerted action to curb
inflation carried out by central banks of the in-
dustrialized countries after 1979.

Many developing countries, in particular in
Latin America, were caught in this high interest
rate trap with disastrous results for their overall
economic development and their foreign indebt-
edness. Servicing the existing debt became more
difficult in an environment of climbing interna-
tional interest rates and, eventually, plunged many
developing economies into severe economic cri-
ses during the 1980s.

The repercussions from current price devel-
opments in the oil market will much less likely
produce the kind of dramatic impact seen during
the 1970s, particularly in the absence of compa-
rable interest rate reactions in developed countries.

Moreover, the impact on consumer prices is
much weaker as increased efficiency in energy use
over the past few decades has contributed to a
decline in the share of energy products in the con-
sumer price index. The effect is further mitigated
by the presence of higher indirect taxes on energy
consumption, particularly on gasoline. In the euro
area, about two thirds of the price for transport
fuels and lubricants are made up by taxes, mean-
ing that a price increase only works on one-third
of the overall price. The respective tax burden is
smaller in the United States and slightly larger in
Japan. Moreover, the use of other energy sources
has also contributed to the reduction in the share
of oil in total energy consumption.12

Furthermore, in addition to greater efficiency
in the use of energy for final consumption, there

has also been a decline in energy intensity of pro-
duction.13 The overall economic structure of
developed economies has changed over the past
30 years. It has become more service-oriented and
less reliant on industrial production, which fur-
ther reduces the likely role of an oil price rise as
an impending disturbance. The combination of
these various factors explains why the average oil
bill of the major economies (as depicted in fig-
ure 1.5) has declined to about 0.8 per cent of GDP
in 1999, and why present inflation did not pick up
in the same way it did during the 1970s.

3. The impact on oil-importing
developing economies

Exposure of oil-importing developing coun-
tries to oil price hikes frequently differs from that
of the developed world. First-round effects on
prices and balance of payments tend to be more
severe, as the energy and oil intensities are gener-
ally higher in these countries. Taking the OECD
countries level as 100, oil intensity (e.g. primary
oil consumption per unit of GDP) in 2002 was
142 in Brazil, 232 in China, 237 in Thailand and
288 in India (IEA, 2004b: 11). Moreover, the share
of taxes in the final price of fuels is usually much
lower in developing than in most developed coun-
tries, and in a number of them, these prices are
subsidized. As a consequence, the cost of crude
has a more direct impact in developing countries,
either on the final consumer price or on fiscal ac-
counts. If these impacts are seen as a threat to the
control of inflation or to fiscal consolidation, they
would call for policy adjustments with all the at-
tendant effects these have on growth. Finally,
developing countries could also feel another indi-
rect effect, stemming from policy reactions in the
developed countries, in the form of lower exports
and tighter conditions in international financial
markets.

In contrast to the substantial reduction of oil
dependency in developed countries, reliance on
oil imports has increased in the developing word,
as a result of industrialization and urbanization.
In 1972, the oil import bill in developing coun-
tries (excluding OPEC) represented 0.8 per cent

Trade and Development Report, 200526

of current GDP, and it climbed to 2.3 per cent in
1975–1976 and 3.4 per cent in 1980. In 1998–1999
this share was 1.7 per cent of GDP, and it rose to
2.7 per cent in 2000–2003. In 2004–2005 it has
probably exceeded 3.5 per cent, roughly twice the
oil import bill paid in the main OECD countries.14
As a result, the increased cost in oil imports in
developing countries clearly exceeds those faced
by developed regions and more closely resembles
the experience of the oil shocks of the 1970s.

Latin America (excluding the oil-exporting
countries of Ecuador and Venezuela) shows the
lowest exposure among developing regions, with
the share of oil imports rising from 0.8 per cent of
GDP in 1998 to 1.3 per cent in 2003. This has
been, in particular, the result of active Brazilian
policies aimed at substituting oil with national
energy sources (hydroelectricity and alcohol) and
at increasing the domestic production of hydro-
carbons. However, oil imports account for a
significant proportion of GDP in Chile (4.7 per
cent in 2003), Central America (4.9 per cent on
average for Costa Rica, El Salvador, Guatemala,
Honduras, Nicaragua and Panama) and the Carib-
bean, with particularly high shares in Guyana,
Jamaica, Belize and Barbados.

Asia (excluding OPEC) accounts for roughly
80 per cent of oil imports from developing coun-
tries, and is also the region where the ratio of oil
imports to GDP remains the highest. The main rea-
son for this is the deepening of industrialization
in East and South Asian countries. In 2003, the
share of oil imports in GDP was 5 per cent or more
in Singapore, the Republic of Korea, Thailand,
Taiwan Province of China and the Philippines, and
more than 4 per cent in Pakistan and Sri Lanka; in
India, which is relatively less advanced in indus-
trialization than other countries in the region, this
share amounted to 3.8 per cent.

In Africa, the situation is very heterogene-
ous as the region comprises several major oil
exporters, but also a number of countries that are
heavily dependent on oil imports, particularly
among sub-Saharan countries. This subregion as
a whole (excluding Nigeria and South Africa)
presents levels of oil dependency close to those
found in East and South Asian countries (3.5 per
cent of GDP in 2000–2003), despite the much
lower level of industrialization.

Summing up, oil prices have had, and con-
tinue to have, an impact on the import expenditure
of a significant number of developing countries
which is comparable to the one subsequent to the
1970s oil shocks. However, in many cases their
negative impact on the trade balance has been
compensated, either by a parallel increase in the
price of other exported primary commodities or
by expanding volumes of manufactured exports;
the first case was especially relevant in several
South-American and sub-Saharan countries, while
the second explains the solid trade performance
in East and South Asia, despite high oil prices.
Other oil-importing countries, however, face se-
vere financial strain.

In some developing countries, high commod-
ity prices (including oil) have caused concern about
inflationary pressures, and prompted a tightening
of monetary policies in order to prevent second-
round effects on prices. This is in stark contrast
to the reaction in developed economies. There the
lesson has been learned that monetary policy
instruments, which almost exclusively operate
through the impact on aggregate demand and the
absolute price level, should not be used to abate
price increases originating in changes of relative
prices.

Indeed developing countries have taken dif-
ferent approaches. For example, monetary policy
was tightened in Brazil and Mexico in 2004 in
order to prevent second-round effects, even though
it was recognized that higher-than-expected infla-
tion was mainly related to supply-side factors,
including energy prices (IPEA, 2005: 7–9; Banco
de México, 2005: 2). The policy response in other
Latin American and most East Asian countries was
more flexible. In order to avoid negative effects
on growth, monetary policy was not used to curb
inflation forced by higher oil prices (fig. 1.7). For
instance, economic policy in Argentina tried to
avoid high real interest rates and currency ap-
preciation as ways to fight against accelerating
inflation in early 2005. The latter was considered
to be largely due to temporary factors, and the
current levels of real exchange and interest rates
are central policy instruments for maintaining eco-
nomic growth and competitiveness. Similarly, in
most East and South-East Asian countries, supply-
side driven inflation pressures have not led to
sharp interest rates increases, which could have

Current Issues in the World Economy 27

Figure 1.7

REAL INTEREST RATES AND REAL EFFECTIVE EXCHANGE RATES,
SELECTED ASIAN AND LATIN AMERICAN COUNTRIES, 2003–2005

Source: UNCTAD secretariat calculations, based on Thomson Financial Datastream; national sources; and JP Morgan, Effective
Exchange Rate Indices database.

a Interbank rates deflated by CPI changes.

Trade and Development Report, 200528

undermined economic growth and the recovery of
their financial systems from the 1997–1998 crisis.
For the Malaysian monetary authorities, for in-
stance, price pressures have been contained by
improvements in labour productivity and capacity
expansion, enabling monetary policy to remain sup-
portive to growth (Bank Negara Malaysia, 2005).

Several countries have also tried to isolate
domestic from international oil prices. In Latin
America, this has been the traditional approach in
Venezuela (see also annex to chapter III), but also
in a number of Asian countries, including oil-pro-
ducing countries, such as Viet Nam and Malaysia,
and countries dependent on oil imports. In India,
for example, the government resorts to subsidies
in the order of 0.5 per cent of GDP for specific
petroleum products largely used by the rural poor.
In Thailand, such subsidies reached 1.3 per cent
of GDP in 2004, and in Indonesia they amounted
to 2.5 per cent of GDP in the same year. In the

latter countries, these policies have recently been
revised, leading to an increase in oil prices (Chan-
nel News Asia, 2005).

In conclusion, the chances of an oil price hike
plunging the global economy into a recession com-
parable to the ones of the 1970s and 1980s appear
to be small. In the major developed countries, oil
prices have considerably lost significance for the
evolution of GDP. First- and second-round effects
have not led to inflationary pressures that would
have prompted a restrictive stance in monetary
policy. Naturally, the higher cost for energy had
an impact on price indices, but the monetary au-
thorities have learned from the previous oil price
hikes that monetary tightening is not a proper re-
sponse to this challenge. However, oil dependency
remains high in many developing countries and
the prospect of permanently higher oil prices is
especially disturbing for those countries that are
not benefiting from higher prices for their exports.

Asia has been a remarkably dynamic region
over the past four decades, with different econo-
mies in the region experiencing rapid growth and
catching up. Following Japan’s economic catch-
ing up episode between the 1950s and the 1980s,
the fast pace of economic growth, industrializa-
tion and growth of manufactured exports in the
Republic of Korea, as well as in other Asian newly
industrializing economies (NIEs) – Hong Kong
(China), Singapore and Taiwan Province of China
– awarded these countries, and by extension the
region, with the distinction of forming the “East
Asian miracle”. China and India have entered this
process most recently.

E. Rapid growth in China and India and
the profit-investment nexus

In spite of their rapid growth over a number
of years, both China and India still have relatively
low levels of per capita income (table 1.5). How-
ever, due to the two countries’ size and the fact
that, together, they account for about two fifths
of the world population and one fifth of global
income (measured in terms of purchasing power
parity, PPP), their economic performance has al-
ready a sizeable impact on international trade
patterns, global output growth, and the economic
prospects of other developing countries, includ-
ing their progress towards achieving the MDGs.
In 2003, China ranked second and India fourth in
the world in terms of absolute purchasing power,

Current Issues in the World Economy 29

their respective ranks being sixth and twelfth in
terms of real GDP. Moreover, as the third largest
importer and exporter in the world in 2004, China’s
growth dynamics significantly influence commod-
ity prices and the prices of some traded manufactures
such as textiles, as discussed in subsequent chap-
ters of this Report.

This section addresses selected issues that are
of crucial importance for the sustainability of rapid
economic growth in China and India in the me-
dium and long term. In particular, investment plays
a key role in the expansion of productive capacity
and productivity growth (TDR 2003). UNCTAD’s
analysis has shown that the catching up process
in the NIEs was based on the so-called profit-
investment nexus (TDR 1996, chap. II, TDR 2003,
chap. IV), in which savings created by profits in a
process of rapid capital accumulation, technologi-
cal progress and structural change constitute the
basis for sustained productivity growth, rising liv-
ing standards and successful integration into the
international economy. Investment plays the cru-
cial role due to its ability to simultaneously create
income, develop productive capacities, and trans-
mit technological progress; moreover, investment

supports the upgrading of skills as well as institu-
tional deepening.

A macroeconomic environment which both
supports and encourages investors is required for
domestic and foreign investment to become a
source of growth and development. The profit-
investment nexus emphasizes that profits, the sav-
ings accrued at companies, are the dominant
source of financing. Rising profits can create a
virtuous circle whereby the profits stemming from
investment increase the incentives for companies
to invest, thereby raising the capacity for financing
new and additional investment.15 For this to happen
on an economy-wide scale, access to reliable, ad-
equate and cheap sources of financing is an impor-
tant precondition. The stance of domestic monetary
policy is of crucial importance to initiate a process
that will become self-supporting once profits have
started to create the savings necessary to finance
additional investments. Overly restrictive monetary
policy may lead investors to prefer investing in fi-
nancial assets over extending productive capacity.

Together with the interest rate, the exchange
rate level is the other crucial macroeconomic price.

Table 1.5

REAL GDP PER CAPITA AND GDP GROWTH IN CHINA, INDIA, JAPAN AND
THE REPUBLIC OF KOREA DURING THEIR RAPID GROWTH PERIODS

Real GDP per capita (dollars) Average growth rate (per cent)

Market pricesa PPPb

Year Year Year Year Year Year 1st 2nd 3rd 4th 1st 20
1 10 20 2003 1 10 20 2000 decade decade decade decade years

China (1979) 163 347 752 1 067 1 023 1 752 3 276 3 747 8.6 8.1 . . 8.3