WORLD TRADE
ORGANIZATIONWT/WGTDF/W/5/Rev.1
31 July 2002
(02-4229)
Working Group on Trade, Debt and Finance Original:  English
COMMUNICATION FROM UNCTAD
Revision
THE EFFECTS OF FINANCIAL INSTABILITY AND COMMODITY
PRICE VOLATILITY ON TRADE, FINANCE AND DEVELOPMENT*
I. INTRODUCTION
1. The fundamental question before this Working Group is whether or not multilateral rules and
regulations in trade, debt and finance mutually reinforce each other in support of equitable, rapid and
sustainable growth and development.  This is a question that the architects of the post-war
international economic system believed had to be addressed to ensure political and economic security
for all the citizens of the member states of the United Nations.  That it is still being discussed shows
the difficulties involved in providing a durable solution.
2. Arguably, in today’s world of increased economic and political interdependence achieving a
broad-based, rapid and sustained growth in incomes and employment involves even more complex
policy challenges than in the past.  Certainly, the external environment of developing countries has
undergone a number of fundamental changes that are unlikely to be reversed in the foreseeable future.
The average cost of borrowing in international markets has become both higher and more variable.
Similarly, the availability of external finance for these countries has become more unpredictable and
is apt to undergo abrupt changes.  For many developing countries increased financial stringency hasbeen associated with a prolonged depression of export prices and adverse terms of trade.
3. However, despite the recognition that the growth in global interdependence poses greater
problems today, the mechanisms and institutions put in place over the past three decades have not
been adequate to the challenge regarding the coherence, complementarity and coordination of global
economic policy making.  Proposals in the current context of globalization should start with anattempt to address these problems, inter alia , through the appropriate parts of the United Nations
system.  As the focal point within the United Na tions for the integrated treatment of trade and
development and the interrelated issues in the area s of trade, finance, technology, investment and
sustainable development, UNCTAD is well placed to examine these issues and to build a consensus
for reformulation of policies from a development perspective and we are pleased to be able tocontribute to your deliberations.
4. Given the similarity in the issues faced today to those of the immediate post-war period it is
useful to review the approach taken by the architects of the Bretton Woods system (section II) and to
assess its implementation and performance (section III) before moving on to discuss the impact of
                                                     
* For more information, please contact Yilmaz Ak yüz, Director, Division on Globalization and
Development Strategies, UNCTAD.WT/WGTDF/W/5/Rev.1
Page 2
financial crisis and commodity price volatility in the present system (section IV).  The paper
concludes with some recommendations.
II. THE POSTWAR DEBATE ON THE CREATION OF A COHERENT GLOBAL
ECONOMIC SYSTEM
5. Economic security in the post-war world was to be achieved by establishing a multilateral
trade and payments system that would facilitate rapid growth and development.  While this system
required a formal mechanism of multilateral negoti ation to reduce or eliminate tariffs, subsidies,
duties and other bilateral measures that had been adopted in the interwar period, it also required
additional safeguards to ensure the efficient operation and preservation of the system.  The
identification of the measures to be taken was strongly influenced by the assessment of why the
trading system had broken down in the 1920s.
6. During that period, as a result of excessively onerous reparations payments imposed in the
Treaty of Versailles, the insistence on inter-allied debt repayments and volatile international capital
flows the return to the gold standard was accompan ied by financial crises in the United States and
Europe as well as by strongly deflationary macroeconomic pressures in many countries.  In addition,
the collapse in the prices of many traded goods, in particular primary commodities, had a negative
impact on the incomes of those who produced them.
7. The eventual policy response to these problems by individual governments involved extensive
recourse to restrictions on trade and payments which were often of a discriminatory nature.  These
took the form of exchange controls, preferential  tariff systems, bilateral clearing and payments
arrangements and compensation agreements (the last two of which are covered by the term,
"countertrade").  Recourse to these arrangements was accompanied by measures to support the pricesof primary commodities, including international schemes restricting supply as well as national
schemes involving import restrictions, export subsidies and agricultural price supports.  The
objectives in all these cases were to defend the income and employment of domestic residents, and to
ensure the stability of domestic financial institutions.  In addition, many governments resorted to
“beggar-my-neighbor” exchange rate adjustments in order to gain competitive advantages in
international trade.  The establishment of a multilat eral trading system thus required an institutional
structure to eliminate the factors that had caused trade to be viewed as a threat to national economic
welfare and a shift from a purely national perspective on policy formulation to a system of
multinationally negotiated policies based on a recognition of economic interdependence and the need
for economic cooperation.  The solution proposed at the United Nations Monetary and Financial
Conference held in Bretton Woods was to create a series of intergovernmental institutions that would
oversee the multilateral negotiation and coordination of policies capable of countering all theperceived threats to the survival of the new multilateral trading system.  This would include:
• The International Monetary Fund (IMF) to ensure  an orderly system of multilateral payments at
stable, but multilaterally negotiated adjustable exchange rates, in conditions of strictly limited
private international capital flows.
• The International Trade Organization (ITO) to provide a rules-based framework to facilitate
multilaterally negotiated reductions in trade barriers, as well as to coordinate national economic
policies to insure adequate levels of global demand and employment in support of the
development of low-income member countries.WT/WGTDF/W/5/Rev.1
Page 3
• An International Commodity Stabilization Fund to provide for stability of raw material and
primary commodity prices through the creation of international buffer stocks.1
8. The inseparability of national and international goals was the basis on which these institutions
were to be designed.  The importance attached to favourable external conditions in attaining rapid
growth and full employment is reflected in the statement of the objectives of the IMF “to facilitate theexpansion and balanced growth of international trad e, and to contribute thereby to the promotion and
maintenance of high levels of employment and real income and to the development of the productive
resources of all members as the primary objectives of economic policy”.  The ITO charter (Chapter 2,
Article II) was even more explicit:  “The Members recognize that the avoidance of unemployment or
underemployment, through the achievement and maintenance in each country of useful employment
opportunities for those able and willing to work  and of a large and steadily growing volume of
production and effective demand for goods and services, is not of domestic concern alone, but is alsoa necessary condition for the achievement of ... the expansion of international trade, and thus for the
well-being of all other countries”.
2
III. THE FAILURE TO CREATE A FULLY COHERENT GLOBAL ECONOMIC
SYSTEM
9. The process of creating a coherent and coordinated set of international institutions in support
of free trade and development was never fully completed.3  Only the IMF was established, while the
rules-based system of trade negotiations to elimin ate discriminatory bilateral agreements through the
application of unconditional most favoured treatment was all that survived from the ITO charter in the
form of the general agreements on tariffs and trade (GATT).  No global institution was created to deal
with the stabilisation of primary commodity prices.4  Instead, official intervention in support of the
prices of primary commodities continued in the forms witnessed during the interwar period, namely a
patchwork of international agreements dependent on controls over supply and national and (in the
case of EU countries) regional schemes for the support of agricultural prices and incomes.  The most
important and most costly examples of the latter were to be found in industrial countries and, as in the
earlier period, they were generally supported by tariffs and other restrictions on imports and bysubsidies and other methods of export promotion.  The responsibility for dealing with the
consequences of fluctuations in developing country export earnings caused by volatility in commodity
prices was left to the IMF’s provision of short-term liquidity, a special facility for this purpose (the
CFF) being established in 1963.
5
10. During the discussions leading up to Bretton Woods an additional institution was added to the
original design which again recognized the need to address trade, finance and development from an
integrated perspective.  War-torn Europe required substantial imports for reconstruction of their
                                                     
1 The stability in the supply and price of commodities was important for two reasons -- for developed
countries strategic materials were part of national security policy, while for developing countries their exportrepresented a source of foreign exchange through export earnings required for their development.
2 This position is echoed in the preamble to the GATT that notes that: “relations in the field of trade
and economic endeavour should be conducted with a view to raising standards of living, ensuring fullemployment and a large and steadily growing volume of real income and effective demand, developing the fulluse of the resources of the world and expanding the production and exchange of goods”. Indeed, much of Part IIof the GATT deals with such conditions.
3 For the historical evolution of the multilateral economic system see UNCTAD, Trade and
Development Report 1984, Part II.
4 Although Chapter VI of the ITO Charter called for a Conference to be called for the implementation
of Inter-governmental Commodity Agreements and the GATT regulations included  a special exception for suchagreements.
5 The first UNCTAD Conference called for both International Commodity Agreements and
supplementary financing to offset commodity price fluctuations.WT/WGTDF/W/5/Rev.1
Page 4
productive capacity, but had no export capacity or financial resources to pay for them.  These
countries faced what appeared to be a structural trade imbalance that would require long-term
resource transfers, far larger than the supply of  temporary liquidity envisaged for the IMF, if they
were to avoid restraints on trade and payments.  The International Bank for Reconstruction and
Development was created in order “to promote the long-range balanced growth of international tradeand the maintenance of equilibrium in balances of payments by encouraging international investment
for the development of the productive  resources of members, thereby assisting in raising productivity,
the standard of living and conditions of labour in their territories.”  In the event the IBRD was not a
“bank”, in the sense that it could create finance, and most of the long-term financing for European
reconstruction was provided by the Marshall Plan.  Thus most European countries delayed full
observance of their obligations in the internationa l trading system, while their financing requirements
were met from bilateral sources.
11. The specific problems of developing countries participating in the post-war international
trading system were not subject to discussion at Bretton Woods, and the promotion of development in
low-income countries, as distinct from the problems of European reconstruction, was added to the
objectives of the IBRD as an afterthought.
6  However, the ITO Charter explicitly raised the question
of the difficulties facing low-income countries and in doing so raised the issue of the differencebetween financing required to meet imbalances created by long-term development needs, and the
provision of liquidity needed to meet shorter term cyclical international payments imbalances.
However, since the IBRD did not have sufficient resources to meet even the needs of European
reconstruction, the question of financing the structural needs of developing countries remained
unresolved within the multilateral context and became the province of bilateral official developmentassistance programmes.
12. The absence of a system of endogenous provision of finance meant that when a country’s
financing needs went beyond what could be provided  from IMF resources it would have to sacrifice
domestic objectives such as full employment, gr owth or development, or suspend its commitments
made in the multilateral trading system in order to preserve external equilibrium.  The system was infact designed to accommodate the latter option.  For example, Article VII provided for exchange
controls and trade restrictions when the currency required to finance external imbalance was declared
to be “scarce”.
7  This implicit acceptance of the priority of meeting financial obligations over
observance of commitments to free trade is reflected in Articles XII and XV of the GATT.
Article XII ( Restrictions to Safeguard the Balance of Payments)  allows that “any contracting party, in
order to safeguard its external financial position and its balance of payments, may restrict the quantity
or value of merchandise permitted to be imported, subject to the provisions ... [that] [i]mportrestrictions ... shall not exceed those necessary:  (i) to forestall the imminent threat of, or to stop, a
serious decline in its monetary reserves;  or (ii) in the case of a contracting party with very low
monetary reserves, to achieve a reasonable rate of increase in its reserves”
8 while Article XV required
                                                     
6 Indeed, at the time few developing countries existed with independent sovereign status outside of
Latin America, and the protocol to implement the GATT was signed by the Union of South Africa and Southern
Rhodesia from Africa,  Burma, Ceylon, the Republic of China, India, Lebanon, and Pakistan from Asia andBrazil, Chile and Cuba from Latin America.
7 "A decision by the Fund to apportion a scarce currency shall operate as an authorization to a member
country, after consultation with the Fund, temporarily to restrict the freedom of exchange operations in the
affected currency and, in determining the manner of restricting the demand and rationing the limited supply
amongst it nationals, the member country shall have complete jurisdiction" (IMF, p. 134 of the Joint Statementby Experts).
8 “A contracting party which applies restrictions under Article XII or under Section B of Article XVIII
may, in the application of such restrictions, deviate from the provisions of Article XIII in a manner having
equivalent effect to restrictions on payments and transfers for current international transactions which that
contracting party may at that time apply under Article VIII or XIV of the Articles of Agreement of theWT/WGTDF/W/5/Rev.1
Page 5
cooperation between GATT and IMF to coordinate arrangements on exchange rate questions and
granted to the IMF the competence to determine the facts surrounding monetary reserves, balances of
payments or foreign exchange arrangements.
13. Such exemptions were granted to address temporary liquidity problems.  However, similar
exemptions were not granted to developing countries in order to meet their longer-term financingneeds because the ITO Charter was never adopted.  Indeed, the reluctance of developed countries to
accept that developing countries would need such exemptions for their long-term development was in
part responsible for the failure to establish the ITO.  Only in 1965, after the first UN Conference on
Trade and Development, did the GATT formally consider the problems facing the “less-developed
contracting parties” in Part IV dealing with “Trade and Development” and only in 1979 was special
and differential treatment accepted as a general requirement for developing countries’ beneficial
participation in the post-war international trading and financial system designed at Bretton Woods.
14. Although the GATT has now been transformed into  a fully-fledged international institution,
the WTO, a framework is missing for the coordination of trade, macroeconomic and financial policy
issues along the lines envisaged in the original Hava na Charter.  Although the IMF remains, since the
mid-1970s it has abandoned its objective of providing stable exchange rates in an orderly international
financial system and international financial flows ha ve been allowed to return to levels similar to
those that caused instability in the inter-war period, generating exchange rate gyrations and
misalignments and leading to disruptions in internat ional competitiveness.  In contrast to its early
history, the IMF now lends exclusively to developing countries, substantially blurring the distinction
between short-term liquidity requirements of a stable financial system and the long-term financing
requirements for the development of lower income countries.  The World Bank has also given up itsemphasis on longer term infrastructure project lending and now concentrates on ‘structural
adjustment’ lending and poverty abatement.
15. Given the decline in official development assistance, the provision of long-term financing for
developing countries has been left primarily to private capital flows.
9  In direct contrast to those
arrangements originally thought to be necessary to support the international trading system, currentarrangements favour private capital flows over official flows, exchange rate flexibility over stability,
deflationary adjustment over financing, and the interest of creditors over debtors.  They have moved
international trade towards a single-tier system of rights and obligations, in which developing
countries have generally the same level of obligations as the developed countries.  The recognition
that full employment has to be an integral part of the success of increasingly free trade has been
weakened.  The protectionist arrangements for the support of agricultural prices and incomes in
industrial countries are a continuing source of difficulties in multilateral trade negotiations and oftensions in trade relations more generally.  And efforts to control chronic tendencies to excess supply
of certain primary commodities – for example, through the provision of external financing for
structural shifts into new activities in developing countries excessively dependent on primary
commodity exports – have been limited and spasmodic.  Trade liberalization has been put in front of
economic growth and full employment, thereby reki ndling mercantilist agendas, particularly in
developed countries.  While the post-war arrangements were founded on the belief that adverse
influences emanating from trade, finance and debt should be countered through measures that
preserved growth and development, under present arrangements and policies, developing countries
almost invariably find themselves obliged to adjust to international imbalances through domestic
retrenchment.
                                                                                                                                                                    
International Monetary Fund, or under analogous prov isions of a special exchange agreement entered into
pursuant to paragraph 6 of Article XV.”
9 See UNCTAD, Trade and Development Report 1999, Chapter V.WT/WGTDF/W/5/Rev.1
Page 6
16. It is thus not surprising that once again the question has been raised whether the participation
of developing countries in the system is compatible with their development objectives.  Just as in the
immediate post-war period, success in maintaining an open multilateral trading system requires more
than simply dealing with reduct ions in tariffs, quotas, subsidies and other impediments to the
expansion of trade.  Rather if the international regime is to be capable of supporting the tradingsystem, the financial system in particular must be compatible with an open multilateral trading
system.  The lack of singularity of purpose in the policies of the international institutions in ensuring
that their policies meet the requirements for the successful expansion of international trade and an
equitable distribution of its benefits to both developed and developing countries was explicitly
recognised in paragraph  4 of the Marrakech Declaration “On The Contribution Of The World Trade
Organization To Achieving Greater Coherence In  Global Economic Policymaking” which states:
“Ministers recognize, however, that difficulties the origins of which lie outside the trade field cannotbe redressed through measures taken in the trade field alone.  This underscores the importance of
efforts to improve other elements of global economic policymaking to complement the effective
implementation of the results achieved in the Uruguay Round.”
IV. INCONSISTENCY AND INCOHERENCE IN THE CURRENT GLOBAL
ECONOMIC SYSTEM
17. The recent experience of repeated financial crisis in developing countries suggests that
current global arrangements are not capable of providing the financial and monetary stability to
sustain the expansion of employment and output that is necessary for the success of the international
trading system and improving the conditions in developing countries:
• Initiatives taken in the context of the reform of the international financial architecture have not
been effective in preventing financial crises in emerging markets, resulting in reductions in
growth, employment and trade, and sharp declines in commodity prices and adverse movement in
the terms of trade.
10
• The tightened external payments constraint on developing countries resulting from the recent
downturn in the world economy and from the pro-cyclical behavior of international financial
flows and interest rates raises the question of adequacy of multilateral arrangements for theprovision of official balance of payments financing.
11
• The question of stability and appropriate alignment of exchange rates among the G-3 currencies
remains unresolved, and large swings continue to pose threats to global financial stability, theinternational trading system, and to exchange-rate policy and other aspects of external financial
management in developing countries.  The daily volatility in these rates can often offset annualgains in domestic productivity and drastically alter international competitiveness.
12
18. Recent experience has raised questions, particularly from developing countries, about the
effectiveness of current policies promoted by international financial institutions and of other major
features of the international financial regime, maki ng the need for reforms to bring back a greater
                                                     
10 For example, to get an order of magnitude of the declines in trade volumes that result from financial
crises, after the Asian financial crises of 1997 Korean imports fell by over $55 billion in 1998, representing over
10 percent of 1997 GDP; in Malaysia and Thailand imports fell by around $25 billion (around 25 per cent and
15 per cent of 1997 GDP respectively); in Singapore and Indonesia by around $20 billion (over 25 per cent andover 10 per cent of 1997 GDP, respectively). Overall, agricultural raw materials and metals prices fell by nearly20 per cent.  See UNCTAD, Trade and Development Report 1998, Part One, Chapters II and III; and 2000,Chapter IV.
11 See UNCTAD, Trade and Development Report 2001, p. 140; and 2002, pp. 15-21.
12 See UNCTAD, Trade and Development Report 2001, chapter V.WT/WGTDF/W/5/Rev.1
Page 7
degree of  coherence more pressing.  A major concern is the destabilizing and deflationary feedbacks
among various spheres of economic activity, particularly trade, debt and finance, which often create
impediments to development:
• Rather than being governed by comparative advantages, trade flows are frequently distorted by
unstable and misaligned exchange rates with little relation to underlying economic fundamentals,
the effects often being analogous to those of changes in tariffs.13  This problem is ignored in
current global arrangements which are based on a false dichotomy between trade and finance.
• By altering the relative competitive positions of various industries across countries, currency
movements unrelated to economic fundamentals have the potential to trigger trade frictions andprotectionism, undermining the international trad ing system.  Exchange-rate misalignments have
played an important part in recent trade disputes over shipping and steel.
• Shifts in international capital flows can also generate sharp swings in international trade flows by
creating boom-bust cycles in economic activity.  As seen during the East Asian crises and the
more recent information-communication technology cycle in the United States, financial booms
can lead to excessive expansion of investment, production and trade in particular sectors, which
eventually come to an end with the collapse of  the bubble, resulting in sharp declines in trade
flows and prices.
14
• Destabilizing linkages between trade and finance also operate through the cost and availability of
external financing.  Since assessments of creditworthiness determine the costs and conditions offinancing and payments arrangements for trade from both the public and private sectors, financial
crises can make not only importing but also exporting more costly, even after large devaluations
and improvements in competitiveness.  During major financial crises (such as the developing-
country debt crisis of the 1980s) the effects may include resort to countertrade – in other words todiscriminatory financing and payments arrangements similar to those which became widespread
during the 1930s.  In the same vein, trade shocks lead to increased debt burdens and reduced
capital inflows as they feed into higher risk spreads.
19. Quite apart from destabilizing and deflationary feedbacks among various spheres of economic
activity, there are also concerns that global arrangements in trade, debt and finance  contain systemicbiases and asymmetries that constrain development:
• There has always been a close interconnection between movements in prices of the main
internationally-traded primary commodities and monetary and financial factors.  Since the
breakdown of the Bretton Woods system in the early 1970s, the interconnections have become
more marked and have contributed materially to  the instability of the international economic
system.  Commodity price declines were a prominent factor in the debt and development crisis ofthe 1980s and in the continued debt overhang in the current period.  But, as already mentioned,
the mechanisms for dealing with the resulting problems are piecemeal and in many cases
themselves a thorn in the smooth functioning of the trading system.  Indeed, these problems have
not been addressed in a systematic way by the international community.
15
                                                     
13 UNCTAD, Trade and Development Report 1999, pp. 128-131.
14 UNCTAD, Trade and Development Report 1998, Part One, Chapter III; 2000, Chapter IV; 2001,
pp. 7-10.
15 That this is a perennial issue see UNCTAD, Trade and Development Report, 1984, Annex C on
Commodity Markets and Monetary and Financial System.  For the adverse effects of commodity price declines
on export earnings see UNCTAD, Trade and Development Report, 1998, pp. 85-86.WT/WGTDF/W/5/Rev.1
Page 8
• Despite the general acceptance of the benefits of free trade, the international division of labour is
greatly influenced by commercial policies which favour products and markets in which moreadvanced countries have a dominant position and a competitive edge.  High tariffs, tariff
escalation, and subsidies in agriculture and fisheries are applied extensively to products that offer
the greatest potential for export diversification in  developing countries.  The panorama of
protectionism is no better for industrial products including footwear, clothing and textiles wheremany developing countries have competitive advantages.  The abuse of anti-dumping procedures
and product standards against successful developing-country exporters creates further obstacles.
16
• There is an inconsistency between the policy advice given by multilateral institutions to
developing countries in favour of import liberalization and export-oriented growth strategies --
advice which is often reflected in conditionaliti es attached to their lending in the context of
structural adjustment programmes-- and the contin ued protectionism in some industrial countries’
markets for agricultural and labour-intensive products.  Furthermore, through the promotion ofunilateral trade liberalization beyond WTO commitments, developing countries are deprived of
the means to gain concessions on market access in subsequent trade negotiations.
• It is also widely believed that the existing arrangements do not allow sufficient policy space to
developing countries to overcome their longer-term payments constraint by pursuing targeted
trade, industrial and technology policies and thus increasing their export capacity in moredynamic sectors.  There are increasing concerns that current policy orthodoxy and global
arrangements have the result of kicking away the ladder by which today’s advanced countries
attained their present levels of economic development, denying developing countries many of the
policy instruments that were widely and successfully used in the past.
17
V. CONCLUSIONS
20. For most developing countries, the present  international trade and finance systems do not
provide sufficient long-term financial resources to enable them to achieve the rapid and sustained
growth needed to reach various poverty alleviation targets set by the international community for the
new millennium.  Full implementation of commitments by most developing countries undertakenduring the Uruguay Round, together with continued restrictions in market access in some major
industrial countries, are generating payments imbalances that cannot be financed on a sustained and
reliable basis by private international capital flows.
18  Moreover, despite sustained international
pressure, official financial flows continue to decline.  The outcome of the Monterrey Financing for
Development conference highlights this inconsistency: the additional pledges made in the context ofthis conference fall far short of amounts needed to close the resource gap, which, according to
estimates made by the Zedillo Panel as well as the World Bank, would require a doubling of official
aid flows.
19  In the absence of an increase in flows on this scale many developing countries may have
not only to curtail development plans but also to rest rict their participation in the international trading
system.
21. Remedies to this situation are to be found on two fronts.  The first is to ensure that the
redesign of the architecture of the international financial system is undertaken with the basic objectiveof easing the integration of developing countries into the international trading system.  The interest of
developing countries in the stability of the international financial system is that it allows greater
                                                     
16 See UNCTAD, Trade and Development Report 1999, pp. 134-144; and 2002, pp.128-136.
17 UNCTAD, “Development Strategies in a Globalizing World”, mimeo, January 2002.
18 UNCTAD, Trade and Development Report, 1999, Part Two.
19 These estimates confirm an earlier estimate by UNCTAD for sub-Saharan Africa; see UNCTAD,
Capital Flows and Growth in Africa, Geneva, 2000.WT/WGTDF/W/5/Rev.1
Page 9
participation in international trade to be combined  with the full exploitation of their development
potential.
22. Rather than focusing on these issues, the process of reform of the international financial
architecture has so far placed undue emphasis on what should be done at the national level.20  Even in
this regard it has failed to adopt an even-handed approach.  Efforts have concentrated on discipliningdebtors, setting guidelines and standards for major areas of domestic policy, principally in debtor
countries, and providing incentives and sanctions for their implementation.  Debtor countries have
been urged to better manage risk by adopting stricter financial standards and regulations, holding
larger international reserves, establishing contingent credit lines, and making contractual
arrangements with private creditors so as to invo lve them in crisis resolution.  The international,
financial system has continued to be organized around the principle of laissez faire, laissez passer ,
and developing countries are advised to adhere to the objective of an open capital account andconvertibility.  All this has extended the global reach of financial markets without a corresponding
strengthening of global institutions and a recognition of the need for them to operate in a coherent
way to coordinate the trading and financial systems.
23. Just as the original design of the post-war international financial system was undertaken by an
intergovernmental process under the auspices of the United Nations, the redesign of the currentsystem should also be approached within the United  Nations framework with full representation.  It is
essential to ensure that this broader approach to re form is built on an effort to bring coherence to the
policies advocated by various international institutions so as to provide the necessary support for a
successful and durable open multilateral trading system.
24. Another aspect of reform should involve the integration and elaboration of specific measures
within the WTO framework for situations where fina ncing of external imbalances is insufficient or
not available.  Within the current global framework, owing to the inadequacy of financial resources or
to conditions attached to the provision of internat ional liquidity, the remedy for correcting payments
imbalances is often sought in contractionary macroeconomic policies.  The balance-of-payments
provisions of the GATT provide an alternative mechanism for the reduction in imports throughtemporary suspension of commitments.  However, recourse is made to these provisions only
infrequently because they were not designed to deal with  problems endemic in the current
international system and because of the difficulties in the procedures involved.
25. As noted above, because of limitations on provision of liquidity for financing payments
imbalances, countries' obligations under the GATT  can be waived.  Thus international financial
obligations compete with rather than complement  countries’ commitments in the trading system.
Much like the considerations underlying the provision of short-term international liquidity by theIMF, the balance of payments provisions of the GATT (in Article  XVIII:B) are premised on the
assumption that the difficulties they are meant to address result from temporary payments imbalances
caused by “expansion of internal markets and instability of the terms of trade” rather than problems
associated with instability in financial flows, contagion and increases in debt service that may arise
from changes in developed-country policies or other external shocks.
21  In order to address the latter,
the conditions under which measures could be taken to restrict imports for balance of payments
purposes must be redefined. In this respect, the assessment of the adequacy of reserves should be
revised in order to take into account the size of reserves necessary to preserve exchange rate and
                                                     
20 See UNCTAD, Trade and Development Report 2001, Part Two, particularly Chapter III for a survey
of the issues.
21 However, it should be noted that IMF has increasingly engaged in bail-out operations unrelated to
current account needs, and introduced a contingency facilit y to deal with contagion.   For a description and
assessment see UNCTAD, Trade and Development Report, 2001, Chapter VI.WT/WGTDF/W/5/Rev.1
Page 10
financial stability, as well as financing needed for import of goods and services.22  Further, it must be
recognised that the usefulness of such measures in defending reserves or offsetting imbalances due to
financial causes requires rapid implementation (or even on occasion that the measures be instituted in
advance of actual events).  This means that the procedures must be made more flexible and more
streamlined, and even extended to allow them to serve a preventive role.  Furthermore, greaterflexibility is also needed in order to mitigate the possible adverse effects of import restrictions on the
level of economic activity and investment.
26. The existing arrangements in the trading system do not adequately address the systemic
problems associated with insufficient development finance or secular declines in commodity prices
and export earnings of developing countries.  While Article XVIII:A allows measures to promote “a
particular industry with a view to raising the general standard of living of its people”, it is not clear
how far this article can be applied more generally to a country that seeks to reduce its dependence onprimary export earnings by promoting structural change, upgrading and diversification, processes
which typically involve more than one sector or industry.  Furthermore, the provision regarding
compensation conflicts with the need to raise financing for development through higher export
earnings.  It is not appropriate for the intern ational community to ask for compensation from
developing countries trying to deal with what is acknowledged to be a global problem.
27. Finally, it is important to note that all of these measures are required because of insufficient
provision of liquidity in response to short-term imbalances, on the one hand, and of inadequate
development financing, on the other.  Given that the imbalances experienced by developing countries
on their external accounts are increasingly due to debt and debt servicing requirements rather than
their trade deficits, simple measures to restrict goods and services imports are unlikely to be sufficientto provide relief.  Measures that allow the management of debt service payments should be given
equal or even greater importance.  These considerations point to the need for a re-examination of the
concept of admissible safeguard measures or actions, which would expand their applicability beyond
the avoidance of damage to particular sectors or industries to cases where an entire economy is
threatened by financial developments such as the sudden reversal of financial flows or largemovements in important exchange rates.  We expe ct to come back to this issue later in the
deliberations of this Working Group.
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22 For an assessment see UNCTAD, Trade and Development Report 1999, Box 5.2 and 2001 Box 6.1.