WORLD TRADE
ORGANIZATIONWT/WGTDF/W/5
26 June 2002
(02-3544)
Working Group on Trade, Debt and Finance Original:  English
COMMUNICATION FROM UNCTAD
The following communication, dated 24 June 2002, has been received from the UNCTAD
Secretariat in advance of their presentation to the Working Group on 11 July.1
_______________
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 andsustainable 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.  The external environment of developing countries has undergone anumber of fundamental changes that are unlikely to be reversed in the foreseeable future.  The
average cost of international finance has become both much higher and much more variable.
Similarly, the availability of external finance for these countries has  become more unpredictable and
apt to undergo extremely abrupt changes.  For many developing countries increased financial
stringency has been associated with a prolonged depression of export prices and the 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 an
attempt 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 eminently placed to examine these issues and to build
consensus for reformulation of policies from a development perspective and we are pleased to be able
to contribute to your deliberations.
                                                     
1 For more information, please contact Yilm az Akyüz, Director, Division on Globalization
and Development Strategies, UNCTAD.WT/WGTDF/W/5
Page 2
4. Given the similarity in the issues faced today with 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
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 could allow rapid growth and development.  While this required a
formal mechanism of multilateral negotiation 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 tobe taken was strongly influenced by the assessment of why the trading system had broken down in the
1920s.
6. During that period, excessively onerous reparations payments imposed in the Treaty of
Versailles, the insistence on inter-allied debt repayment along with volatile international capital flows
meant that the return to the gold standard was a ccompanied 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 those of 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 was to restrict
trade and payments to a bi-lateral or regional quid pro quo basis in order to defend the income andemployment of domestic residents, to ensure the stability of domestic financial institutions and
support domestic price levels.  In addition, many governments resorted to "beggar-my-neighbour"
exchange rate adjustments in order to gain comp etitive advantages in international trade. The
establishment of a multilateral 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 frompurely 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 the perceived threats to the survival of the new
multilateral trading system.  This would include:
(i) 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.
(ii) The International Trade Organisation (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
Page 3
(iii) An International Commodity Stabilisation Fund to provide for stability of
raw material and primary commodity prices through the creation of
international buffer stocks.2
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 rapidgrowth and full employment is reflected in the statement of the objectives of the IMF "to facilitate the
expansion 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 also
a necessary condition for the achievement of ... the expansion of international trade, and thus for the
well-being of all other countries."  An entire chapter of the ITO Charter was devoted to the need to
coordinate tariff and trade policy with the other aspects of domestic and external macroeconomic
policy because an open multilateral trading system could only be realised if it is seen to bring benefits,rather than threats, to domestic income and employment and financial and exchange rate stability.
3
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.4  Only the IMF was established, while the
rules-based system of trade negotiations to eliminate 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 institution was created to deal
with the stabilisation of primary commodity prices.5  The responsibility for dealing with the
consequences of  fluctuations in developing country export earnings caused by volatility incommodity prices was taken on under the IMF’s provision of short-term liquidity, rather than as a
question of longer term structural financing.
6
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
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
                                                     
2 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.
3 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.
4 For the historical evolution of the multilateral economic system see UNCTAD, Trade and
Development Report 1984, Part II.
5 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.
6 The first UNCTAD Conference had called for both International Commodity Agreements and
supplementary financing to offset commodity price fluctuations.WT/WGTDF/W/5
Page 4
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 trade and 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, thestandard of living and conditions of labor 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 inlow income countries, as distinct from the problems of European reconstruction, was added to the
objectives of the IBRD as an afterthought.
7  However, the ITO Charter explicitly raised the question
of the difficulties facing low income countries and in doing so raised the issue of the difference
between 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 development
assistance programmes.
12. The absence of a system of endogenous provis ion 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 in
fact 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 declaredto be "scarce".
8  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]mport
restrictions ... 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 lowmonetary reserves, to achieve a reasonable rate of increase in its reserves"
9 while Article XV required
cooperation between GATT and IMF to coordinate arrangements on exchange rate questions and
                                                     
7 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 and
Brazil, Chile and Cuba from Latin America.
8 "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 theaffected currency and, in determining the manner of restricting the demand and rationing the limited supplyamongst it nationals, the member country shall have complete jurisdiction" (IMF, p. 134 of the Joint Statement
by Experts).
9 "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 thatcontracting party may at that time apply under Article VIII or XIV of the Articles of Agreement of theInternational Monetary Fund, or under analogous prov isions of a special exchange agreement entered into
pursuant to paragraph 6 of Article XV."WT/WGTDF/W/5
Page 5
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 financing
needs because the ITO Charter was never adopted.  Indeed, the reluctance of developed countries toaccept 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 in to 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 andmisalignments 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 its
emphasis on longer term infrastructure project lending and now concentrates on ‘structuraladjustment’ lending and poverty abatement.
15. Given the decline in official development assistance, the provision of long-term financing for
developing countries has been left to private capital flows.
10  In direct contrast to those arrangements
originally thought to be necessary to support th e international trading system, current arrangements
favour private capital flows over official flows, ex change rate flexibility over stability, austerity over
expansion, adjustment over financing, and the intere st 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, replaced by a focus on price stability.  Trade liberalization and expansion have been put in
front of economic growth and full employment, thereby rekindling mercantilist agendas, particularly
in developed countries.  While the post-war arrangements were founded on the belief that adverseinfluences 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.
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, it should be clear today that success in maintaining an open multilateral
trading system requires more than simply dealing w ith reductions in tariffs, quotas, subsidies and
other impediments to the expansion of trade -- the entire international economic system must be
capable of supporting the trading system, and in particular this means the compatibility of thefinancial system 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 international trade and an equitable distribution of its benefits to both developed
                                                     
10 See UNCTAD, Trade and Development Report 1999, Chapter V.WT/WGTDF/W/5
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and developing countries was explicitly recognised in paragraph 4 of the Marrakesh Declaration "On
The Contribution Of The World Trade Organizatio n To Achieving Greater Coherence In Global
Economic Policymaking"  which states: "Ministers recognize, however, that difficulties the origins of
which lie outside the trade field cannot be redressed through measures taken in the trade field alone.
This underscores the importance of efforts to improve other elements of global economicpolicymaking 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 expansion of employment and output that is necessary for the success of the internationaltrading system and improving the conditions in developing countries: 
Initiatives taken in the context of the reform of the international financial architecture
have not been very effective in preventing financial crises in emerging markets,
resulting in reductions in growth, employment and trade, and sharp declines in
commodity prices and terms of trade.
11
The tightened external payments constraint on developing countries resulting from
the recent downturn in the world economy and from the pro-cyclical behaviour of
international financial flows and interest rates raises the question of adequacy of
multilateral arrangements for the provision of official balance of payments
financing.12
The question of stability and appropriate alignment of exchange rates among the G-3
currencies remains unresolved, so that large swings continue to pose threats to global
financial stability and the international trading system.  The daily volatility in these
rates can often offset annual gains in domestic productivity and drastically alter
international competitiveness.13
18. Recent experience has raised questions, particularly from developing countries, about the
effectiveness of current policies promoted by international financial institutions and arrangements and
made the need for reforms to bring back a greater degree of  coherence more pressing.  A source of
these concerns is that there are 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
                                                     
11 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 per cent 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.
12 See UNCTAD, Trade and Development Report 2001, p. 140; and 2002, pp. 15-21.
13 See UNCTAD, Trade and Development Report 2001, Chapter V.WT/WGTDF/W/5
Page 7
fundamentals.14  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 and
protectionism, undermining the international trading system.  Exchange-rate misalignments haveplayed 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 themore 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.
15
• Destabilizing linkages between trade and finance also operate through the cost and availability of
external financing.  Since assessments of creditworthiness determine access to trade financing
from both the public and private sectors, financial crises can make not only importing but also
exporting more difficult even after large devalua tions and improvements in competitiveness.  In
the same vein, trade shocks lead to increased debt burdens and reduced capital inflows as theyfeed into higher risk spreads.
19. Quite apart from such destabilizing and deflationary feedbacks among various spheres of
economic activity, there are also concerns that global arrangements in trade, debt and finance  contain
systemic biases 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 thebreakdown 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 of
the 1980s and in the continued debt overhang in the current period.  This problem, however, hasnot been addressed by the international community.
16
• 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 offerthe greatest potential for export diversification in  developing countries.  The panorama of
protectionism is no better for industrial products including footwear, clothing and textiles where
many developing countries have competitive adva ntages.  The abuse of anti-dumping procedures
and product standards against successful developing-country exporters creates further obstacles.
17
• 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 --
                                                     
14 UNCTAD, Trade and Development Report 1999, pp. 128-131.
15 UNCTAD, Trade and Development Report 1998, Part One, Chapter III; 2000, Chapter IV; 2001,
pp. 7-10.
16 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 declineson export earnings see UNCTAD, Trade and Development Report, 1998, pp. 85-86.
17 See UNCTAD, Trade and Development Report 1999, pp. 134-144; and 2002, pp.128-136.WT/WGTDF/W/5
Page 8
advice which is often reflected in conditionaliti es attached to their lending in the context of
structural adjustment programmes-- and the continued protectionism in some industrial countries’
markets for dynamic agricultural and labour-intensive products.  Furthermore, through the
promotion of unilateral 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 more
dynamic sectors.  There are increasing concerns that current policy orthodoxy and global
arrangements have the result of kicking away the ladder by which the today’s advanced countries
attained their present levels of economic development by denying developing countries many of
the policy instruments that were widely and successfully used in the past.18
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 a 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 undertaken
during 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.19  Moreover, despite sustained international
pressure, official financial flows continue to decline.  The outcome of the Monterrey Financing forDevelopment conference highlights this inconsistency: the additional pledges made in the context of
this 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.
20  This implies that many developing countries may have to curtail development plans and
restrict their participation in the international trading system.  On the other hand, as recent experiencein several emerging markets shows, efforts to accelerate growth by greater reliance on private
financial flows can make the matters worse by creating instability and boom-bust cycles, which, inter
alia, harm the productive investment needed to improve trade performance.
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 stability of
the international financial system and particular financial arrangements are of  interest to developing
countries in so far as they allow them to combin e greater participation in the international trading
system 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.
21  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
                                                     
18 UNCTAD, "Development Strategies in a Globalizing World", mimeo, January 2002.
19 UNCTAD, Trade and Development Report, 1999, Part Two.
20 These estimates confirm an earlier estimate by UNCTAD for sub-Saharan Africa; see UNCTAD,
Capital Flows and Growth in Africa, Geneva, 2000.
21 See UNCTAD, Trade and Development Report 2001, Part Two, particularly Chapter III for a survey
of the issues.WT/WGTDF/W/5
Page 9
larger international reserves, establishing contingent credit lines and making contractual arrangements
with private creditors so as to involve them in cr isis 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 and convertibility.  All this
has extended the global reach of financial markets without a corresponding strengthening of globalinstitutions 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 system should
also be approached within the United Nations framework with full representation.  It is essential to
ensure that this broader approach to reform is built on bringing coherence to the policies advocated by
various international institutions so as to  provide the necessary support for a successful and durableopen multilateral trading system.
24. The second aspect of reform involves the integration and elaboration of specific measures
within the WTO framework that can be implemen ted when financing of external imbalances is
insufficient or not available.  Within the current global framework, because of insufficient financial
resources or the conditions often attached to the pr ovision of international liquidity,  the remedy for
correcting payments imbalances is sought in a decline in the overall level of activity through
contractionary macroeconomic policies.  The balance-of-payments provisions of the GATT provide
an alternative mechanism for the reduction in impor ts through temporary suspension of commitments.
However, recourse is made to these provisions only infrequently because they do not seem to be
designed for the problems endemic in the current international system and because of the difficultiesin the procedures involved.
25. As noted above, because of limitations on provision of liquidity for financing payments
imbalances, countries are allowed to sacrifice their obligations under the GATT. This implies that
international financial obligations compete rather  than complement countries’ commitments in the
trading system.  Much like the considerations underlying the provision of short-term internationalliquidity by the  IMF, 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.
22  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 ofreserves should be revised in order to take into account the size of reserves necessary to preserve
exchange rate and financial stability, as well as financing needed for import of goods and services.
23
Further, it must be recognised that the usefulness of such measures in defending reserves or offsettingimbalances due to financial causes requires extremely rapid implementation or even that the measures
be instituted in advance of actual events.  This m eans that the procedures must be made more flexible
and more streamlined, and even extended to allow them to serve a preventive role. Furthermore,
greater flexibility 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
                                                     
22 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.
23 For an assessment see UNCTAD, Trade and Development Report 1999, Box 5.2 and 2001 Box 6.1.WT/WGTDF/W/5
Page 10
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
that it can be applied more generally to a country that seeks to reduce its dependence on primary
export earnings by promoting structural change, upgrading and diversification.  Furthermore, the
obligation to provide compensation conflicts with the need to raise financing for development throughhigher export earnings.  It would not be appropriate for the international community to ask for
compensation from developing countries trying to deal with this problem which should, in any case,
be dealt with globally.  Problems of this nature were dealt with in the ITO charter by noting that the
best compensation for developed countries facing competition from newly industrialising countries
was to pursue full employment policies at home which would lift all boats, rather than seeking
payment for damages which would be to the detriment of all.
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 increasing due to debt and debt servicing requirements, rather than their
trade deficits, it is unlikely that simple measures to restrict goods and services imports will be
sufficient to provide relief.  Rather, measures that allow the management of debt services paymentswill be of equal or even greater importance.  An example of one such measure is a standstill
mechanism which would allow a developing country to respond to a short term imbalance without
compromising its commitments to open trade and rapid development – an issue we expect to come
back to later in the deliberations of this Working Group.
__________