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September 17, 1998


Stricter sanctions will lead to payments problems in the subcontinent, cautions UNCTAD

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The economies of both India and Pakistan may face payments difficulties and a slowdown in growth if the sanctions imposed by some of their major trading partners in the wake their nuclear tests are intensified, according to the United Nations Conference on Trade and Development.

In its 1998 report on trade and development, UNCTAD paints a sombre picture of the world economy in the aftermath of the east Asian financial crisis and warns that unless the region switches from deflation to reflation, and European countries and Japan boost global demand for growth and services, there could be a full-grown global recession. ''The world economy is on a knife-edge,'' says the report.

In analysing the economic consequences of the Asian financial crisis on other parts of the world, UNCTAD comes to the conclusion that the impact on south Asia has been ''less than dramatic'' because of restrictions on capital account convertibility and more limited exposure to short-term foreign debt.

The report notes that the currencies of India and Pakistan depreciated around ten per cent in the latter half of 1997. Unlike in southeast Asia, the economies of the sub-region remain less closely integrated with the global economy because of a gradual approach to trade liberalisation, financial deregulation and privatisation. The creation of industrial regional arrangements such as the South Asian Preferential Trade Agreement is a step towards closer integration within the region and also with the world economy, the report says.

In UNCTAD's view, in the event of intensification of countries may face payments difficulties and slowdown in growth, even though they may avoid a serious financial and currency turbulence associated with capital flight.

According to UNCTAD estimates, growth in south Asia in 1997 fell to less than five per cent from 6.8 per cent in 1996. Growth in the region is expected to revert back to the 1996 level with the recovery of India and Pakistan, but in most countries it will continue to be constrained by inadequate infrastructure as well as political instability. Without further adjustments in exchange rates, major export sectors, such as garments, textiles, plastics and synthetic fibres, which compete with exports from other Asian economies, will be adversely affected.

Pakistan, in particular, with its exports largely in textiles and clothing, will face keener competition.

Noting that the current Asian economic crisis is more serious in terms of its scope and repercussions than any such crisis in the past three decades, and that its full effects have yet to be felt, UNCTAD argues that current approaches to crisis management have turned a liquidity crisis into a solvency crisis, and calls for a fresh approach to managing international financial crises in general.

The worse-case scenario for the world economy is further bouts of financial instability in emerging markets, a correction of equity prices in major industrial countries, together with a sharp slowdown in the United States, tight monetary policy in Europe, prolonged recession in east Asia and Japan, and increased trade imbalances in the major industrial countries.

This, UNCTAD warns, could tip the world into a deep and, possibly, prolonged recession. It could also mean a reappearance of serious trade conflicts. Avoiding such an outcome depends on increasing the contribution of developed economies, particularly those of Europe and Japan, to world demand, as well as reversing deflationary policies in east Asia, it says.


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