By Jawaid Bokhari

KARACHI, Oct 5: The key issue, without which neither globalization can be sustained nor can a sound international financial architecture be designed, is developing world’s increased access into the developed markets.

The alternative is a self-reliant national economic growth with globalization restrained by growing debt crises and currency crashes.

Perhaps, finance minister Shaukat Aziz hit the nail on the head when he told the annual joint meeting of the IMF and World Bank: “What is the point of enhancing capital flows if the capacity to pay them continues to be constrained by restrictive trade practices.”

In the current phase of their economic development, emerging markets suffer from “chronic trade gap, imports exceeding exports, that impacts on their current account adversely.”

On the other hand, industrialized states suffer presently from economic slump and recessionary trends and need markets to sustain growth.

And the world trade order needs to be built on exchange of trade surpluses created by natural domestic advantage that each country possesses and as far as possible and practical on balanced bilateral trade.

When greater access to developed markets is denied, emerging markets suffer the balance of payments deficits that is managed either by external assistance, foreign investment or capital controls.

And the countries that borrow heavily and tend to integrate with the global financial system without corresponding rise in volume of exports, are hit by debt crises and currency crashes.

Owing to this imbalance, the global debt crises, that, so far were managed by IMF bailouts, are getting worse, forcing the Fund to consider something akin to bankruptcy law and practices as an option to resolve the global debt problem.

The Bush administration wants minimum of bailouts, an end to “unwarranted lending” that would not precipitate a default. Quite often, it says that grants should be preferred to loans but these words have yet to be matched effectively by action. It wants the emerging markets to restructure their debts smoothly and more frequently. This is what the policy makers in Pakistan are doing.

The IMF is currently developing a framework for sovereign debt restructuring. In his speech at the annual IMF\WB meeting, Shaukat Aziz cautioned the IMF on two counts: a) whatever measures are taken should not impair the developing countries’ access to financial markets. b) That non-HIPC states, staying on a reforms course, need fiscal space to invest more on human development.

Despite the improvement in the external sector and the debt relief provided by the Paris Club, Pakistan’s external debt at $36 billion is unsustainable. Combined with other positive developments like soaring home remittances and unprecedented forex reserves, the external support has removed the threat of a default. But providing piecemeal support, the donors have tried to keep Pakistan dependent and compliant.

In the current situation, the government is thinking of identifying and retiring some more expensive debts, a process initiated by the Musharraf regime.

But the ad hoc solutions aside, trade not aid or foreign investment holds the key to economic development.

After the collapse of colonial empires, foreign loans and credits have provided industrial states markets for goods and services in borrowing countries. This has also spurred economic growth in developing states but left them with mountains of debt not because of mismanagement but due to lack of adequate outlets of foreign sales. The series of debt crises in developing states restrained the donors because more debts could not be serviced with low export earnings. Exceptions have been made for reasons of strategic political gains, to get worse outcomes.

The gradual decline in official capital inflows was followed by focus on foreign direct investment (FDI) and portfolio investment. The bulk of this investment has been shared among Europe, the US and Japan, now China claiming a substantial share. Portfolio investment has proved, because of its quick inflows and outflows, more harmful than beneficial for cash-trapped developing states. There has been a sharp fall in global FDI flows in last two years. The trend is unlikely to be reversed soon both for official and private capital flows that reinforced globalization.

In the global economic slump, no developing country can bank on substantial foreign investment to push up its growth rate specially with the debt overhangs.

And in current pre-mature drive towards globalization, capital controls are not an accepted norm, at least, with the IMF and other multilateral agencies. The alternative for countries like Pakistan is to build huge reserves, targeted at $10-12 billion, to keep the exchange rate stable and defend the rupee from speculative attack in a free float. So much funds are tied to reserves because free float has not been preceded by freer access of the developing states’ good and services to developed markets.

On the other hand, emerging markets are being induced to open up markets for foreign goods. Lower customs duties impact on tax revenue and raise fiscal deficits. More imported goods means bigger trade deficit. Trade liberalization needs to be reciprocated by industrial states.