By Hardev Kaur.

MALAYSIA has told the world community "to leave its selective capital controls alone". Even as the Malaysian economy and those of other developing countries are on the recovery path, danger still lurks in the world financial system. The United Nations Conference on Trade and Development (UNCTAD) acknowledges that there is "potential instability inherent in ... foreign capital inflows that are so volatile".

Even as there is acknowledgment of "instability" and the damage that volatile currency trading can cause, the full impact of the financial crisis on developing countries has not been fully computed. More grim figures are revealed in the United Nations Trade and Investment reports.

UNCTAD in its latest report reveals the "damage" to the economies of developing countries, while the World Development Report shows declines in foreign direct investment flows to developing countries. The Trade and Development Report 1999 points out that the crisis "wiped out the fruits of decades of economic growth and poverty eradication". The gap between the rich and poor, the developed and developing countries widened further. For the first time in 50 years the share of primary products in world trade fell below 20 per cent. This together with the appreciation of the US dollar in 1997 and 1998, resulted in a decline in the dollar value of export earnings of developing countries for the first time since 1991. While oil producers suffered, OPEC export revenues plummeted by over US$50 billion in 1998, and oil exporters as a whole lost more than 6 per cent of their GNP, non-oil developing countries were not spared. They suffered terms of trade declines and income losses.

The beneficiaries were the "rich developed" countries as they gained from the unprecedented collapse in commodity prices and cheaper manufactured imports from countries that had suffered currency devaluations and depreciations. Gains from cheaper imports of oil alone amounted to US$60 billion. This exceeded the total Official Development Assistance (ODA) in 1998.

In contrast, in Latin America, declines in export prices resulted in a loss of over US$10 billion in foreign exchange earnings, and in Sub-Saharan Africa the losses reached almost 2 per cent of Gross Domestic Product (GDP). The improvement in the terms of trade for developed countries helped to maintain income levels and reduce inflation.
On a per capita basis developing countries also received less Foreign Direct Investment (FDI) than developed countries, last year. According to UNCTAD's World Development Report 1999, this reflects the concentration of population in developing countries and the concentration of FDI in developed countries. The developed world also suffered little from the declines in asset prices or increases in risk premium in global capital markets that accompanied drastically reduced capital inflows into emerging markets, especially in the months following the Russian crisis in January 1999. They were also not affected by the Brazilian crisis.

On the other hand they benefitted. The "flight to safety", which followed the financial crisis in developing countries, made its way to the developed countries and "helped to boost stock markets in the North and stimulate consumption, notably in the US". As a consequence the US has enjoyed an unprecedented eighth year of expansion. According to UNCTAD figures private consumption in the US rose by more than US$400 billion from the second quarter of 1997 to the end of 1998, more than twice the total annual income of Sub-Saharan Africa. US is perhaps the only country in the world that continues "to live beyond its means". Its economy has also benefitted from the "cheap" imports from the crisis hit developing countries. The woes of developing countries have been translated into a prolonged boom, low inflation and low interest rates in the US.

UNCTAD says while the prospects for world growth in 1999 look better it notes that "fear has given way to complacency" and points to the "... underlying structural problems, including fiscal fragility" have not disappeared. Its forecast for growth in developing countries, excluding China, will be below that of population and lower than in industrial countries. Even so the world body says that the international community must face up to the pronounced external constraints of development and the need for exports rather than unstable capital flows to underpin a return to rapid and sustained growth in the third world.