World Economic Situation and

Prospects 2002

DEPARTMENT OF ECONOMIC AND SOCIAL AFFAIRS AND

UNITED NATIONS CONFERENCE ON TRADE AND DEVELOPMENT

United NationsNew York, 2002

This report is a joint product of the Department of Economic and Social Affairs (DESA) and the United NationsConference on Trade and Development (UNCTAD). It provides an overview of recent performance and short-termprospects for the world economy and of some key global economic policy developments and issues. One of its purposesis to serve as a point of reference for discussions on economic, social and related issues taking place in various UnitedNations entities in the first half of 2002.

The material contained in this report is based on information available as of 30 November 2001.

FOR FURTHER INFORMATION, PLEASE CONTACT:

In New York In Geneva

Mr. Ian Kinniburgh Mr. Carlos FortinDirector Deputy Secretary-GeneralDevelopment Policy Analysis Division United Nations Conference onDepartment of Economic and Social Affairs Trade and DevelopmentRoom DC2-2170 Palais des Nations, Room E-9052United Nations, New York 10017 1211 Geneva 10U.S.A. Switzerland

Phone: (212) 963-4838 Phone (41)(22) 907-5789Fax: (212) 963-1061 Fax: (41)(22) 907-0057E-mail: kinniburgh@un.org E-mail: fortin@unctad.org

IIIT A B L E O F C O N T E N T S

CONTENTS

Chapter Page

I. GLOBAL OUTLOOK . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1Some key issues on the international policy agenda . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4

International Conference on Financing for Development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4Strengthening the Heavily Indebted Poor Countries (HIPC) Initiative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5Rethinking the role of private creditors in debt crises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5Implementing the Doha work programme . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5

II. INTERNATIONAL TRADE AND FINANCE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7Slowing international trade . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7Softening international commodity prices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9Reduced foreign investment flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12Hesitant financial flows to developing countries and economies in transition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15

Private financial flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15Official financial flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17

Trade policy developments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .18Developments prior to Doha . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .18Regional trade arrangements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .19Strengthening trade-related assistance to developing countries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .20Doha: The new WTO work programme . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .21

International financial cooperation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .22International Conference on Financing for Development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .22Implementating the Heavily Indebted Poor Countries (HIPC) Initiative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .22Combating the financing of terrorism . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .22

III. REGIONAL DEVELOPMENTS AND OUTLOOK . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .25Developed economies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .25Economies in transition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .30Developing countries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .32

W O R L D E C O N O M I C S I T U A T I O N A N D P R O S P E C T S 2 0 0 2IV

Page

FIGURES

II.1. OPEC production quota and the price of Brent crude oil, January 2001-January 2002 . . . . . . . . . . . . . . . . . . . . . . . . . . .9II.2. Prices of primary commodities and manufactures, 1998-2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11II.3. The effects of the terrorist attacks on plans for FDI by Japanese TNCs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15II.4. Net financial flows to developing and transition economies, 1991-2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .16II.5. Yield spreads on emerging market bonds, 2 January 2001-30 November 2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17II.6. Regional trade agreements under negotiation or being implemented in 2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .20

III.1. Consumer confidence in major economies, 1998-2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .26III.2. Annual rate of change in consumer price index in the Euro zone, January 2000-November 2001 . . . . . . . . . . . . . . . . .28III.3. Euro zone and the United States: policy interest rates, January 1999-November 2001 . . . . . . . . . . . . . . . . . . . . . . . . .29III.4. Selected developing countries: seasonally adjusted quarterly rate of growth of real GDP,

first quarter 1999-third quarter 2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .35

TABLES

I.1. Growth of world output and trade, 1992-2002 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2I.2. Developing countries: frequency of high and low growth of per capita output, 1999-2002 . . . . . . . . . . . . . . . . . . . . . . .3II.1. Inflows of foreign direct investment, by region, 1998-2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12II.2. Most-favoured economies by region: share of responses citing an economy as a priority location in a region . . . . . . .14

ANNEX TABLES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .39

VE X P L A N A T O R Y N O T E S

EXPLANATORY NOTES

The following symbols have been used in the tablesthroughout the report

.. Two dots indicate that data are not available or are notseparately reported.

- A dash indicates that the amount is nil or negligible.- A hyphen (-) indicates that the item is not applicable.- A minus sign (-) indicates deficit or decrease, except as

indicated.. A full stop (.) is used to indicate decimals./ A slash (/) between years indicates a crop year or

financial year, for example, 1990/91.- Use of a hyphen (-) between years, for example, 1990-1991,

signifies the full period involved, including the beginning and end years.Reference to "dollars" ($) United States dollars, unless otherwise stated.Annual rates of growth or change, unless otherwise stated, refer to annual compound rates.In most cases, the growth rate forecasts for 2001 are rounded to the nearest quarter of a percentage point.Details and percentages in tables do not necessarily add tototals, because of rounding.

The following abbreviations have been used:

ACP African, Caribbean and Pacific (Group of) States AGOA Africa Growth and Opportunity ActAIDS acquired immunodeficiency syndromeASEAN Association of Southeast Asian NationsATC Agreement on Textiles and Clothingbps basis pointsCACM Central American Common MarketCARICOM Caribbean CommunityCEE Central and Eastern European (countries)CEO Chief Executive Officer (World Bank)CFA Communauté financière africaineCIS Commonwealth of Independent StatesCPC Caspian Pipeline ConsortiumCPI consumer price indexDAC Development Assistance Committee (of OECD)DDO deferred drawdown option (World Bank)DME developed market economyECB European Central BankEU European UnionFATF Financial Action Task Force on Money Laundering FDI foreign direct investmentFIUs financial intelligence units (IMF)FSAP Financial Sector Assessment Programs (IMF)FTA free trade agreement (WHO)

FTAA Free Trade Agreement of the AmericasGATT General Agreement on Tariffs and TradeGDP gross domestic productGNP gross national productGWP gross world productHICP Harmonized Index of Consumer PricesHIPC heavily indebted poor countriesHIV human immunodeficiency virusIBRD International Bank for Reconstruction

and DevelopmentICT information and communications technologyIDA International Development AssociationIF Integrated Framework for Trade-related Technical

Assistance to Least Developed Countries (WTO)IIF Institute of International FinanceIMF International Monetary FundIMFC International Monetary and Financial CommitteeJETRO Japan External Trade OrganizationLDCs least developed countriesM&As mergers and acquisitionsmbd million barrels per dayMERCOSUR Southern Cone Common MarketNAFTA North American Free Trade AgreementNasdaq National Association of Securities Dealers

Automated Quotations System NATO North Atlantic Treaty OrganizationNGO non-governmental organizationNPL non-performing loanODA official development assistanceOECD Organisation for Economic Cooperation

and DevelopmentOPEC Organization of the Petroleum

Exporting Countriespb per barrelProject LINK international collaborative research group for

econometric modelling, coordinated jointly by the Development Policy Analysis Division of theUnited Nations Secretariat, and the University of Toronto

PRSP Poverty Reduction Strategy Paper (IMF and World Bank)

PSI private sector involvementRTAs regional trade arrangements (WTO)TMB Textile Monitoring Body (WTO)TNC transnational corporationTRIMS Trade-related Investment Measures (Agreement on)TRIPS Trade-related Aspects of Intellectual Property

Rights (Agreement on)UNCTAD United Nations Conference on Trade

and DevelopmentUN/DESA Department of Economic and Social Affairs of the

United Nations SecretariatUNLDC III Third United Nations Conference on the Least

Developed CountriesWTO World Trade Organization

The key concern of economic policy makers at the begin-ning of 2002 is to ensure a prompt and widespread eco-nomic recovery. This report forecasts a gradual recoverybeginning in 2002, with GWP expected to grow by only1½ per cent and world trade by 3 per cent. Such limitedgrowth in 2002 implies no growth in per capita worldoutput for two consecutive years. As in 2001, countriesaccounting for two-fifths of the population of the devel-oping world are expected to increase output per capita byless than 3 per cent in 2002 (see table I.2), compoundingthe challenge of reducing the number of people living inpoverty in these countries.

The global recovery expected in 2002 depends to alarge extent on the anticipated revival of the United Stateseconomy, which led the global slowdown in 2001.1 By theend of 2001, a number of the forces that had contributedto the slowdown in the United States and in the worldeconomy generally had improved, partially because ofmore accommodative monetary policy and fiscal stimulus

in the major developed economies. The global consolida-tion in the information and communications technology(ICT) sector appeared to be ending; energy prices hadfallen considerably; other primary commodity prices hadsoftened; and world equity markets had rebounded, albeittentatively. These developments presage a halt to thedeterioration in the world economy early in 2002. Therecovery is then expected to gather momentum graduallyduring the second half of the year (see chapter III).

The overall strength and the breadth of the economicrecovery in 2002 are, however, likely to be limited. Inaddition, in contrast with the synchronization amongeconomies in the slowdown, diversity is expected in theupturn. First of all, only a slow recovery of businessinvestment is expected in the major developed economies,especially in the ICT sector. Secondly, the lingering tradeimbalances within and among the major developedeconomies are likely to dampen their recovery. Thirdly,the frail international economic environment, including

1G L O B A L O U T L O O K

CHAPTER I: GLOBAL OUTLOOK

A pervasive slowdown in the world economy, aggravated by the terrorist attacksin the United States of America, has led to the lowest growth of gross worldproduct (GWP) in a decade. GWP grew little more than 1 per cent in 2001 andthe volume of world trade stagnated (see table I.1). The weakness became morewidespread as the year progressed, with three quarters of the world’s economiesregistering lower economic growth than in the previous year. Meanwhile, morethan a dozen economies, accounting for more than two-thirds of world outputand including the world’s three largest economies, were falling into recession.

For the year as a whole, growth in the developed countries was the lowest in adecade. The economies in transition grouping exhibited greater resilience buttheir average growth also declined. With the exception of the year following theAsian crisis, annual average growth in the developing countries as a group wasalso the lowest since the beginning of the 1990s. Output registered an absolutedecline in several of these countries and output per capita fell in West Asia, EastAsia and Latin America and the Caribbean when averaged for the regions as awhole. Africa was less adversely affected, with average growth changing littlefrom the previous year. The largest developing countries—China and, to a less-er extent, India—were among those best able to sustain their growth in the faceof the slowdown.

the slow growth of international trade, weak primarycommodity prices and restrained external financing con-ditions, is unlikely to improve until the recovery in thedeveloped economies is well advanced; these factors willdelay the recovery of the developing countries andeconomies in transition.

For their part, a large number of developing countriesand economies in transition are constrained in their abili-ty to stimulate domestic demand, either because of theirweak fiscal position or because of the implicit restrictionson their policy options imposed by their integration intothe world economy. The room for fiscal expansion inmany of these countries is limited because budget deficitsare already large—either because of diminishing govern-ment revenue as a result of lower commodity prices (inmany African countries) or because of continued publicexpenditures relating to the 1997-1998 financial crises (inseveral Asian and Latin American countries).Commitment to fiscal consolidation, either induced bypressures from global capital markets or required byagreements with the Bretton Woods institutions, has alsoprecluded the use of stimulus measures in some countries.At the same time, monetary policy in many developingcountries and economies in transition has been directedexclusively to target either the exchange rate or inflation,leaving little room for counter-cyclical easing. Only asmall number of developing countries and economies intransition have been able to undertake monetary easingand to use fiscal stimuli simultaneously. The lack of roomfor policy manoeuvre will contribute to the slowness ofthe recovery in many developing countries and economiesin transition.

The collapse in the growth of international trade, exac-erbated by the disruption caused by the terrorist attacks,was a key feature of the slowdown in 2001 (see chapterII). Only a limited improvement in the growth of worldtrade is expected for 2002, while the tepid global recov-ery suggests that international commodity prices, includ-ing that of oil, will remain soft during the year.

The modest increase in net financial flows to developingcountries and economies in transition in 2001 is notexpected to be sustained in 2002. Total flows of foreigndirect investment (FDI) to these countries had seemed rel-atively immune to the crises of the previous few years butfell in 2001 and are expected to drop further in 2002.Meanwhile, other private capital flows to developing coun-tries and economies in transition remain subdued and theircosts, having risen in the wake of the terrorist attacks, hadnot returned to their previous levels by year-end.

The lower exposure of developing countries to short-term capital flows and the adoption of more flexibleexchange-rate regimes meant that external shocksthrough international financial channels in 2001 weresmaller than in the 1997-1998 international financialcrises. Nevertheless, a few countries, notably Argentinaand Turkey, suffered from a combination of, and interac-tion between, domestic and international financial diffi-culties in 2001. Despite some large depreciations in 2001,there was a greater degree of stability in the exchangerates of developing countries and economies in transitionthan in the past few years. However, the adverse develop-ments on both the current and capital accounts mean thata number of developing economies, notably those in LatinAmerica highly dependent on external financing, are fac-

W O R L D E C O N O M I C S I T U A T I O N A N D P R O S P E C T S 2 0 0 22

Table I.1.GROWTH OF WORLD OUTPUT AND TRADE, 1992-2002

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001a 2002b

World outputc 1.7 1.4 3.1 2.7 3.2 3.5 2.3 2.9 4.0 1.3 1½of which:

Developed economies 1.7 0.9 2.9 2.3 2.7 3.0 2.5 2.7 3.5 0.9 ¾Economies in transition -11.8 -6.7 -7.2 -0.6 -0.1 2.2 -0.7 3.0 6.0 4.3 3¾Developing economies 4.8 5.1 5.6 5.0 5.7 5.4 1.6 3.5 5.8 2.3 3½

World traded 5.7 4.6 10.5 8.6 5.5 9.2 3.3 5.2 11.4 0.8 3

World output growth with PPP-based weightsd 1.9 1.8 3.8 3.5 3.9 4.1 2.6 3.4 4.6 2.2 2½

Annual percentage change

Sources: UN/DESA.a Partly estimated.b Forecasts.c Calculated as a weighted average of individual country growth rates of gross domestic product (GDP), where weights are based on GDP in 1995 prices and exchange ratesd Employing an alternative scheme for weighting national growth rates of GDP, based on purchasing power parity (PPP) conversions of national currency GDP into international

dollars (for explanation, see the introduction to the statistical tables in the World Economic and Social Survey 2001).

ing a balance-of-payments shock that is likely to persistin 2002.

Unemployment is on the rise in the overwhelmingmajority of countries, with little improvement foreseen in2002. In 2000 and early 2001, unemployment fell in mosteconomies, reflecting not only improved economicgrowth after the setbacks of 1997-1998, but also structur-al reforms of labour markets in some cases. Nevertheless,for many developing economies in Asia, the recovery inlabour markets was insufficient to reduce unemploymentrates to the levels prevailing before the Asian crisis andwas short-lived. Since mid-2001, the global economicdeterioration has aggravated the high levels of unemploy-ment in this region, as well as in other developing coun-tries. In the developed economies, the improvements inunemployment rates over the past few years also began tobe reversed in the second half of the year, with the unem-ployment rate in the United States rising from its recenthistorical lows and that in Japan breaking its record

highs. One exception to the global trend is the RussianFederation, where unemployment fell in 2001 and realwage rates increased. In addition to the cyclical weaknessin most labour markets, structural unemployment remainshigh in many economies.

Inflation is not an imminent global concern; to the con-trary, deflation remains worrisome in a number of coun-tries. After a mild upturn in inflation during the first halfof 2001, caused by the pass-through of higher prices ofenergy in the previous period and increased food prices,the majority of developed countries experienced disinfla-tion as a result of weakening global demand, falling pricesof primary commodities, particularly oil, growing excesscapacity in manufacturing, rising unemployment andincreasing international competition. For most developingcountries and economies in transition, restrictive policieswere successful in controlling inflation. Relatively stableexchange rates also contributed to the non-inflationaryenvironment; even for the few countries whose currencies

3G L O B A L O U T L O O K

Table I.2.DEVELOPING COUNTRIES: FREQUENCY OF HIGH AND LOW GROWTH OF PER CAPITA OUTPUT, 1999-2002

Number of Growth of GDP per capitacountries Decline in GDP per capita exceeding 3 per centmonitored 1999 2000 2001a 2002b 1999 2000 2001a 2002b

Number of countries

Developing countries 95 39 25 32 16 24 35 21 21of which:

Latin America 24 12 6 13 7 6 7 3 1Africa 38 15 15 9 4 7 8 10 9Eastern and Southern Asia 18 2 1 5 1 9 13 6 9Western Asia 15 10 3 5 4 2 7 2 2

Memo items:Least developed countries 41 17 17 12 13 8 7 8 9Sub-Saharan Africa 31 13 14 9 4 4 5 7 9

Percentage of population

Developing countries 95 22.5 6.5 11.2 4.2 63.0 74.3 59.3 59.7of which:

Latin America 24 69.1 11.8 42.9 13.9 25.2 59.7 4.9 0.2Africa 38 46.6 28.6 19.7 10.1 19.1 16.7 23.2 20.4Eastern and Southern Asia 18 6.7 0.2 1.7 0.0 83.4 90.6 80.6 82.7Western Asia 15 58.1 9.1 41.2 20.1 9.9 71.3 9.9 10.0

Memo items:Least developed countries 41 32.8 24.9 18.1 19.7 39.2 38.0 51.0 51.6Sub-Saharan Africa 31 43.2 38.0 29.6 13.8 13.6 9.7 28.6 33.4

Source: UN/DESA, including population estimates and projections from World Population Prospects: The 2001 Revision (United Nations publication, Sales No. E.01.XIII.8).a Estimates.b Forecasts.

depreciated, there was little pass-through to domesticprices, with the exception of Turkey. These factors areexpected to sustain global disinflation in 2002. For mostdeveloped economies, inflation rates are expected to fallbelow 2 per cent and many developing countries andeconomies in transition are expected to achieve a furtherdecline in inflation. In a small but increasing number ofeconomies, notably Japan and a few Asian countries,fighting deflation has become the challenge.

The outlook for 2002 encompasses unusual caveats,particularly in terms of international political or militarydevelopments regarding terrorism. On the economicfront, the high dependency of the global economy on therecovery of the United States involves risks because ofthe country’s persisting imbalances. For example, equityprices, although somewhat lower, are still above tradi-tional benchmarks; household saving rates are still at anextremely low level; and private sector debt is at histori-cal highs. Internationally, the country’s external deficitshave diminished somewhat but remain large and the risksof an abrupt adjustment in the trade imbalances amongmajor economies and of a sudden fall in the value of thedollar remain.

There are also downside risks in other economies. Thedeep recession and the protracted financial difficulties inJapan, the world’s second largest economy, create down-side risks not only for Japan itself, but also for manyAsian developing economies and for the global financialsystem. The depreciation of the Japanese currency at theend of 2001 has also placed pressure on other currenciesin Asia and will create difficulties for their export sectors.Elsewhere, the debt crisis in Argentina had limited finan-cial contagion effects for other developing countries in2001, but the country’s continued recession and the lackof a resolution to the crisis was giving rise to a largeamount of uncertainty in financial markets and was hav-ing adverse effects on other countries in the region at theend of 2001.

SOME KEY ISSUES ON THE INTERNATIONALPOLICY AGENDA

Developments in 2001 underlined once again the highdegree of interdependence between developed and devel-oping countries. The global economic slowdown hasbecome deeper and more widespread than anticipatedand has fully enveloped the developing countries, addingto the difficulties that remained from the disruptions ofthe la te 1990s. For the developing countr ies andeconomies in transition, global linkages have amplifiedthe impact of the vicissitudes in world economic growthin the past few years. Moreover, the impact has oftenbeen asymmetric, with most developing countries tend-

ing to benefit less than the leading developed economiesin the upturns but suffering equally, or more so, in thedownturns. A continuation of this pattern of growththreatens the attainment of the Millennium DevelopmentGoals, notably the target of reducing the number of poorby half by 2015.

These developments suggest that the current chal-lenges for policy makers worldwide are not only to extri-cate the global economy from the current slowdown, butalso to seek more balanced and stable global growth inthe longer run. Maintaining accommodative macroeco-nomic policies, particularly in major developedeconomies, is crucial for securing the recovery. However,it is equally important to also sustain the longer-termagenda that seeks to ensure that developing countries andeconomies in transition can participate more effectivelyin the globalized world economy and become less vulner-able to its periodic gyrations. This requires both contin-ued reform in the developing countries and economies intransition themselves and strengthened international eco-nomic cooperation. In 2001, there was increasing recog-nition of the need for further reforms in the internationaltrade and financial systems and for an increase in finan-cial transfers to poor countries. The following are some ofthe areas where progress needs to be consolidated andcarried forward in 2002 and subsequent years.

International Conference on Financing for Development

I t is widely accepted that the at ta inment of theMillennium Development Goals will require additionalresources, new approaches and a new partnership amongall development stakeholders. The overall objective ofthe Internat ional Conference on Financing forDevelopment, to be held in Monterrey, Mexico, in March2002, is to identify the common ground on these issues,in particular to promote innovative thinking and initiateconsideration of new proposals for financing for devel-opment. One broad goal is to agree on a number ofnational policies and institutional changes that willimprove the mobilization of domestic resources fordevelopment within developing countries. A necessarycomplement will be to agree on the policies and institu-tions necessary to mobilize additional private and publicinternational resources to support developing countriesin their development efforts. In addition, the Conferencewill consider issues related to the international financialarchitecture, global economic governance and the role ofthe United Nations and the United Nations system inensuring general policy coherence and coordination.

Within this agenda, some of the specific issues to beconsidered include facilitating access to financial servic-es by low-income people, particularly women, in devel-

W O R L D E C O N O M I C S I T U A T I O N A N D P R O S P E C T S 2 0 0 24

oping countries; building investor confidence in directand portfolio investment in emerging economies; boost-ing support for development as a guideline in internation-al trade policy negotiations; significantly raising the vol-ume and efficiency of official development assistance;helping to devise mechanisms to address external debtcrises; enhancing international cooperation to combatcorruption; addressing various multinational tax matters,including reducing evasion; and raising the participationof developing countries and other relevant stakeholders inthe consensus building needed for coherent and consis-tent international policy on financing for development.

Strengthening the Heavily Indebted Poor Countries(HIPC) Initiative

Despite the progress to date, challenges to expeditiouslycomplete the HIPC Initiative remain. One is to ensurethat eligible countries reach the completion point as expe-ditiously as possible. A second is to help more countries,especially those emerging from conflict situations, toqualify for relief under the Initiative. Another is to ensuresufficient flexibility in the programme so as to assistcountries whose debt situation is worsened by shocks,such as natural disasters or a fall in the prices of com-modity exports. A fourth is that the low level of fundingof the HIPC Trust Fund could impede debt relief: as ofNovember 2001, paid-in contributions totalled only 41per cent of the pledged amount. Additional efforts arerequired to mobilize the resources necessary to imple-ment the Initiative fully.

Rethinking the role of private creditors in debt crises

Since the 1997-1998 international financial crises, therehas been growing consensus among Governments on theneed to improve arrangements for “private sectorinvolvement” (PSI) in the prevention and resolution ofsuch crises. This led to an agreement at the 2000 IMF-World Bank Annual Meetings on a voluntary and non-binding framework that employs a case-by-caseapproach, based on an assessment of each country’s bal-ance-of-payments situation and prospects for regainingaccess to international capital markets. The basic princi-ples of the framework are that the use of official financ-ing in resolving crises should be limited and that privateinvestors and creditors should bear the consequences oftheir decisions.

The application of the framework has brought mixedresults thus far.2 The major lesson after a number of casesis that the present arrangements do not guarantee anorderly and timely solution to debt crises. No acceptedmechanism has emerged to treat the sovereign debt ofmiddle-income countries that cannot pay. The lack of alegal infrastructure for changing debt-servicing obliga-

tions encourages debtors to postpone necessary restruc-turing for as long as possible in the hope that their pay-ment capacity will recover. At the same time, uncertaintyabout how the 2000 framework would be applied has con-tributed to the widening withdrawal of private creditorsfrom emerging markets.

In the face of the debt crises in Turkey and then inArgentina, there is now increasing support for a system-atic, rule-based approach, rather than the present ad hocarrangements. There is a growing appreciation that anarrangement akin to an international bankruptcy proce-dure could establish a clear set of rules for how sovereignborrowers with debt problems should negotiate with cred-itors over debt rescheduling. This would reduce uncer-tainty and this, in turn, could enhance the sustainabilityof capital flows to emerging markets.

While many proposals have been made, no specificplan is widely accepted. The First Deputy ManagingDirector of the International Monetary Fund made a pro-posal in November 2001.3 According to this proposal, aGovernment would be allowed to come to the IMF andrequest a temporary standstill on the servicing of its debtswhile it negotiated a rescheduling or restructuring with itscreditors. If the Fund agreed, the country would be grant-ed protection from those creditors for a limited period oftime in exchange for entering into negotiations with itscreditors, while adopting sound economic policies. Duringthis period, it could impose capital controls to stem capi-tal flight. Unlike the present framework, the proposalwould create a mandatory process for restructuring. It hasbeen argued that the very existence of the opportunity toinvoke this process would create incentives for a debtorand its creditors to reach timely agreement on their ownaccord without the participation of the official sector.

Other proposals have been made by official authorities,non-governmental organizations, academics and privatesector financial professionals. The formulation of policy isthus at an early conceptual stage, with various proposalsbeing critiqued and sharpened. However, the imperative towork on this issue at the international policy level hasbeen recognized and the need is to arrive at a consensusaround a workable solution as soon as possible.

Implementing the Doha work programme

International trade can make an important contribution toeconomic growth and development but many developingcountries have confronted difficulties in taking advan-tage of the opportunities that international trade canoffer. Many developing-country concerns regarding theinternational trading system that were raised in the ThirdWTO Ministerial Meeting in Seattle and reaffirmed inthe Plan of Action adopted by UNCTAD X in Bangkokin February 2000 are included in the new WTO agenda,providing an opportunity to improve developing coun-

5G L O B A L O U T L O O K

tries’ effective participation in international trade (seechapter II). However, the outcomes of the Doha Meetingconstitute only the starting point of a negotiation processand the numerous provisions that reflect the concerns ofthe developing countries will have to be given substancein the agreed negotiations and other elements of theWTO work programme. Many developing countries willneed assistance to engage in these negotiations meaning-fully, as well as to implement the agreed conclusions.

Particular attention will need to be given to the long-standing issue of provisions for special and differentialtreatment that take into account the development perspec-tive of developing countries. At the same time, the WTOagenda is expanding to incorporate so-called ‘new’ issuesbrought forward at the 1996 WTO Ministerial Conferencein Singapore (investment, competition, government pro-curement, and trade facilitation). Some believe that fur-ther liberalisation in these areas will help developingcountry participants to attract foreign investment and toimprove the operation of their economies, while alsoimproving and securing access to other markets. Othersbelieve that negotiations on these new issues do not nec-essarily create new opportunities for developing coun-tries, but will impose burdens that these countries are ill-prepared to bear. The challenge will be to strike the rightbalance and to provide adequate support and safeguardsduring and after negotiations in these areas.

In the meantime, there is scope to build further onsome recent initiatives. The United States’ Africa Growth

and Opportunities Act and the European Union’sEverything But Arms initiative, whereby Member Statesagreed to provide duty and quota-free access to mostgoods from the least developed countries (LDCs), wereimportant steps forward but need to be followed by simi-lar action by all developed countries. In addition, becausetheir overall development and supply-side constraints willlimit the LDCs’ ability to use these new opportunities inthe short term, initiatives such as the IntegratedFramework for Trade-related Technical Assistance toLeast Developed Countries (IF), which aims to addresssupply-side and domestic trade policy limitations, shouldbe used in order to ensure that the poorest countries areable to participate effectively in, and benefit from, theglobal trading system.

Notes

1 See chapter 1 of World Economic and Social Survey 2001(United Nations publication, Sales No. E.01.II.C.1).2 For details, see World Economic and Social Survey 2001,pp.51-53.3 Anne Krueger, “International Financial Architecture for 2002: ANew Approach to Sovereign Debt Restructuring”, Address to theNational Economists’ Club Annual Members’ Dinner,Washington, D.C., 26 November 2001 (available athttp://www.imf.org).

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SLOWING INTERNATIONAL TRADE

World trade decelerated dramatically over the course of2001, growing by less than 1 per cent in terms of the vol-ume of world total exports, a significant decline fromgrowth of over 11 per cent in 2000 (see table A.9). Thisslowdown emanated primarily from the decline in globaldemand for ICT-related products, particularly in majordeveloped economies. As the weakness in the globaleconomy intensified in the second half of the year, exac-erbated by the terrorist attacks, a general reciprocalreduction in import demand across nations led to a sharp

dwindling in all trade categories: manufactured goods,primary commodities, and services. With a gradualrecovery in global economic activity over the course of2002, world trade is expected to pick up; however, theuncertain prospects for the ICT sector, the slow recoveryof investment and the obstacles to commerce created byenhanced security measures mean that the growth ofinternational trade is likely to be in the region of only 3per cent.

The import demand of developed economies, particu-larly of the United States, remains the key for the dynam-ics of world trade. The aggregated imports of developed

7I N T E R N A T I O N A L T R A D E A N D F I N A N C E

CHAPTER II: INTERNATIONAL TRADE AND FINANCE

International economic linkages increased in the 1990s and were one of the driv-ing forces for economic growth during the decade. In 2001, their role wasreversed as they transmitted economic weakness across nations, resulting in asynchronized global slowdown. With these enhanced global linkages, the terror-ist attacks of 11 September, physically concentrated in only two cities, weretransformed into worldwide economic shocks.

Amidst the global slowdown, the international economic environment deteri-orated in 2001, particularly for many developing countries and economies intransition: international trade stagnated at the global level and declined signif-icantly for many countries; the international prices of many commodities onwhich the exports of a large number of developing countries are still concen-trated fell substantially; net capital flows to developing countries remained at alow level; and the external financing conditions for these economies becamemore stringent. While some improvement is expected, many developing coun-tries and transition economies continue to face a challenging external situationin 2002.

Despite these discouraging short-term developments, some international poli-cy developments augur well for the longer term. The Fourth Ministerial Meetingof the WTO was successful in setting an agenda for international trade negotia-tions, with the prospect that these might particularly address some of the diffi-culties confronting developing countries and economies in transition. Therewere also tentative signs of a strengthening of international financial coopera-tion, including a possible bottoming out of flows of official development assis-tance and greater attention to the need for a clear framework for private sectorinvolvement in external debt crises.

economies as a group registered virtually no growth in2001. Imports of the United States declined by more than3 per cent, leading to a negative contribution of about 1per cent to world trade.1 The decline in import demandwas led mainly by the contraction of investment spend-ing, but the terrorist attacks had also caused severe dis-ruption in trade, with the value of United States’ mer-chandise imports dropping by 14 per cent in September2001 compared to the same month of the previous year.The growth of European Union imports also deceleratedas early as the first quarter of 2001. Despite some cush-ioning from the appreciation of the euro, the declineaccelerated in the second half of 2001. Excluding intra-EU trade, imports of EU from the rest of the world wereeven weaker. Meanwhile, import demand in Japan weak-ened continuously during the course of 2001, along witha significant decline in exports and a prolonged contrac-tion in industrial production. The weakness intensified inthe second half of the year: the slowdown in the ICT sec-tor resulted in reduced demand for related parts andimports of other goods, and services also decreased.

The prospects for a rebound in import demand fromthe major developed countries remain lacklustre in 2002.The anticipated economic recovery in most developedeconomies, at least in the early phase, will be drivenmainly by policy stimuli; corporate capital spending isexpected to remain weak until late 2002, while privateconsumption is expected to remain moderate.

Import demand in most economies in transition wasrobust in 2001. Recovery in domestic demand in manyeconomies in this group fuelled imports, with investmentgoods accounting for a large share. Except Poland, mosteconomies in the group registered double-digit growth ofimports in 2001, although a slight deceleration was witnessedcompared with 2000. A further moderation in the growth ofimports for the group is expected for 2002, as the weaknessin the external sector of these economies accumulates.

The deceleration in imports was more significant fordeveloping countries than for other groups, a swing fromgrowth of 16 per cent in 2000 to less than one per cent in2001. A general trend of weakening domestic demandwas a common reason for the sharp decline in the growthof imports in many developing countries, with other fac-tors varying from country to country. For manyeconomies in Asia and Latin America, which have largeshare of intra-industry trade, or so-called “processingtrade”, a slowdown in the demand from the rest of theworld, particularly from major developed countries, ledto a slowdown of the same magnitude in the imports ofraw materials and intermediate goods. For many com-modity-exporting countries, a deterioration in their termsof trade restrained their import demand. Meanwhile,reduced external financial flows (see below) also curbedimports in some developing countries. Only a moderate

recovery to about 5 per cent in the growth of imports isexpected for developing countries in 2002, as theimprovement in both income and the terms of trade formost of these economies will be limited.

Export performance was homogeneously weak acrossmajor developed countries in 2001. Both North Americaand Japan registered outright declines in the volume ofexports of 3 and 5 per cent respectively, while WesternEurope’s growth was less than 3 per cent, including intra-regional trade.

Many economies in transition maintained a double-digit growth of exports in 2000, partly because of the rel-atively low exposure of their exports to the markets ofmajor developed countries—more than one third of theirexports were within the group. Meanwhile, with improve-ment in both the quality and the composition of theirexports, many economies in Central and Eastern Europehave gained market shares in Western Europe. At thesame time, the continued stabilization and recovery of theRussian economy has generated more synergy for inter-national trade among many economies in transition.

The export performance of the developing countriesvaried, but a large number of them suffered a doubleblow: a decline in the volume of exports combined with adrop in the prices of their exports. For example, both thevolume and the value of East Asia’s total exports fell in2001, with export values declining most, largely becauseof the plunge in both the demand and the prices of ICTproducts.2 The export slowdown in the Republic of Korea,Malaysia, the Philippines, Singapore and TaiwanProvince of China,3 was particularly sharp, and the highdegree of intraregional industrial linkages exacerbatedthe set back to trade in East Asia.4 The situation was notunique to the economies with a large share of ICT prod-ucts in their exports. Many economies in Latin Americaand Africa, where exports consist to a greater extent ofgeneral manufacturing goods and/or primary commodi-ties, also experienced a decline in both the prices and thevolume of their exports, although to a lesser degree.Many oil-exporting countries faced the same situation asthey cut the volume of exports when the prices of oil fell,although a few non-OPEC countries managed to main-tain, or even to increase, their volume of exports.

As developing countries have increased their share ofexports in the global economy,5 none of them could beimmune to such a deep and broad external demandshock, but a number of them have attempted to alleviatethe situation by various measures. For example, inAfrica, currency depreciation in several countriesimproved export competitiveness and provided a stimu-lus for exports. Non-traditional exports (such as horticul-tural products) increased in several countries, while oth-ers benefited from increased exports of textiles andclothing as a result of the improved access to the United

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9I N T E R N A T I O N A L T R A D E A N D F I N A N C E

States market provided under the Africa Growth andOpportunity Act (AGOA). Privatization led to efficiencygains and increased exports in some minerals-producingcountries. Meanwhile, a few countries were able to takeadvantage of the weaker international prices of somecommodities to increase export volumes and thus sustainexport revenues.

Matching the projected mediocre recovery of importdemand in major developed economies, the outlook forglobal export growth remains weak in 2002. The growthof exports of the major developed economies willimprove only moderately in 2002, the momentum of therelatively strong exports from the economies in transitionis expected to soften, and the pace of exports for manydeveloping countries will remain far below their averageperformance of the last decade.

The large fluctuation in international trade has beenaccompanied, as almost always, by considerable adjust-ments in external balances across countries. Among themajor developed economies, the United States, as expected,reduced its external deficits from $450 billion to about $400billion in 2001, but the remaining deficit is still large enoughto be an unstable factor for the world economy. WhileWestern Europe improved its external balance moderately,Japan’s surplus dwindled by more 15 per cent. For a major-ity of developing countries and economies in transition, theimprovement in their external balance in 1999-2000 fromthe 1997-1998 international crises reversed markedly during2001. A further deterioration in the external balance for thegroup of developing countries and economies in transition islikely in 2002, posing a challenge for these economies.

SOFTENING INTERNATIONAL COMMODITY PRICES

The prices of oil exhibited considerable volatility in thefinal months of 2001. For the year as a whole, the priceof Brent crude oil averaged $24.5 per barrel (pb) but isexpected to decline to about $20 dollars pb in 2002. Thedecline primarily reflects weak demand, strained cohe-sion within the Organization of the Petroleum ExportingCountries (OPEC), and increased supply from non-OPEC producers.

Prior to the terrorist attacks of 11 September, oil pricesin 2001 fluctuated within the OPEC target range of $22 to$28 pb,6 partly due to OPEC cutting its production quotasthree times by a total of 3.5 million barrels per day (mbd)(see figure II.1). Developments since the terrorist attackshave posed OPEC with a dilemma. Prices far below thetarget range would constrain spending and aggravate fis-cal imbalances in most member countries. Overly aggres-sive quota policies in the context of a global slowdownand a campaign against international terrorism wouldalienate major consumers. Furthermore, at the same timeas OPEC has cut production, non-OPEC producers haveincreased their output, undermining OPEC’s ability toinfluence prices. Responding to these challenges, OPEC’sministerial meeting on 14 November 2001 maintained thegoals of achieving market stability and minimizing pricevolatility and called for other oil-exporters to cooperatein order to meet these goals. OPEC announced a furtherreduction in production of 1.5 mbd, effective 1 January2002, subject to a firm commitment from key non-OPEC

Figure II.1.OPEC PRODUCTION QUOTA AND THE PRICE OF BRENT CRUDE OIL, JANUARY 2001-JANUARY 2002

Price of BrentOPEC quota

Million barrels per day Dollars per barrel

21

22

23

24

25

26

27

Jan-01 Feb-01 Mar-01 Apr-01 May-01 Jun-01 Jul-01 Aug-01 Sep-01 Oct-01 Nov-01 Dec-01 Jan-0215

17

19

21

23

25

27

29

31

Sources: International Energy Agency,Middle Eastern Economic Survey andIMF.

Note: OPEC refers to OPEC-10. Itexcludes Iraq.

January 2002 quota reflects the propos-al at OPEC’s ministerial meeting on 14November 2001.

oil producers to concomitantly reduce their production bya total volume of 0.5 mbd.

The incentive for the non-OPEC producers to avoid acollapse in prices is high. Their production costs general-ly exceed OPEC’s, and they rely heavily on oil for exportsand government revenues. For instance, half of Russianexport revenues are from sales of oil and gas. As of earlyDecember 2001, Mexico, Norway, and Oman had madeconditional pledges to cut their production by 100,000 bdbetween 150,000 bd, and 40,000 bd, respectively. TheRussian Federation, which initially had offered to cutexports by 30,000 bd, expanded its offer to 150,000 bd.Subsequent to these announcements, OPEC sought toensure that the cuts would endure beyond the first quarterof 2002 and at least until mid-2002.

The risks to the price forecast are primarily on thedownside and are generally related to potential increasesin supply. First, following the reduction in quotas in2001, OPEC’s share of the world oil market shrunk fromnearly 40 per cent at the end of 2000 to 34 per cent at theend of 2001, reducing the Organization’s leverage in themarket. At the same time, OPEC has nearly 5 mbd ofspare capacity. Additionally, OPEC was producing signif-icantly in excess of quotas in late 2001 – in October,overproduction was estimated at almost 1 mbd. Secondly,even though a cooperative effort involving non-OPECproducers appeared likely, past history indicates thatthere might be a difference between commitments andimplementation. Although the non-OPEC producers’pledge to curb production in 1999 had a positive effect onmarket sentiment and prices increased, the implementa-tion of their commitments, particularly in the case of theRussian Federation, was imperfect. In 2002, the marketmay be more wary of the credibility of the pledges made.

There are also some upside risks to the price forecast.First, the supply of oil from Iraq, which accounts foraround 3.5 per cent of global oil production, remainsuncertain. The oil-for-food programme was renewed foranother six months at the end of November 2001 but, inthe event of more discussions in the Security Council in2002 concerning revisions of the sanctions regime, thereis a possibility of further disruptions in the supply of oilfrom Iraq. Moreover, although events in Afghanistan havehad limited effects on oil prices so far, a spillover to othercountries could change the situation as demonstrated bythe Gulf crisis of 1990/1991.

Non-oil commodity prices fell by about 2.5 per cent,on average, in 2001 (see figure II.2). Prospects for 2002are for a slight price increase across most categories inthe non-fuel commodity index, as world demand andmanufacturing activity start to recover gradually, whileexcess supplies continue to moderate price increases inseveral markets.

Among the various commodity groups, the prices offoods and grains improved after the second quarter of2000. Nonetheless, this recovery ended towards the endof 2001, as the rate of increase of the price index of foodand grains decelerated during the year. Average food andgrains prices remain significantly below their level beforethe Asian crisis.

Trends, however, have been divergent among the maincomponents of the food category. For instance, the priceof sugar was affected throughout the past decade byincreasing production, particularly in Brazil, the largestproducer. After a strong upturn, which started in 2000 andlasted until the first half of 2001, the price of sugar fell inthe third quarter of 2001 due to increased stocks.Conversely, the price of bananas benefited from produc-tion cuts and growing demand from countries in Asia andCentral and Eastern Europe. The price increased by about45 per cent in 2001, but is expected to moderate signifi-cantly in 2002.

Grains have also shown different price trends: theprices of maize and wheat rose in 2001, whereas the priceof rice reflected the high level of stocks and continued todecline. All these major grains are forecast to post someincrease in prices in 2002 in view of the expected reduc-tion of stocks during the 2001-2002 season. Nonetheless,due to the continued relatively high level of stocks, theprice of rice is forecast to advance more moderately thanthe prices of maize and wheat in 2002.

The prices of tropical beverages continued to slide in2001. As in other commodity categories, trends have beenvery divergent among the main components of the group.For instance, due to supply restrictions in Côte d’Ivoireand strong demand from the Russian Federation and theCentral and Eastern European countries, cocoa pricesrecovered significantly in 2001. This recovery is expect-ed to continue in 2002. Conversely, the prices of tea andcoffee were weak in 2001. Tea prices suffered from theimpact of production increases, as well as the devaluationin Sri Lanka in 2001. Coffee prices have continuouslyfallen since 1998 and declined sharply in 2001, reflectingoversupply due to large crops in major producers, such asBrazil and Viet Nam, as well as the ineffectiveness ofsupply restriction measures—export retention attemptsby the Association of Coffee Producing Countries—in theface of declining world demand. The weakening of theBrazilian currency also contributed to the fall in coffeeprices in 2001. The decline is expected to moderate in2002 if normal weather conditions prevail; prices, howev-er, are not anticipated to recover in the near term.

The prices of vegetable oilseeds and oils have beenfalling since their recovery in 1998. They continued toweaken during the first half of 2001, mainly due to con-tinued production increases, particularly for soybeans and

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11I N T E R N A T I O N A L T R A D E A N D F I N A N C E

Figure II.2.PRICES OF PRIMARY COMMODITIES AND MANUFACTURES, 1998-2001

Sources: UNCTAD, Monthly Commodity Price Bulletin and IMF.

40

60

80

100

120

1998Q1 1999Q1 2000Q1 2001Q10

10

20

30

40

ManufacturesNon-fuel primary commoditiesPetroleum

40

60

80

100

120

1998 1999 2000 2001

Food

40

60

80

100

120

1998 1999 2000 2001

Tropical beverages

40

60

80

100

120

1998 1999 2000 2001

Vegetable oilseeds and oils

40

60

80

100

120

1998 1999 2000 2001

Agricultural raw materials

40

60

80

100

120

1998 1999 2000 2001

Minerals and metals

Indices of dollar prices, 1995=100 Indices of dollar prices, 1995=100

Indices of dollar prices, 1995=100 Indices of dollar prices, 1995=100

Indices of dollar prices, 1995=100 Indices of dollar prices, 1995=100

palm oil, the two largest components of this group.However, some encouraging signs were recorded towardsthe end of the year, as prices improved in the third quar-ter of 2001 (see table A.8). A small increase in productionis anticipated for the period 2001-2002, which, alongwith good demand prospects in China and India, suggestsa continued moderate recovery in prices in 2002.

The prices of agricultural raw materials did not sus-tain their limited gains of the second half of 2000 andearly 2001. The combined price index recorded a 5 percent decrease in the third quarter of 2001 when comparedwith the same period of the previous year, in a path thattends to follow the economic cycle more closely thanother agricultural commodity groups. The price of cottonis expected to have declined by about 12 per cent in 2001due to a record crop in the United States and increasedstocks. Due to expanded planting and stagnant globaldemand, prices are not expected to recover in 2002. Theprice of natural rubber also declined significantly in2001, reversing the gains of 2000. Despite large increas-es by China, world demand for natural rubber slowed sig-nificantly as production kept growing, notably in VietNam and Thailand. Nevertheless, a modest upturn indemand and a slower growth of supply are expected toreduce excess stocks and have a positive impact on pricesin 2002. A supply management arrangement is beingnegotiated among the three largest producers of naturalrubber—Thailand, Indonesia and Malaysia. The initia-tive, however, is unlikely to yield major results if the out-comes of similar cooperative arrangements for other agri-cultural commodities are used as indicator.

Prices of minerals, ores and metals declined in 2001(see table A.8), closely following the downturn in worldeconomic growth and the resulting increases in stocks.The combined price index of this commodity group isexpected to have declined by at least 8 per cent in 2001.Demand for aluminium and copper has been especiallyhurt by the downturn in key manufacturing activities,

such as the automotive sector in the case of aluminiumand the electronics sector in the case of copper. Lowerdemand from stainless steel makers led to a sharp fall inthe price of nickel in 2001. During the past few months,producers have been reacting to the lower prices by cut-ting output; this has brought supply more in line withdemand averting steeper price declines. As a result, somerecovery in the prices of copper, aluminium and nickelwas recorded towards the end of 2001. This notwith-standing, for the year as a whole, the price of copper andnickel are expected to have declined by between 14 and30 per cent, while the price of aluminium declined moremoderately, partly due to more substantial productioncutbacks and partially because of the electricity supplycrises in the United States and Brazil. Conversely, theprice of lead recovered moderately in 2001: the weakdemand in developed countries was met by tight supplyand stocks declined. The outlook for most metals andminerals is not encouraging, as prices will remain affect-ed by large stocks and the expected slow recovery ofworld manufacturing activity. Further cutbacks in supplymay be required to sustain prices in the near term.

REDUCED FOREIGN INVESTMENT FLOWSUNCTAD estimates just before the terrorist attacksshowed that world foreign direct investment (FDI) flowswere likely to decline by 40 per cent in 2001, to $760 bil-lion (see table II.1). This would represent the first drop inFDI flows since 1991 and the largest in three decades.7

Furthermore, to the extent that the world economy slowedmore than anticipated at that time and since FDI flowstend to be pro-cyclical, the decline in world FDI flows in2001 may be even larger than estimated and may dip tothe 1998 level of less than $700 billion.

The decline in FDI flows in 2001 is mainly the resultof the decline in world economic growth and, in particu-lar, in cross-border mergers and acquisitions (M&As).

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Table II.1.INFLOWS OF FOREIGN DIRECT INVESTMENT, BY REGION, 1998-2001

1998 1999 2000 2001a

World 693 1 075 1 271 760

Developed countries 483 830 1 005 510

Developing countriesb 188 222 240 225Africac 8 9 8 10Latin America and the Caribbean 83 110 86 80Asia and the Pacific 96 100 144 125

South, East and South-East Asia 86 96 137 120

Central and Eastern Europe 21 23 25 25including the countries

in the former Yugoslavia 22 25 27 27

Billions of dollarsSources: UNCTAD, FDI/TNC database.a Preliminary estimates, made on 3 September

2001, on the basis of 51 countries that account-ed for more than 90 per cent of FDI inflows in2000. The data cover the first two quarters orthe first several months of this year. Estimatesfor 2001 were derived by annualizing thesedata. See UNCTAD, "World FDI flows to dropthis year", Press release, TAD/INF/PR30 (18September 2001).

b Including the countries in the formerYugoslavia.

c If South Africa is included, the figures are 8 in1998, 10 in 1999, 9 in 2000 and 11 in 2001.

M&As account for the bulk of FDI and the dramaticincreases in cross-border M&As led to unprecedentedFDI flows during 1999-2000.8 A lull in the consolidationprocesses in certain industries through M&As (e.g.telecommunications, automobiles) also played a role. Thevalue of cross-border M&As completed between Januaryand 10 December 2001 stood at some $533 billion, aboutone half of the value during the same period of 2000.9

This dip in cross-border M&As is a reflection of a declinein the overall number of cross-border M&As, in particu-lar of large-scale deals.

During the period of January-10 December, the totalnumber of cross-border M&As declined from some 7,500in 2000 to 5,500 in 2001. During the same period, thenumber of cross-border deals worth over $1 billiondeclined to 100, worth $336 billion, compared to 163 and$812 billion, respectively, the year before. The significantincreases in FDI flows in 1999 and 2000 – by some 50 percent and 18 per cent, respectively – were driven by thesemega M&A deals, for example, the $200 billion acquisi-tion of Mannesmann (Germany) by VodafoneAirTouch(United Kingdom) in 2000 and the $60 billion deal ofAirTouch Communications (United States) and VodafoneGroup (United Kingdom) in 1999. The value of world-wide M&As (both domestic and foreign) in 2001 isexpected to be $1.6 trillion, half the value reported for theprevious year.10

The declining number of cross-border M&As wascombined with a lower average value because of lowershare prices. The exchange of shares had become impor-tant in financing M&A transactions; in 2000, shares wereused to finance some 56 per cent of cross-borderM&As.11 Falling share prices in 2001 dampened the abil-ity of firms to use equity as consideration in many poten-tial M&A deals.12 With the market value of all stocks list-ed in the six major stock exchanges falling by one-thirdin the first nine months of 2001(from $29 trillion at thepeak in 2000 to $19 trillion at the end of September2001),13 the nominal value of a given number of cross-border M&A deals also falls if shares are used to financeM&As, lowering the recorded value of the investment.

Lower share prices also make it difficult for companiesto raise funds in financial markets by issuing new stocks.As a part of these funds is used to finance FDI, the morelimited availability of funds can lead to a decrease in FDIflows. For example, Japanese TNCs financed some 30 percent of their capital expenditures in their affiliates in theUnited States and Europe with funds raised throughstocks (as well as corporate bonds) in 1998.14

The M&A-led decline in FDI flows in 2001 affectedmostly developed countries, with flows to developingcountries relatively unchanged. This is because cross-bor-der M&As are particularly important between developedcountries, while FDI through greenfield investment is

more important for developing countries. Consequently,UNCTAD estimates that FDI flows to developed coun-tries will fall to $510 billion in 2001 from $1 trillion in2000 (i.e. by about half), while FDI flows to developingcountries are expected to decrease by only 6 per cent,from $240 billion to $225 billion, between 2000 and2001.15 Decreases in FDI inflows are expected in bothLatin America and developing Asia, while FDI flows toCentral and Eastern Europe are expected to remain stablein 2001.

Assuming that the basic firm-specific conditions induc-ing outward FDI will remain the same, the most importanteconomic determinants of FDI flows are market size andmarket growth in the various countries or regions that areactual or potential investment locations for productionactivities by transnational corporations (TNCs).16 Evenbefore the terrorist attacks, a weakening of demand insome of the world’s largest economies had already had adampening effect on FDI. For example, a survey duringearly 2001 indicated that two-thirds of United StatesTNCs expected to maintain FDI in 2001 at the level of theprevious year, while 13 per cent were expected to cutFDI.17 This is in sharp contrast to 2000, when nearly 60per cent of United States TNCs were optimistic about theglobal environment and their FDI plans.

Despite this immediate dampening impact, the invest-ment plans of TNCs for the coming three years are stillpromising. Major TNCs plan to sustain the pace of theirinternational expansion.18 The expansion is likely tofocus on production and distribution functions and thepreferred mode of expansion continues to be cross-borderM&As in developed countries and greenfield investmentin developing countries. According to this survey, themost favoured locations for FDI by TNCs for the nextthree years are the United States, for developed countriesas a whole; Germany, the United Kingdom and France,for Europe; China, for Asia; Brazil, for Latin America;Poland, for Eastern Europe; and South Africa, for Africa(see table II.2). This survey gauged the attitudes of majorTNCs for the medium term, in light of the fact that directinvestment typically is motivated by longer-term consid-erations. Similarly, as many as 72 per cent of JapaneseTNCs said that they will strengthen and expand their for-eign operations, a jump of 55 per cent compared to theprevious year.19

The effects of the terrorist attacks of 11 September onFDI flows are difficult to gauge. Company surveys sug-gest that they would be limited.20 In October/November2001, the UNCTAD et al. survey revisited a number ofthe firms they had surveyed just before 11 September andfound that few expected to change their FDI plans in thelight of the attacks. Similarly, the Japan External TradeOrganization (JETRO) found in October 2001 that nearlyhalf of all firms surveyed did not expect to change their

13I N T E R N A T I O N A L T R A D E A N D F I N A N C E

FDI plans, with most of the balance not yet able to makean assessment (figure II.3).21 These findings are also con-sistent with a survey undertaken by A.T. Kearney inSeptember/October 2001: two-thirds of corporate execu-tives of the world’s 1,000 largest firms said that they stillintended to invest abroad at almost the same levels asalready planned, while 16 per cent said that their FDI in2001 would increase and 20 per cent said that it woulddecline.22

The impact of the terrorist attacks on FDI is likely tobe through their effect on economic growth, one of theprincipal determinants of FDI flows. In particular, if theattacks continue to aggravate the economic slowdown, itis likely that FDI flows will decline further. Such an addi-tional decline could be limited geographically. In particu-lar, companies and countries that rely heavily on UnitedStates markets may be affected more. For example, FDIoutflows from the United Kingdom – a good part ofwhich are being directed to the United States – areexpected to decline considerably in 2001, according toUNCTAD estimates. On the other hand, China willreceive record FDI inflows, fueled not only by continuedeconomic growth but also by the impact of China’s acces-sion to WTO. Industries in which FDI may be affectednegatively include transportation services, financial serv-ices and tourism because they were particularly affectedby the attacks. A number of companies are restructuring,being acquired or are going bankrupt. Difficulties of this

kind reduce the capacity of TNCs in these industries toinvest abroad.

More generally, the higher level of uncertainty createdby the attacks, including the perception of increasedpolitical risk associated with war and terrorism, mayinduce some companies to adopt a “wait-and-see” posi-tion and to delay planned investment until they gain a bet-ter comprehension of world economic prospects and thelonger-term impact of the attacks on the United States – apossibility reflected in the JETRO survey reportedabove.23

On the other hand, if the economic policy response tothe events helps to counteract the economic slowdown, itmay also help to stabilize FDI flows. Moreover, the slow-down in the world economy adds to competitive pressuresin many industries, forcing companies to enhance theircost-efficiency. Faced by more price-driven competition,some TNCs may expand production facilities in low-costcountries; in this case, there may be some redistributionof FDI flows towards developing countries. This effectcould be even stronger if developing countries continue toliberalize their regulatory regimes in order to attractFDI.24

On balance, the decline of FDI flows in 2001 is notlikely to be recouped in 2002. For developing countries,developments are likely to be uneven, with the overallresult difficult to predict. On the positive side, the poten-tial for FDI is far from exhausted in many countries and

W O R L D E C O N O M I C S I T U A T I O N A N D P R O S P E C T S 2 0 0 214

Table II.2.MOST-FAVOURED ECONOMIES BY REGION: SHARE OF RESPONSES CITING AN ECONOMY AS A PRIORITY LOCATION IN A REGION

Central and EasternEurope and

Commonwealth of Africa andDeveloped economies Developing Asia Latin America Independent States West Asia

Economy % Economy % Economy % Economy % Economy %

United States 27 China 27 Brazil 31 Poland 33 South Africa 17Germany 16 Indonesia 10 Mexico 20 Hungary 20 Egypt 12United Kingdom 12 Thailand 10 Argentina 15 Czech Republic 18 Turkey 8France 10 Malaysia 9 Chile 10 Russian Federation 11 Morocco 8Italy 6 India 9 Colombia 5 Romania 4 Nigeria 6Japan 5 Korea, Republic of 7 Peru 4 Bulgaria 4 Saudi Arabia 6Spain 5 Taiwan Province Bolivia 3 Ukraine 2 United Arab Sweden 3 of China 7 Venezuela 3 Other 7 Emirates 5Canada 3 Viet Nam 5 Other 8 Israel 2Ireland 2 Hong Kong, Angola 2Other 13 SAR of China 4 Other 4

Philippines 4Singapore 4Other 4

Percentage

Source: UNCTAD, "Transnational corporations expected to continue worldwide expansion, but full impact of economic slowdown stillunknown", Press Release, TAD/INF/PR27/Rev.1 (5 December 2001). Based on the survey conducted by UNCTAD/AFII/Andersen.

preliminary data for countries such as China, Mexico andSouth Africa suggest a substantial increase in FDI flows.Many developing countries have only started to allow FDIin utilities and other services, while others that havealready done so might benefit from “sequential” invest-ment following the initial privatization phase. Also, as thestock of FDI in developing countries is growing, thepotential for FDI through reinvested earnings from priorinvestments (especially in countries where high profitsare realized) is increasing. On the other hand, most devel-oping countries will not be able to de-link themselvesfrom global economic developments and their effects oninvestment.

In the longer run, the key is economic growth. To theextent that consumer confidence and economic growthcan be restored, FDI flows are likely to increase again.This is particularly the case because other basic factorsdetermining FDI flows – such as the quality of infrastruc-ture, the availability of skills and technological capacityin host countries – have not changed. Nor have the factorsdriving cross-border M&As in the international marketfor firms.25 And neither have the principal driving forcesof the growth of international production: the combina-tion of the liberalization of FDI regimes (which permitsand encourages the growth of FDI, supported further byactive efforts to attract investment), developments ininformation and communication technologies (whichmake it possible to manage worldwide affiliate networkson an ongoing basis) and competition between firms(which encourages them to seize the possibilities offeredby liberalization and technology).

HESITANT FINANCIAL FLOWS TO DEVELOPINGCOUNTRIES AND ECONOMIES IN TRANSITION

In 2001, there was a net financial flow to developingcountries and transition economies of almost $37 billion.This was tiny by the standards of the mid-1990s, butlarger than the amount in 2000 (see figure II.4). Almostall of the net inflow in 2001 was accounted for by netofficial financial flows, mainly because of the rise inassistance to countries in financial difficulties. FDI con-tinued to be the mainstay of net private financial inflowsalthough, as indicated in the previous section, it declinedfrom its level in 2000. Portfolio investment and otherinvestment, mainly bank credit, were the sources of sub-stantial net private financial outflows from developingcountries and transition economies in 2001. A recoveryin private financial flows to these countries is not expect-ed in 2002, although official financial flows may be fur-ther bolstered by an increase in multilateral assistance toeconomies adversely affected by the global economicslowdown and financial difficulties.

Private financial flows

Investor concern about risk rose in mid-2001 with grow-ing evidence of a global economic slowdown and the con-sequent deterioration of growth prospects for developingcountries and transition economies. The terrorist attacksand the deepening financial difficulties of Argentinatowards year-end exacerbated the situation. This was seenin both credit and equity markets and FDI flows.

15I N T E R N A T I O N A L T R A D E A N D F I N A N C E

Figure II.3.THE EFFECTS OF THE TERRORIST ATTACKS ON PLANS FOR FDI BY JAPANESE TNCs

Percentage

All industry

Manufacturing

Non-manufacturing

45.1

47.0

41.1 2.3

2.0

1.8

53.0

51.1

56.6

No change in plans Postponement of plans Undetermined at this stage

Source: Data provided by JETRO,International Economic ResearchDivision.

Note: On the basis of 659 JapaneseTNCs that responded to this question inthe survey conducted by JETRO inOctober 2001.

In July and August, financial uncertainties inArgentina and Turkey and the strong spillover effect onBrazil increased the perception of investment risk in thesemarkets and, to a lesser extent, in other emerging mar-kets. This was reflected in the widening spreads betweenthe yields on international bonds of Turkey and LatinAmerican countries and the yield on United StatesTreasury bonds, the risk-free benchmark (see figure II.5).After the terrorist attacks, already-high investor risk aver-sion rose sharply, raising spreads again and thereby fur-ther deterring borrowing. Although there was a subse-quent improvement in sentiment towards investment insome emerging markets, creditors largely took defensivepositions by selecting investment-grade issues.26

Argentina’s announcement in November of a proposalto restructure its public debt to avoid default and its sub-sequent imposition of banking and exchange controls toprevent a collapse of the banking system were additionalnegative developments for financial flows to emergingmarkets. The immediate effect on investment risk beyondArgentina and its major trading partner, Brazil, was mod-est. Nevertheless, uncertainty about the vulnerability ofinternational bonds to forced restructuring by sovereigndebtors, such as Argentina, placed a chill on investment inemerging market debt.

A number of emerging market economies faced diffi-culty in rolling over maturing bonds with new issues inlate 2001, and this is expected to persist into 2002. Theresult was large net outflows from Argentina and Turkeyand a decline in net bond financing for Brazil. The over-all credit flow from the issuance of bonds by emerging

markets as a group was sharply lower in 2001 as a result.With the outflow of funds to banks exceeding the

inflow in 2001, international banks reduced their expo-sure to emerging market economies, continuing a trendsince the Asian financial crisis. Paralleling the bond mar-kets, there were large net repayments by Argentina andTurkey, substantial but declining repayments by Asianeconomies and only modest net bank lending to otheremerging market economies.27 At the same time, slowingeconomic growth reduced demand for credit and currencyweakness in some developing countries deterred foreigncurrency borrowing. In addition, high liquidity levels indomestic banks in regions other than Latin Americaboosted local borrowing. Loan activity was further sub-dued after the terrorist attacks owing to the postponementof loans and the “flight to quality”.28

Net portfolio equity investment flows to emergingmarkets in 2001 were substantially lower than in the pre-vious year, especially following the terrorist attacks.Price declines in emerging equity markets began early inthe year in parallel with markets in developed economiesand intensified after mid-year as a result of the deterio-rating global economic growth prospects followed by theterrorist attacks. This raised the cost of new equityfinancing while weakening economic conditions souredthe outlook for profits. Equity prices in oil-exportingcountries, such as Malaysia, Mexico and the RussianFederation, rose because of strong oil prices during mostof the year, but prices in countries facing balance-of-pay-ments difficulties and in economies whose exports aremost vulnerable to the global economic slowdown suf-

W O R L D E C O N O M I C S I T U A T I O N A N D P R O S P E C T S 2 0 0 216

Figure II.4.NET FINANCIAL FLOWS TO DEVELOPING AND TRANSITION ECONOMIES, 1991-2001

Billions of dollars

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001c

0

50

100

150

200

250

300

-50

-100

-150

Total net flowNet direct investmentNet portfolio investmenta

Other net investmentb

Net official flows

Sources: International Monetary Fund,World Economic Outlook database (on-line), December 2001 and UN/DESA.a Including portfolio debt and equityflows.b Including short- and long-term banklending. It may include some officialflows owing to data limitations.c Estimate.

fered declines. Primary equity issuance by emerging mar-ket firms was negligible in late 2001 as many plannedissues were delayed or cancelled. Issuance in 2002 is notexpected to rebound substantially, given the expectedcontinued weakness of overall economic and financialmarket conditions.

As elaborated in the preceding section, FDI alsodeclined in 2001, although it remained the main source ofnet private financial flows to developing countries andtransition economies for the fourth consecutive year.

Official financial flows

A new round of financial rescue packages for countriesin financial distress spurred the increase in official flowsin 2001. Nevertheless, the International Monetary Fundremained a net recipient of funds from the developingcountries during the first nine months of 2001, althoughon a markedly reduced level compared to the same peri-od of 2000 ($2.4 billion versus $7.2 billion). The releaseof about $4.7 billion of the $15.5 billion stand-by facilityto Brazil and sizeable drawings by other countries, suchas Turkey, against stand-by facilities approved in previ-ous years were the major disbursements. Loan repay-ments by previously crisis-affected countries of Asia andby the Russian Federation have begun to wind down. Thetotal net flow of funds to the IMF from the transitioneconomies also declined sharply as disbursements rose intandem with higher loan commitments.

Net lending by the World Bank rose moderately in2001, although concessional loans from the Bank’s

International Development Association (IDA) rosestrongly owing to a sharp rise in lending to Africa duringthe year. The sizeable disbursements to Ethiopia in sup-port of post-conflict rehabilitation and to Kenya in sup-port of its structural adjustment programme contributedto the increase. IDA disbursements included severalAfrica-wide programmes, such as a concerted response tothe HIV/AIDS crisis, and assistance early in the year tocountries to adjust to high oil prices.

Net flows from the regional development banksincreased as well, led by the European Bank forReconstruction and Development whose net disbursementsnearly doubled during the first three quarters of 2001.

Data on official development assistance (ODA) in2001 were not available at the time of writing. In the pre-ceding year, ODA declined by 6 per cent in nominal termsto $53 billion.29 This was equivalent to 0.22 per cent ofthe GNP of the member countries of the DevelopmentAssistance Committee of the OECD, the lowest ratio everrecorded. At the meeting of the Joint MinisterialCommittee of the Boards of Governors of the Bank andthe Fund (Development Committee) in Ottawa on 18November 2001, ministers agreed that a substantialincrease in ODA levels was needed to enable the low-income countries to take advantage of opportunities aris-ing from their implementation of sound policies. Severalministers pointed to the need to reach the target of 0.7 percent of GNP called for in various United Nations forums.

The outlook for concessional lending by the WorldBank for the fiscal years 2003-2005 improved as negotia-tors sought to complete agreement on the thirteenth

17I N T E R N A T I O N A L T R A D E A N D F I N A N C E

Figure II.5.YIELD SPREADS ON EMERGING MARKET BONDS, 2 JANUARY 2001-30 NOVEMBER 2001

Percentage points

0

2

4

6

8

10

12

14

Jan Mar May Jul Sep Nov

Russian Federation Turkey

Latin America Asia

Source: Data of J.P. Morgan Co., NewYork.

replenishment of IDA resources (IDA-13) by early 2002.For the first time in IDA history, borrower countries as agroup participated in the replenishment discussions in aneffort to strengthen the development partnership.

Meanwhile, to respond to the economic dislocationsresulting from the terrorist attacks, the World Bank isoffering additional long-term financial assistance.Additional credits may be provided to those countrieswhere adverse external factors dampen export demandand weaken commodity prices, on condition that thecountries are maintaining sound macroeconomic policiesand implementing reform programmes. For other strong-ly performing countries, the World Bank may acceleratethe preparation of new adjustment operations. In addition,beginning on 1 May 2002, borrowing countries withsound macroeconomic policies and good programmeimplementation will be able to avail themselves of the“deferred drawdown option” (DDO), which is, in effect, acontingent credit line to protect their core structural pro-grammes during times of reduced access to the financialmarkets.30 It will be available to countries qualified eitherto borrow from the World Bank or to use both Bankresources and IDA credits.

TRADE POLICY DEVELOPMENTS

The preparat ions for the Fourth WTO MinisterialMeeting in Doha, Qatar dominated trade discussions in2001. Other trade policy developments during the yearstemmed from the so-called ‘built-in agenda’ of theWTO. New negotiations on services and agriculture,envisaged when the WTO Agreement was approved in1994, were begun in 2000 and continued in 2001. Inaddition, there were talks within the WTO on otheraspects of the implementation of the results of theUruguay Round. There was also intensive debate insideand outside the WTO on the effects of the Agreement onTrade-related Aspects of Intellectual Property Rights (the“TRIPS Agreement”) on access to medicines to treatHIV/AIDS. Other developments included the continuingrapid growth in the number of regional trade agreementsand further progress towards enhanced assistance thatwould enable developing countries to participate moreeffectively in the international trading system.31

The Third United Nations Conference on the LeastDeveloped Countries (UNLDC III), held in Brussels inMay 2001, stressed the importance of enhancing marketaccess opportunities for LDCs and concluded with aProgramme of Action that praised the efforts of a numberof countries to improve market access for LDCs. It notedthe EU’s decision to extend duty and quota-free access tomost goods from the LDCs32 and encouraged other majordeveloped countries to do likewise. However, it was alsonoted that, with the exception of a few products, even

with such enhanced market access in place, LDCs’ capac-ity to use these new opportunities will remain stronglyaffected by, and linked to, domestic supply-side and pol-icy constraints, in addition to remaining market accessbarriers, such as rules of origin and non-tariff measures.

Given these constraints, for a large number of WTOdeveloping-country members the most challenging task inDoha was to make any new trade negotiations a ‘develop-ment round’ by ensuring that their concerns were reflect-ed in the negotiating mandates, i.e., in particular regard-ing implementation, TRIPS and public health, special anddifferential treatment, transfer of technology, trade, debtand finance, and technical cooperation.

Developments prior to Doha

Negotiations within the WTO on agriculture started inearly 2000 and continued during 2001 on the basis ofArticle 20 of the WTO Agreement on Agriculture. Onehundred and twenty one countries submitted variousnegotiating proposals during this period. The mostimportant issues on the agenda were tariff quota admin-istration, tariffs, export subsidies, export credits, statetrading enterprises, export restrictions, food security,food safety, and rural development. A number of propos-als referred to the need to eliminate tariff peaks and tariffescalation, particularly for products of export interest todeveloping countries.

On domestic support, many developing countriescalled for provisions that were more responsive to thosecountries’ specific needs and special situations, especial-ly with respect to food security, rural development andpoverty alleviation. Virtually all developing-countrynegotiating proposals called for the elimination of exportsubsidies. There were also proposals for improved meas-ures in favour of least developed and net food-importingdeveloping countries.

The planned negotiations on services entered into anext phase, following the adoption of the NegotiatingGuidelines and Procedures by the WTO Council for Tradein Services in March 2001. During 2001, negotiationswere extended to emergency safeguard measures(Article X); government procurement (