Economy: Tensions Could Turn Into Protectionism

Economy: Rising Tensions Could Degenerate Into Protectionism, Warns OECD-UNCTAD Report

G20 leaders must remain vigilant against the risk that tensions over current account imbalances could slow investment or degenerate into a protectionist spiral, according to the OECD and UNCTAD.

In their fourth report to the G20, the organisations find that most new investment measures taken from mid-May to mid-October by governments were aimed at facilitating and encouraging investment flows.

However, some countries have recently put in place capital controls and regulations to buffer their economies from foreign exchange volatility and capital flows. While such measures may serve legitimate purposes under exceptional circumstances, they could lead to a fragmentation of international capital markets along national lines, and may be difficult to dismantle once in place, says the report.

"Foreign exchange intervention is not the most helpful instrument for macro-economic management," OECD Secretary-General Angel Gurría said. "It can prompt countervailing intervention and may trigger new protectionist responses."

Besides steering clear of further intervention in currency markets, governments must also wind down emergency schemes as quickly as is prudent. Exit strategies should be transparent and accountable. While 12 G20 countries implemented emergency programmes for the financial sector, India is the only country to date that has fully dismantled them and retains no related assets or government guarantees.

"G20 countries have to respect the letter as well as the spirit of the anti-protectionist pledges they have made," Mr Gurría said. "Keeping international investment open in the months and years ahead will be key to a strong, sustainable recovery."

Looking ahead, the report warns that governments must remain alert to two principal dangers:

* Signs of intensifying protectionist pressures, as unemployment remains high in many G20 countries and tensions over exchange rates continue;

* The need to manage investment measures taken in response to the crisis. Countries must ensure that exit measures remain transparent and non-discriminatory against foreign investors.

Leaders of the G20, which comprises the world's largest economies, committed to resist protectionism and promote global trade and investment at summits in 2008, 2009 and 2010. They mandated WTO, OECD and UNCTAD - the leading international organisations in the area of international trade and investment policies - to monitor policy developments and report publicly on countries' respect of their commitments.

This report has been prepared for the meeting of G20 leaders in Seoul, 11 - 12 November 2010. The previous report was issued in June 2010.

ENDS

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