TWN Info Service on WTO and Trade Issues
necessary to prevent deflationary spiral
This warning was issued by the UN Conference on Trade and Development (UNCTAD) in its annual flagship Trade and Development Report (TDR) released Tuesday.
"A continuation of the expansionary fiscal stance is necessary to prevent a deflationary spiral and a further worsening of the employment situation," said UNCTAD Secretary-General Dr Supachai Panitchpakdi in an overview to the report.
of a premature exit from stimulus in
[Meanwhile, in what appears to be a change from its traditional stance of structural adjustment preached and pushed on developing countries, the International Monetary Fund has come out in favour of governments adopting policy measures to promote employment-generating growth.
[According to a report
in the New York Times, speaking at an ILO employment conference in
[The IMF chief economist, Olivier J. Blanchard, was also reported by the NYT as advocating that "countries that need to rebuild credibility (in the markets) should first re-allocate spending to get long-term unemployed and young people back into the labour market." - SUNS]
According to the TDR, the world economy appears to be recovering from its worst crisis since the Second World War. After a marked slowdown in 2008 and a real contraction of almost 2% in 2009, global GDP is expected to expand by about 3.5% in 2010.
This would mean a return to pre-crisis growth rates in most regions, with the exception of the European Union (EU) and some transition economies where a resurgence of growth is proving to be much slower.
However, the report adds, these prospects are no reason for complacency: the exit from recession may seem to have been rapid but it is unlikely to be either strong or durable if it continues to be based on temporary factors, such as inventory cycles and exceptional fiscal stimulus programmes, and if the underlying causes of the crisis are still in place, such as unregulated financial systems, income inequality and global imbalances.
In developed economies, the rescue packages initiated by governments in 2008 and 2009 prevented the collapse of financial markets, while supportive fiscal and monetary policies partially compensated for sluggish private demand. With some exceptions (e. g. Finland, Greece, Iceland, Ireland, Italy, Spain and the Baltic countries), developed economies returned to positive growth rates between the second and the fourth quarter of 2009.
It is estimated that
in 2010, growth rates will be close to 3% in
According to the report, the main reason is that, in general, final domestic demand remains weak owing to continued high unemployment and low private consumption. Investment remains discouraged by idle productive capacities, uncertain future demand and more difficult access to credit. Indeed, it is likely that balance-sheet adjustments in financial and non-financial private sectors will continue to dampen domestic demand.
Several developed countries
seem to be promoting net exports as a possible driver of growth. Very
dynamic regional growth in Asia, and the resultant strong demand, contributed
most to the significant export-led recovery of
The report notes that the financial turmoil had little effect on low-income countries that are largely excluded from international financial markets (such as South Asian and sub-Saharan African countries) and on emerging-market economies that had avoided large external deficits and accumulated significant international reserves in the years prior to the crisis.
This not only gave their governments enough policy space to conduct counter-cyclical macroeconomic policies, but also their previously accumulated reserves provided a buffer against the financial shock-waves and helped them to pre-empt exchange-rate and banking crises.
As a result, most Asian and Latin American emerging-market economies were able to contain a rise in unemployment and achieve rapid recovery of domestic demand, which appear to be the main drivers of their growth in 2010. Latin American GDP is forecast to expand by some 5% in 2010.
Most South-East Asian
economies started 2010 with very rapid growth rates, sustained by both
buoyant exports and strong domestic demand. Even if some deceleration
is likely in the second half of 2010 and into 2011, the sub-region's
GDP should expand by some 7% in 2010. South and
Policies aimed at boosting
domestic demand in
Recovery has been weak
in the transition economies of Central and
International trade, which contracted sharply in both volume and value, was the main channel through which the crisis spread globally. The volume of world trade plunged by more than 13% in 2009. Given the overall fall in unit prices of trade (close to 11%), the decline in the value of trade in current dollars was even more pronounced, reaching 23% for the year.
Although the crisis-induced squeeze on trade credit played a role in reducing trade worldwide, the decline in domestic demand, amplified by the globally synchronized nature of the downturn since 2008, was the main cause of the slowdown in world trade in 2009.
Overall, says the report, world trade in goods could expand in volume by more than 10% in 2010, which would allow it to return to its pre-crisis levels. However, measured in current dollars, the recovery will take more time, as unit values in international trade remain, on average, clearly lower than their 2008 peaks.
It notes that after the collapse in demand for and prices of commodities in the second half of 2008 as a result of the global financial and economic crisis, most commodity prices rebounded in 2009. This upward trend continued partially into 2010, although the behaviour of prices in the first months of the year was fairly erratic, exhibiting some downward corrections in January-February and May 2010.
While the evolution of demand fundamentals in emerging-market economies certainly will have contributed to the upturn in the prices of a large number of commodities, it does not explain the magnitude of the price increases, which seems to have been excessive given the fragility of the recovery of the world economy during 2009.
An additional major factor that may have boosted commodity prices beyond market fundamentals was the strong presence of financial investors in these markets. After fleeing from commodity markets in the second half of 2008, financial investors returned in 2009, driven by their growing appetite for risk in response to indications of better prospects for global economic activity. The increasing attractiveness of commodities as an asset class has also been reinforced by ample liquidity and low interest rates.
The report finds that the volume of derivatives trading in non-precious metals increased by 132.8% in 2009, while it rose by 12.9% for energy products and by 3.7% for agricultural products. According to Barclays Capital (2010), in 2009, commodity assets under management rose to an all-time high year-end value of $257 billion - representing the largest annual increase on record - with inflows of $68 billion. This has contributed to a 42-fold increase in commodity assets under management over the past decade. The rising trend in commodity investments is expected to continue through the next decade.
In general, commodity prices have remained highly volatile, and their future evolution is extremely uncertain. "As long as excessive speculation on commodity markets is not properly contained, the strong presence of financial investors will continue to add instability to these markets, as investors tend to react quickly to any financial and economic news, even if unrelated to commodity market fundamentals."
In mid-2009, says the report, the global economy appeared to have bottomed out, and has since shown some promising signs of recovery, albeit to varying degrees in different regions and countries.
"As a preliminary assessment, it would be fair to say that the implementation of powerful counter-cyclical macroeconomic policies won global policy-makers an important first round in battling the crisis. However, remaining stresses and re-emerging imbalances as well as renewed fears and instabilities in global financial markets since the first quarter of 2010 indicate that the war against a global depression has not yet been won."
Despite this, calls for an "early exit" from the demand-stimulating macroeconomic policy stance have been growing louder. Such calls have been particularly prominent among European policy-makers, most of whom had agreed only belatedly, and with great reluctance, to contribute to the global effort of countering the crisis in the first place.
Indeed, notes the report, already in 2009 some European countries embarked on retrenchment rather than stimulus programmes, and in the first half of 2010, new austerity measures aimed at balancing government budgets sooner rather than later were being announced.
From a global perspective,
adds the report, this is a risky undertaking, because it is precisely
"It is therefore important to stress that at this juncture any withdrawal of a stimulus policy seems rather premature, since in many countries private demand remains fragile, having only partially recovered from its trough so far, and with no sign of even approaching its pre-crisis levels. It therefore risks undermining the incipient global recovery and raises the spectre of a double-dip recession that could push the global economy into a vicious circle of debt deflation," cautions UNCTAD.
Another risk is that countries or regions that make a premature exit from a domestic-demand-supporting policy stance could become over-dependent on exports for their growth. This could result in the emergence of new divergences and renewed tensions at the regional and/or global levels, prompting retaliatory measures in the form of protectionism, which, if practised widely, could magnify any contractionary effects and stall the recovery.
The report notes that
as some large developed economies continue to struggle with problems
in their financial sector and with sluggish domestic demand due to half-hearted
In a repeat of global
pre-crisis patterns, among the developed countries, the
But Europe, which is
the main market for United States exports and was late in joining the
global boom of 2002-2007, is now also the outstanding laggard in the
current global recovery. This limits the scope for faster export growth
From mid-2009, a very
moderate recovery began in
Instability in the
euro area is largely a homegrown problem, says the report, adding that
the sub-prime mortgage crisis in the
While sub-prime-related write-downs have certainly added to pressures for the de-leveraging that is under way within European banking systems, the root cause of the European crisis can be traced to serious intra-regional divergences and to the related build-up of regional imbalances that had long been negligently ignored by market participants and policy-makers alike.
By mid-2010, the measures
According to the report, questions are also being raised as to the effectiveness of the draconian fiscal retrenchments in achieving fiscal sustainability when countries are pushed into deep recession, particularly as retrenchment in those countries with current-account deficits is not being offset by simultaneous expansion in surplus countries in the region.
The crisis in
"It is mainly
for these reasons that
At the current juncture, notes the report, in the eagerness to embark on uncoordinated consolidation, there is a tendency to forget that a double-dip recession which could result from a premature abandoning of expansionary policies poses by far the greatest threat to public finances.
Coordination does not mean that all countries should withdraw their stimulus programmes simultaneously; it primarily concerns the free-rider problem. "As a rule, governments should withdraw stimulus in line with the recovery of private domestic demand in their country."
Ending stimulus to domestic demand before that point means having to rely on exports for recovery, thereby shifting the burden of sponsoring demand stimulus onto others. Ideally, the timing of a stimulus withdrawal should contribute towards re-balancing global demand.
At the peak of the global crisis, says the report, G-20 members managed to see eye-to-eye on the need for coordinated measures to generate a strong demand stimulus, as the sheer severity of the events discounted any alternative.
Today, there is a strong
belief among policy-makers in the euro area that fiscal austerity will
not harm, but rather support, growth by boosting confidence. In contrast,
policy-makers in the
Failure to coordinate policies at the G-20 level raises the prospect of global imbalances reemerging, especially among developed countries. A re-emergence of global imbalances would be contrary to the declared G-20 objectives and reflect a failure of the G-20 process of international cooperation.
So far, that process has fallen short of launching serious reforms of the international monetary and financial system, the report concludes.