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TWN Info
Service on WTO and Trade Issues (Mar21/20) Geneva, 18 Mar (D. Ravi Kanth) – The world economy is forecast to grow at 4.7% in 2021, after the “annus horribilis” (the horrible year) witnessed in 2020 due to the COVID-19 pandemic that continues to impose uneven costs on countries for a speedy recovery, says a new comprehensive report by the UN Conference on Trade and Development (UNCTAD) issued on 18 March. It says that the faster recovery of 4.7% growth in the global economy appears possible due to a variety of factors, including the large fiscal stimulus of $1.9 trillion by the United States coupled with speedy distribution of COVID- 19 vaccines in several advanced countries. The report says that the fiscal stimulus of $1.9 trillion is likely to boost consumer spending in the US. It notes that while the latest stimulus package signed into law by the Biden administration contains large cash transfers, there is much less spending on investment, which would expand aggregate demand and lead to a green transition. Therefore, the full effect of the $1.9 trillion package remains uncertain. The likely stronger recovery could still leave a global financial hole as the world economy remains short of $10 trillion at the end of 2021 compared to pre-pandemic trends, the report argues. The developing countries are hit hard by the pandemic due to their inability to raise funds and also face huge debt-related problems. In the face of rising geopolitical tensions, such as the formation of a new Quad comprising the US, Japan, India, and Australia, ostensibly to contain China, the prospects for multilateral cooperation could become difficult, at least in the climate change negotiations with the two biggest polluters – China and the US – remaining at “daggers crossed” in a so-called new Cold War. Unlike other reports, UNCTAD has warned the advanced countries that blocking the TRIPS waiver proposal at the World Trade Organization in combating the COVID-19 pandemic could have serious adverse effects on the global economy. More disturbingly, the report notes that the stand against the TRIPS waiver by the advanced countries (the US, Canada, Norway, the European Union, and Switzerland) has only signaled “a priority of profits over people in the fight against the pandemic.” In contrast, the other advanced countries, particularly the EU members, are lagging behind in providing substantial stimulus and relief packages as compared to the US, the report suggested. The lead authors of UNCTAD’s new analysis – Mr Richard Kozul-Wright, Director of the UNCTAD Division on Globalization and Development Strategies, and Mr Nelson Barbosa, Brazil’s former finance minister and Professor of Economics at the University of Brasilia, cautioned that the festering problems of inequality, indebtedness and insufficient investment threaten the hope for a resilient future. According to the report, the developing and emerging economies are still not out of the woods as “the brunt of the hit to the global economy is being felt in these countries with limited fiscal space, tightening balance of payment constraints and inadequate international support.” Titled “Out of the frying pan … Into the fire?,” the 22-page analysis offers a detailed and powerful account of the challenges being faced by countries across all the regions. It highlights how important it is to arrive at an agreement on the TRIPS waiver at the World Trade Organization to ramp up global production of COVID-19 medical products, particularly vaccines. Against the backdrop of fragility in the financial markets, it argues for a close vigil on the continued downside risks that could arise from the financial markets and spike in asset prices in several economies, including the US and China. The potential downside health and economic risks could still create new slippages, Mr Kozul-Wright warned. PLETHORA OF ASSESSMENTS Amidst a plethora of assessments offered by various international organizations, including the Paris-based Organization for Economic Cooperation and Development (OECD) and the International Monetary Fund (IMF), UNCTAD’s comprehensive analysis stands out as a sui generis account of the dynamics of the global economy as well as a credible gauge on the uneven and imbalanced developments in the world economy. UNCTAD’s analysis, according to Mr Kozul-Wright, “is also about the recovery and how it will evolve this year and the Biden bounce (and its effects on other countries) and the possible slippages that could happen.” “We call 2020 “annus horribilis” and it might have been more “horribilis” than it turned out to be,” says Mr Kozul- Wright, adding that timely government intervention and stimulus programs starting with the CARES Act in the US last year and other relief provided by advanced countries in response to the crisis and the lockdown conditions brought a modest turnaround. “We give ourselves a B+ in terms of our forecast, we weren’t as alarmist as some others were,” he told journalists at a virtual media briefing, suggesting that the TDR (Trade and Development Report) forecast was for 4.3% growth last year. The turnaround was made possible by a number of reasons such as better than expected performance of East Asia with positive growth in 2020, particularly a positive performance by China, as well as positive ramifications from regional trade links, Mr Kozul-Wright suggested. He acknowledged that “the US did better than we expected” due to strong intervention in the CARES Act, a relief package that was passed last year. Besides, the financial markets were much stronger than we expected, he said, arguing that rising commodity prices also had a positive effect on the markets in the US. The report says, “for 2021, we now expect a 4.7 per cent expansion, 0.6 percentage points better than our previous forecast.” “However, this more optimistic scenario hinges on three assumptions: (i) improved vaccination and disease containment in advanced and middle-income countries; (ii) a speedy transition from economic relief policies to recovery-policies in the largest economies of the world; and (iii) no financial crash of global significance.” According to Mr Kozul-Wright and Mr Barbosa, “under these circumstances, the challenge is less one of policy uncertainty as it is one of policy complacency setting in as the recovery advances.” They argue that “the emerging growth patterns post-COVID-19 are a cause for concern” due to four factors. These include: (1) the strong growth recovery in East Asia, which reflects a robust export-investment link, increased intra-regional trade, and the risk of accumulating large trade surpluses resulting in trade tensions; (2) the EU’s increased reliance on export-led recovery reflecting its aversion to a coordinated and sufficiently strong fiscal expansion; (3) while the $1.9 trillion stimulus package by the Biden administration is encouraging, “the growth regime in place prior to the pandemic was heavily consumption-driven, dependent on rising household debt (in the absence of robust wage growth) and strong wealth effects (from buoyant financial markets)”; and (4) across many countries in Latin America and Africa, commodity dependence, heavy reliance on capital flows, and low rates of capital formation continue to make for a fragile growth trajectory. Therefore, “in the light of the persistent vulnerability across the global economy,” the report suggests that “a number of lessons can be drawn from what has happened to date.” The lessons include: * Austerity undermines resilience and fiscal space as happened in the aftermath of global financial crisis in 2008; * In an interdependent global economy, international cooperation is key to both recovery and resilience. So far, it has fallen short of what is required to address an emergency global challenge. Sputtering vaccine rollout in most countries only indicates insufficient international policy coordination as well as large-scale hoarding of vaccines by a few developed countries – the US, Canada, the EU, the United Kingdom, Australia, and Israel among others. * More ominously, the report notes that delay in approving the TRIPS waiver by developed countries could have far-reaching adverse effects on economic recovery and further damage overstretched health systems in the developing countries. Further, prolonging the pandemic anywhere will have consequences everywhere. * While the likely approval by the Biden administration of a $500 billion issuance of Special Drawing Rights (SDRs) is a welcome signal, the insignificant release of around $11 billion under the Debt Service Suspension Initiative to developing countries with conditionalities is a cause for concern. * Growing food insecurity in the face of a continued upward trend in prices since 2021 is a third area of inadequate international cooperation, which needs rapid reforms to the rules on agricultural trade at the WTO. * The growing disconnect between financial markets and the real economy remains a systemic concern for future stability and resilience. While there was a V-shaped recovery in many financial markets, which initially saw sharp losses as the pandemic gained strength and later followed by unprecedented gains, by the end of 2020, there was weaker recovery in terms of output, employment, investment, wages etc. * Moreover, this anaemic recovery has only contributed to what the TDR referred to as K-shaped recovery in many countries “as the owners of assets (and certain types of knowledge capital) have successfully managed the crisis, while the situation facing many other workers has been one of job loss and precarity.” Mr Kozul-Wright has argued that “the kind of lessons we would like to draw is that financial volatility remains an endemic feature of the contemporary global economy, and that is both positive and negative.” He says that many developing and emerging economies last year were engulfed in a vicious cycle because of capital outflows. Another important lesson that is learned last year, according to Mr Kozul-Wright, “is that fiscal space matters a lot and there is a big difference between developed and developing countries of the fiscal firepower they have in response to the kind of shock we have seen.” Debt-servicing poses a bigger burden on emerging economies as compared to the advanced economies – in terms of interest payments and dollar contracts they have to service, the report pointed out. “MULTILATERALISM HAS LOST ITS MOJO” According to Mr Kozul-Wright, “the multilateralism has lost its mojo”, with coordination in the G20 countries having become weak and the debt servicing initiatives being extremely inadequate. Also, there was no SDR issuance last year which “we thought is an important response to the pandemic.” Moreover, there are serious weaknesses in the health architecture and the vaccine rollout across countries. “We are worried about very less investment spending in the current US package and the talk is that investment component will be pushed into the second half of next year – what it might be remains to be seen.” “That said, as compared to other advanced economies, the US administration is responding to the crisis in a very serious way,” he argued. PROSPECTS OF A “LOST DECADE” “Looking beyond this year, our main concern remains a misplaced optimism in the rules, practices and policies of the hyper-globalized economy,” Mr Kozul-Wright pointed out during the press conference. “This has, if anything, only been reinforced by the lack of progress in strengthening international cooperation during a year of widespread economic collapse,” the report argued, saying that “pressures for a return to austerity over the medium term have already surfaced.” Continued pursuit of business-as-usual neoliberal policies such as “austerity, inflation targeting, trade and investment liberalization, innovative finance and labour market flexibility, amongst a litany of hackneyed economic ideas, retain a loyal following in policy circles and provide a default narrative for charting a well-trodden path for the global economy.” “This path led to a world of growing economic inequalities, arrested development, financial fragility, and unsustainable use of natural resources before the pandemic hit,” the report pointed out. “Barring any serious setbacks to economic growth and public health, following this path will still require several years to recover the employment, wages and output lost to the Covid-19 shock.” The report warns that “since global output growth is expected to slow down after 2021, particularly in the advanced economies, it seems reasonable to assume that, unless there is a determined shift in policy direction, the world economy will take more than a decade to catch up with its pre-pandemic trend.” “For the moment,” the report says that “the fiscal responses (whether implemented or planned) in developed economies contain no tangible increase in public investment” and “there is, moreover, growing evidence that Covid-19 can have lasting effects on human health requiring dedicated medical and mental health resources, as well as increased income support.” “Epidemiologists and public health experts are also warning that Covid-19 may prove a trial run for far more serious pandemics. Just as importantly, longer-term scarring is also appearing in the economy.” Further, “persistent difficulties in the service sector are one possible indicator but long-lasting difficulties from Covid-19 have also been identified in the commercial real estate market, with shrunken supply chains and through weaker consumer demand if households increase their savings rate in anticipation of difficult times ahead. Such effects would likely impede any lasting recovery.” “Moreover, the underlying conditions exposed by the global financial crisis, and not addressed since, have in some respects worsened as a result of the Covid-19 crisis,” the report warned. The report said that the world is now facing a grimmer crisis on the lines of what the US President Roosevelt laid out 80 years ago. Roosevelt had said presciently: “the simple, basic things that must never be lost sight of in the turmoil and unbelievable complexity of our modern world: equality of opportunity for youth and for others, jobs for those who can work, security for those who need it, the ending of special privilege for the few, the preservation of civil liberties for all, the enjoyment of the fruits of scientific progress in a wider and constantly rising standard of living.” Unfortunately, the writing on the wall is that the Roosevelt standards are now being denied across countries with growing inequality, lack of opportunities for education for youth and others, rising unemployment for those who want to work, the denial of civil liberties and democratic rights, and the denial of COVID-19 vaccines, Mr Kozul- Wright argued.
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