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TWN
Info Service on WTO and Trade Issues (Apr23/09) Geneva, 13 Apr (D. Ravi Kanth) — The developing countries are being trapped in a vicious cycle of “deepening distress” that could ultimately result in a “lost decade” for them, largely due to the recent high interest rate hikes by the central banks of the developed countries, the United Nations Conference on Trade and Development (UNCTAD) has warned. In its latest Trade and Development Report (TDR) Update released on 12 April, UNCTAD said the deepening debt distress in developing countries could cause a “developmental crisis”, with 39 countries paying more to their external public creditors than what they received in new loans, with an adverse impact on public investments and social protection. Amidst the likelihood of a deceleration in global economic growth in 2023, from an earlier forecast of 2.2 percent made in its TDR issued in September 2022, to its forecast of 2.1 percent this year, the TDR Update estimates that the high interest rates in the US and other developed countries could contribute to more than $800 billion in foregone income over the coming years for developing countries (excluding China), compared to what would have been generated without them. In contrast, the International Monetary Fund’s latest forecast announced on 5 April suggests that global economic growth would hover around 2.8% and a possible “hard landing” if inflation continues to remain high. As the IMF appears to be more concerned about the global economic growth prospects in the US and other developed countries, the TDR Update expressed grave concerns over the tight credit policies on the developing countries, whose debt burden seems to have increased by about $8 billion. GRIM GROWTH PROSPECTS The TDR Update said the overall growth prospects appear to be grim, with global growth estimated at below 2.2 percent in 2023, as compared to the TDR’s earlier projection of around 3.1 percent last year. The African region is expected to grow at around 2.6 percent in 2023, while the Americas, which includes the world’s largest economy, the US, is forecast to grow at around 1.1 percent this year. The US, according to the TDR Update, is expected to grow at 0.9 percent in 2023. The Asian region (excluding China) is likely to register a growth of 4 percent in 2023, with China likely to grow around 4.8 percent and Japan at 1.6 percent this year. India, according to the TDR Update, is expected to grow at 6 percent this year, while countries in South East Asia are likely to register a growth rate of around 4.1 percent. Indonesia, the largest country in South East Asia, is expected to grow at 4.7 percent in 2023. ANOTHER “LOST DECADE” FOR SOUTH The TDR Update says somewhat poignantly that the developing countries face the prospect of a “lost decade” of the 2020s with inexorable debt levels and consequently, higher debt-servicing costs. At a time when international support remains woefully insufficient, the TDR Update calls for a fresh allocation of another $650 billion in Special Drawing Rights (SDRs) at the ongoing IMF-World Bank spring meetings in Washington DC. In a box insert in the TDR Update, UNCTAD quotes findings from a US Federal Reserve discussion paper that suggests that an increase in the Fed’s policy rate would lead to a contraction of Gross Domestic Product (GDP) in the developing countries. According to the Fed’s study, quantitatively, for each percentage point increase in the Fed funds rate, the contraction of GDP in the developing countries is estimated to be 0.8 percentage points after three years in practice. As the Fed’s effective rate has increased by 4.8 percentage points since January 2022, the estimated contraction of GDP in the developing countries is around 3.9 percent by 2025, or $814 billion. The TDR Update seems to have provided a thorough analysis of the current bank crises in some of the developed countries as well as the cost-of-living crisis due to failed regulatory oversight that allowed opaque and increasingly concentrated markets. NEED FOR WIDE SYSTEMIC OVERSIGHT The current banking crises in some of the developed countries has created fears of the 2008 financial crisis re-surfacing all over again. Against this backdrop, the TDR Update calls for closing the loopholes left in the wake of the 2007-09 crisis as well as widening the scope of systemic oversight and reforming the growing shadow banking institutions, particularly the hedge funds and asset management companies, which form part of what the neo-classical economist John Maynard Keynes called “Casino Capitalism.” The TDR Update also calls on the dominant countries, including the US, that seem to have caused the “boom-and-bust” economic crises, to focus on a multilateral agenda to strengthen the overall debt architecture. URGENT NEED FOR NEW DEBT ARCHITECTURE In its TDR Update (on page 30), UNCTAD called for a New Debt Architecture. It said that “as part of the urgently required process of reform of global economic governance, UNCTAD has highlighted the need for an international debt architecture to provide timely and orderly debt crisis resolution, improve debt transparency and fully align with the 2030 Agenda.” “This new architecture,” according to the TDR Update, “aims to accomplish three inter-related objectives.” The objectives include:
The TDR Update highlighted the wide disparities in liquidity support provided to the failed Silicon Valley Bank, a regional lender in the US. The Fed extended $297 billion in liquidity support to banks in the US in the week ending 17 March 2023. In contrast, developing countries, including China, received $232 billion in SDRs in 2021. Meanwhile, based on UNCTAD Secretariat calculations, 37 countries classified at high risk or in debt distress by the IMF as of November 2022, received $9.1 billion in 2021. It is in this context that the TDR Update says that the ongoing IMF-World Bank meetings offers an opportunity to ease the liquidity constraint on countries in immediate financial need and beyond that to bolster development finance. More importantly, the TDR Update calls for a new SDR issuance of at least US$650 billion as a first step at the ongoing IMF-World Bank meetings, without adding to the debt burdens that is crushing development prospects. The TDR Update also suggests that “the structural imbalance in the financial system is already having contagion effects.” It points out that “developing countries are in a particularly vulnerable position due to the lack of an adequate global financial safety net (GFSN).” It said that “under normal circumstances, expectations of lower interest rates in developed countries are supportive of capital flows to developing countries.” “However, in the current context, uncertainty is triggering a flight to safety which is visibly hurting developing countries,” the TDR Update said, suggesting that “capital outflows from developing countries are accelerating, as indicated by the evolution of net investor flows to emerging market funds”. Moreover, it said that “sovereign bond spreads vis-a-vis Treasuries have already widened considerably in the face of these developments. This is an indicator of heightened risk aversion as investors dump risky assets with countries in Africa particularly affected by this dynamic”. According to the TDR Update, “these challenges highlight the urgent need to strengthen the GFSN (global financial safety net)” and “the special drawing rights (SDRs) are a central part of the GFSN as well as the fast liquidity windows in the IMF and the World Bank.” It argued that UNCTAD, as well as the United Nations Global Crisis Response Group (GCRG), have insisted that as part of an emergency response package, a new SDR issuance should be considered to provide liquidity support to developing countries. POLICY CONFUSION The TDR Update said the likely increase in policy rates by central banks in developed countries to accelerate price deflation, pressure on existing bondholders, asset fire sales and the added financial burden on developing countries could still cause a sharper slowdown. According to the TDR Update, “81 developing countries (excluding China) lost US$241 billion in international reserves in 2022, a decline on average of 7 percent, but with over 20 countries experiencing a drop of over 10 percent, in many cases exhausting their recent addition of SDRs.” Worse still, the TDR Update argues that “the borrowing costs, measured through sovereign bond yields for 68 emerging markets, increased from 5.3 percent to 8.5 percent in 2022, with 19 emerging markets now having bond spreads above 1,000 basis points over US Treasuries.” As inflation continues to be driven by international prices of energy and food commodities, the TDR Update says that countries are able to exert some degree of control over these pressures depending on market structure and degree of concentration and on governments’ ability to administer consumer prices. ROLE OF LOSS AND DAMAGE FINANCING The TDR Update also captured the “development-climate double bind” in which the Least Developed Countries and climate-vulnerable countries “do not have the financial means to cover existing loss and damage (LD) from climate shocks on their own,” never mind meeting huge adaptation or mitigation costs. It urgently calls for “a multilateral mechanism for rapid access to grants-based (and under some circumstances concessional) finance to cover LD (Loss & Damage) for rapid and slow onset climate events in developing countries.” It highlighted the breakthrough outcome at the 27th Conference of the Parties (COP27) in Sharm El-Sheikh, Egypt, in 2022, wherein “Parties mandated a timeline in 2023 towards establishing a new LD Finance Facility (LDFF) at COP28” later this year. It emphasized that “the outcome acknowledged not only the necessity of a new funding mechanism but also of a systemic alignment of economic institutions with the realities facing developing countries as they deal with oncoming climate impacts.” The TDR Update noted that “squeezed by compounding crises, a step forward on this outcome in 2023 could have a dramatic effect on the stability of climate-vulnerable countries, filling a critical gap at the nexus of climate, development, and humanitarian finance.” Acknowledging that there is no commonly agreed definition within the climate negotiations, it said that “LD is understood to be the economic and non-economic impacts from climate change, inclusive of rapid and slow onset events (the latter including, for example, desertification and rising sea levels).” It said though the LD financing is separate, it is still “connected to the other two pillars of the climate regime: mitigation and adaptation.” The TDR Update said: “Currently, the mechanisms available under the UNFCCC (United Nations Framework Convention on Climate Change) are geared towards averting and minimizing LD through mitigation and adaptation.” It observed that “unfortunately, the current schemes do not provide means for addressing LD to help people to recover from climate impacts.” “The current approach,” according to the TDR Update, “ensures that developing countries pay disproportionately for warming they did little to contribute to, at odds with the principle of common but differentiated responsibilities (CBDR).” Furthermore, it said that “humanitarian aid is aimed to meet the immediate needs of communities affected by a disaster, but not on longer-term support for rebuilding homes and infrastructure following a rapid-onset emergency, or indeed responding at all to slow-onset impacts.” In conclusion, the TDR Update argues that “development finance has a broader scope than humanitarian response, however, a large share of this finance is provided as loans which could compound vulnerabilities for developing countries facing LD.” +
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