The United Nations Conference on Trade and Development (UNCTAD) released the Trade and Development Report 2011 (TDR 2011), which diagnoses the post-crisis state of the world economy and offers desirable policy recommendations. The report highlights the adverse fiscal impact of the 2008-09 global economic crisis and the ensued dramatic accumulation of public debt. Whereas a structural reform of the excessively financialized markets has been touted in the wake of the crisis, the enthusiasms on the reforms have waned, the report points out. This leaves a “very real risk of new crises erupting.”
According to the TDR 2011, the pace of the global economic recovery has declined to 3.1% of GDP growth in 2011, from 3.9 % in 2010. The recovery is proceeding at a “two-speed,” with growth rates of developing countries outstripping those of developed countries. While developed countries are caught in stagnation of private demand mainly grounding in stagnating wages and employment, developing countries have better maintained their domestic demands with sustained wage levels.
Yet even in developing countries growth rates are expected to slow down, largely owing to their strong interconnectedness with the world economy. The commodity prices of the developing markets, for instance, are vulnerable to speculative financial activities, short-term capital flows, and the adverse developments of the international financial system as a whole. Prescribing the current state of the world economy as “struggling to recover from the worst recession since the Great Depression,” the report attributes the stagnation to the developed countries’ mismanagement of the financial sector, which has increasingly moved toward deregulation throughout the past few decades. Furthermore, it points out that fiscal retrenchment, which has been pursued in many countries as a countermeasure to the crisis, “is misguided, as it risks tackling the symptoms of the problem while leaving the basic causes unchanged:” in many countries fiscal deficits were the results rather than the cause of the economic downturn, and in such “debt-deflation” crises as in many economies of today, resorting to monetary policies in any way are unlikely to have stimulating outcomes.
The report points to a solution in more fundamental terms, concerning the oversight on the financial sector and its relations with other sectors of the world economy. Some suggested measures include:
• enlarging the role of public and cooperative banks to cater to the needs of the real economy;
• separating the activities of commercial and investment banks to curb the activities of the global financial casino;
• putting in place stricter regulations on financial investors to increase the transparency in physical and derivative market transactions;
• establishing a rules-based managed floating system as part of the global financial governance to align the foreign exchange system with the macroeconomic fundamentals;
• enhancing the coherence between the multilateral trading system and the international monetary system; and
• pursuing mass income growth as the basis of development at the regional and national level, rather than centering on meeting public deficit targets.
Most importantly, the report calls for a more effective collaboration among all nations, yet by more vigorous initiatives of the developed economies, in creating a sustainable macroeconomic environment “that encourages an appropriate level of investment in fixed capital.” This is essential for “supporting the necessary structural change” of the world economy, which is highlighted throughout the report.
The full report is available online.
Click here for the press release.