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Global economic uncertainties risk undermining growth in developing countries


Press Release
For use of information media - Not an official record
UNCTAD/PRESS/PR/Accra/2008/011
Global economic uncertainties risk undermining growth in developing countries

Geneva, Switzerland, 2 April 2008

UNCTAD XII to consider long-term impact of financial instability on trade and development

Geneva, 2 April 2008 — The risk posed to developing countries from an economic downturn in the industrialized world is likely to be among key issues under consideration at UNCTAD XII. The Conference takes place amid heightening uncertainty about world economic prospects, with financial turbulence causing growth to slow in developed nations.

Participants in the conference – devoted to “addressing the opportunities and challenges of globalization for development” – are expected to consider the impact on developing countries of the current financial and economic crisis. With recession threatening the United States and growth weakening in Europe, international economic prospects increasingly hinge on the ability of developing nations to continue posting strong growth rates. Attention is likely to focus on maintaining the dynamism of emerging economies such as China, India, Brazil and South Africa.

According to UNCTAD economists, the difficulties currently facing the global economy highlight the urgent need for improved macroeconomic policy coordination among key economies and better rules and regulations regarding international finance.

The financial turmoil that began with the collapse in the U.S. subprime mortgage market and spread to European countries has had limited impact on the financial sectors of developing countries so far. This reflects the fact that developing country banks and markets were less exposed to risky financial transactions than their developed country counterparts.

Instead, the main danger for the developing world comes from the wider economic implications of the financial crisis. An economic downturn in the U.S. and other industrialized countries, particularly if prolonged, would cut demand for the exports that have been crucial in underpinning strong developing country growth rates. Moreover, continued financial turmoil could bring a further jump in risk aversion, increasing the cost of external capital. There is also the possibility of volatility spreading to commodity markets, which have seen a boom in prices and trading.

A recession in the U.S. would be transmitted to other parts of the world mainly through trade linkages. Imports of the United States account for 15 per cent of total world trade, with some 44 per cent coming from other developed countries and more than 50 per cent from developing countries. The direct impact would be felt most strongly by those countries that have a large share of their exports in the United States market, especially the other members of the North American Free Trade Agreement (NAFTA) and other Latin American and Caribbean countries.

The UNCTAD secretariat estimates that with zero growth in the United States that would not be compensated, at least in part, by stronger stimulation of demand in Western Europe and Japan, growth in developing countries would fall by between 2 and 2.5 percentage points.

Such a scenario reinforces the case for macroeconomic policy coordination among the world´s main economies, which has been lacking in recent years. The U.S. can reduce the risk of a hard landing for the global economy by adopting expansionary macroeconomic policies. But the sharp fall in the value of the dollar resulting from these policies may hurt economic growth in countries that export to the US. Better international coordination is needed to help mitigate the impact of the weaker dollar and gradually reduce global imbalances. Countries with current account surpluses, such as Japan, China and Germany, can complement the efforts of the U.S. by stimulating domestic spending and import growth. In the euro area, interest rate cuts are necessary. In Japan, where there remains little scope for expansionary monetary policies, authorities may need to intervene to bring the country out of its deflationary trap.

Strong growth rates and increased trade among developing countries means that they are in a stronger position to withstand financial and economic turmoil than was the case ten years ago. Their main role will be to try to maintain as much domestic demand as possible and to focus increasingly on regional integration. In addition, the big surpluses built up by governments and national agencies in developing countries can contribute to promoting financial stability. Developing country sovereign wealth funds (SWFs) helped some large European and US banks in the effort to rebuild their capital base, and they also have the potential to meet some of the needs of long-term external financing of other developing countries.

In the longer run, there is a need to improve global oversight of economic and financial matters. In 2002, the Monterrey Consensus(1) adopted by heads of state and government identified the "urgent need to enhance coherence, governance, and consistency of the international monetary, financial and trading systems", including through "reform of the international financial architecture". The Consensus also urged international financial institutions to place a high priority to preventing potential crises and to strengthen their surveillance of all economies.

Ensuing years, however, have seen little, if any, progress on this front. To the contrary, integration of financial markets has increased dramatically, without a commensurate strengthening of the global system for economic governance. There is also lack of coherence between the international trading system, which is governed by a set of rules and regulation, and the international monetary and financial system, which is not.