Five years after the onset of the global financial crisis the world economy remains in disarray, a new UNCTAD report stresses.
To adjust to what now appears to be a structural crisis of the world economy, fundamental changes are needed in prevailing economic policy, the Trade and Development Report 20131 (TDR13) contends. The study, subtitled “Adjusting to the changing dynamics of the world economy,” maintains developed countries must act more decisively to address the fundamental causes of the crisis, in particular rising income inequality, the diminishing economic role of the State, the predominant role of a poorly regulated financial sector, and an international system prone to global imbalances. Developing and transition economies that are overly dependent on exports for growth need to reconsider their development strategies, and rely more on domestic and regional demand (see UNCTAD/PRESS/PR/2013/37).
In its review of trends in the global economy, the Report observes that world output growth, which had already slowed from 4.1 per cent in 2010 to 2.8 per cent in 2011 and then to 2.2 per cent in 2012, will not recover but might further decelerate to 2.1 per cent in 2013. Developed countries will continue to lag behind the world average, with only a 1 per cent increase in gross domestic product (GDP), reflecting the mix of a stable growth rate in Japan, a moderate deceleration in the United States and a further contraction in the Euro area.
Stimulus measures in the major developed economies have relied on expansionary monetary policies, but combined with fiscal austerity and continued subdued private demand, these policies have not succeeded in fostering credit creation, aggregate demand, and growth. Several developing and transition economies have been able to mitigate the adverse impact of the financial and economic crises in the developed world by means of counter-cyclical macroeconomic policies. But with the effects of such responses fading away and the external economic environment showing few signs of improvement, these economies have found it increasingly difficult to avoid slowdowns. Reverting to pre-crisis growth strategies is no solution, either, the TDR warns, as these were built on unsustainable demand and financing patterns.
Economic activity in most developed countries is still reeling under the impacts of the financial and economic crisis that started in 2008, including insufficient job creation, wage compression, and the still incomplete process of balance-sheet consolidation. However, continuing weak growth in several countries is also due to their current macroeconomic policy stance. In the European Union, the process of deleveraging is still incomplete and expansionary monetary policies have failed to induce banks to provide new credit to the private sector – credit that is needed to reinvigorate demand. In this context, the increased tendency towards fiscal tightening makes a quick return to a higher growth trajectory highly unlikely. In the United States, private domestic demand has begun to recover, partly owing to progress made in the consolidation of its banking sector, but cuts in public spending are having a contractionary effect. Japan is bucking the current austerity trend by providing both strong fiscal stimulus and monetary expansion aimed at reviving economic growth and curbing deflationary trends.
The TDR forecasts that developing and transition economies will grow at rates similar to those of 2012 – slightly above 4.5 and 2.5 per cent, respectively – and will therefore continue to be the main drivers of economic growth, contributing about two thirds to global output growth in 2013. In many of these economies, growth has come to be driven more by domestic demand than exports, as external demand from developed economies remains weak.
Global trade expansion has virtually ground to a halt, with its volume increasing less than 2 per cent in 2012 and the first months of 2013. Sluggish economic activity in developed countries has accounted for most of this slowdown in international trade, but trade has also decelerated considerably in developing and transition economies. The global trade collapse of 2008–2009 altered trade patterns in both developed and developing countries. Import and export volumes of developed regions have remained below their pre-crisis levels, with the exception of the United States, where exports have exceeded their previous peak of August 2008. The group of emerging-market economies has experienced a significant slowdown in the pace of growth of trade, and available data for the first half of 2013 indicate that this slowdown is likely to persist. This general downward trend in international trade highlights the vulnerabilities developing countries continue to face at a time of lacklustre growth in developed countries.
As developing countries have experienced faster economic growth than developed countries, they have seen a significant increase in their proportion to the global economy – their share in world output grew from 22 per cent in 2000 to 36 per cent in 2012, while their participation in world exports increased from 32 per cent to 45 per cent over the same period. Much of that increase resulted from the expansion of South-South trade.
However, there is little change in the two main characteristics of South-South trade, namely its narrow concentration in Asia, related to these countries’ strong involvement in international production networks, with developed countries as final destination markets; and the major role of primary commodities in the expansion of South-South trade over the past two decades. This indicates that South-South trade has not become an autonomous engine of growth for developing countries. Nonetheless, if developing countries could shift to a strategy that gives a pronounced role to domestic demand growth, a greater share of their manufactured imports would be destined for final use in their domestic markets rather than being re-exported to developed countries. Such a shift could well increase the contribution of South-South trade to output growth in developing countries.
For the world economy as a whole, the Trade and Development Report 2013 underlines that coordinated, demand-driven policies, with surplus countries applying stronger stimuli and no country adopting contractionary policies, would deliver better results in terms of growth, income distribution, employment, and global re-balancing than current policies that place the entire burden of adjustment on deficit countries. According to simulations of alternative policy scenarios conducted with the United Nations Global Policy Model, even if developed countries were to persevere with their current policy stance, developing countries could still improve their economic performance by providing coordinated economic stimuli. Hence, enhanced regional cooperation and South-South trade should be an important component of these countries’ development strategies.
Full report: http://unctad.org/en/PublicationsLibrary/tdr2013_en.pdf
Overview: http://unctad.org/en/PublicationsLibrary/tdr2013overview_en.pdf
