TO THE MINISTERIAL MEETING OF THE GROUP OF 24
Statement by by Mr. Sha Zukang, Under-Secretary-General for Economic and Social Affairs, Secretary-General of the 2012 UN Conference on Sustainable Development
19 April 2012, Washington D.C.
Greater policy efforts are needed to avoid deeper global downturn
Despite some sporadic signs of improvement recently, prospects for the world economy continue to be sombre and challenging. The United Nations baseline forecast, reported in the World Economic Situation and Prospects 2012 at the beginning of the year, remains unchanged, with the world economy expected to grow by 2.6 per cent in 2012 and by 3.2 percent in 2013, but risks of a renewed recession in developed countries and a much more significant slowdown in developing countries remain high and worrisome.
Most developed countries are still struggling to overcome economic woes originating from the financial crisis of 2008-2009. Four major weaknesses continue to feed into one another: (i) banks, firms and households continue deleveraging; (ii) financial institutions remain fragile; (iii) the risk of sovereign debt distress spreading further is still high; and (iv) unemployment remains elevated, which, combined with a major shift to fiscal austerity, is depressing aggregate demand. Policy efforts to break out of this vicious circle are falling short.
Developing countries continue to lead the global recovery, but have also seen economic growth moderating significantly in 2011 while the prospects of a further slowdown remain high. Although economic ties among developing countries have strengthened, they continue to be highly vulnerable to the business cycles of developed economies.
Persistent high unemployment, especially in developed economies, remains the Achilles heel of global recovery. Unemployment rates in most developed countries remain well above pre-crisis levels. While some recovery in employment has been registered in countries such as the United States and Japan, unemployment rates continue to rise in a number of European economies, with rates surpassing 20 per cent in Greece and Spain. The number of discouraged workers who have stopped looking for work continues to increase in most countries with long-term unemployment. This is also jeopardizing medium and long-term economic growth prospects, as those long without jobs tend to lose skills and experience, affecting their own lifetime income prospects as well as effective demand and capacities of the economy at large.
In developing countries, employment recovery has been much stronger than in developed economies. However, developing countries continue to face major challenges owing to the high shares of workers who are underemployed, poorly paid, face precarious job conditions or lack access to adequate social security. At the same time, open unemployment rates remain high, at well over 10 per cent in urban areas, with the situation particularly acute in a number of African and West Asian countries.
Another area of growing concern is the high level of youth unemployment. About 76 million youth are without a job, representing around 13 per cent of people aged 15-24, globally. It is a huge setback to the declining trend of youth unemployment observed since 2002. What is more worrisome is the declining youth labour force participation rates and youth employment-to-population ratios. The youth labour force participation rate decreased globally from 52.9 to 48.7 per cent between 2000 and 2011, while the youth employment-to-population ratio fell from 46.2 to 42.6 per cent during the same period. Youth unemployment is not a new phenomenon; what is new are the staggering proportions it has reached since the 2008-2009 crisis. It exceeded 18 per cent in Europe, reaching 46 and 42 per cent in Spain and Greece, respectively.
Despite some progress in early 2012 in the efforts to contain the sovereign debt crisis in Europe, the crisis is far from over. Credit channels in major financial markets remain clogged, the effects on short and medium term growth of structural reforms in labour and product markets remain uncertain in some countries, while fiscal austerity thus far has not restored confidence in financial markets, but instead undermined output and employment growth.
To make the global economic recovery more robust, balanced and sustainable, the UN’s World Economic Situation and Prospects 2012 reiterated the need for stronger concerted policy action to: (a) use the fiscal space still available in most developed countries for additional short-term stimuli and to deter premature shifts to fiscal austerity; (b) coordinate short-term stimuli among major economies for a benign global rebalancing; (c) reorient macroeconomic policies and regulatory reforms to provide much stronger incentives for job creation and investments for sustainable development; (d) fast-track financial sector regulatory reforms and create a strong global financial safety net to reduce volatility in financial and currency markets; and (e) ensure more adequate availability of development financing to accelerate progress towards achieving human and sustainable development goals in developing countries.
Enhancing the global financial safety net
The global financial crisis of 2008 and the more recent sovereign debt distress in Europe have underscored the need for an effective global financial safety net. There is a need for large liquidity buffers to deal with fast and sizeable capital market swings and strengthening multilateral capacity to cope with shocks of a systemic nature. In addition, the safety net must be able to address the needs of low-income countries, particularly vulnerable to global volatility. A recent IMF study estimated that low income countries would need $27 billion in 2012 in the event of a sharp slowdown in the global economy.
To this end, it is imperative to significantly enhance IMF resources. As one option, this could be achieved by issuing Special Drawing Rights (SDRs). In doing so, it will be important to also consider inclusion of the currencies of major emerging market economies in the SDR basket, in recognition of their increased importance in the world economy. Enhancing the global financial safety net this way will further require accelerated quota reform of the IMF, giving emerging market and other developing economies greater voice.
Next to making more international liquidity available, the global financial safety net can be strengthened through closer cooperation with regional and sub-regional mechanisms, such as the Arab Monetary Fund (AMF), the Chiang-Mai Initiative (CMI), the financial stabilization facilities of the euro area countries, and the Latin American Reserve Fund (FLAR). Most of these mechanisms have provided crisis liquidity during the recent economic and financial crisis, partly in conjunction with IMF programmes.
Advancing governance reform of the IMF and World Bank
Governance reforms of the World Bank and the IMF agreed to in 2010 represent important progress, and implementation of these reforms should be secured this year. The fourteenth IMF quota review resulted in a roughly 6-percentage-point shift in quota share within the membership to increase the share of emerging market and developing countries. Yet, the governance structures of the Bretton Woods institutions will need to be further improved. As a result of the weaknesses of current governance, informal groupings like the G-20 have emerged, with far-reaching impacts beyond their limited membership but also undermining long-standing inclusive multilateral institutions. Such policy coordination processes would be better embedded within institutionalized multilateral decision-making. In this context, it is also important to clarify the roles and responsibilities of the management and executive boards of the IMF and World Bank to improve their accountability and effectiveness.
Regional and sub-regional institutions and arrangements can also play a role in strengthening the existing architecture of global economic governance. These institutions are well placed to capture and respond to specific needs and demands, especially for small countries, and could be part of a multi-layered framework of global economic governance, with a strong network of regional and sub-regional institutions, playing a complementary role to global institutions.
Ensuring adequate climate finance
From the perspective of sustainability, ‘business as usual’ is not an option. A twenty-first century transformation in production and consumption patterns is needed. The financing needs for such a transition are vast and will need to be satisfied through a mix of public finance, carbon market revenue and private finance. This also includes redirecting existing investment and subsidies to ‘green’ ends.
As a complement, public instruments to leverage private investments by subsidizing, reducing risks, bringing forward returns, and co-investing to catalyze resources for green investment, are needed. Policies should also aim to internalize environmental costs in the regulation and pricing of goods and services. These may include introducing payment schemes for ecosystem services, carbon taxes and phasing out fossil fuel subsidies. By introducing sustainability criteria in public procurement practices, governments can create high-volume and long-term demand for green goods and services, promoting longer-term investments in innovation and encouraging producers to realize economies of scale, thus lowering costs. In turn, this can lead to wider commercialization of green goods and services, promoting sustainable consumption. The trade restrictions that might emanate from such measures, a concern of many developing countries, should be carefully considered and addressed.
In addition, it is important to create a multilateral framework for knowledge and technology sharing and to strengthen mechanisms for technology transfer (such as the Technology Mechanism established under the UNFCCC at Cancun in 2010).
Further mechanisms for climate financing should be enhanced and better streamlined. The current global climate finance architecture is fragmented, involving a multitude of multilateral and bilateral, private and public funds. The global Green Climate Fund (GCF), approved last year in Durban as the main multilateral financing mechanism of the UNFCCC to support climate action in developing countries, could become the nucleus of climate financing supporting transitions to low-carbon growth and adaptation strategies in developing countries. The GCF could consolidate several existing funds, including the Clean Investment Funds. The GCF should receive sufficient initial capital and begin work as soon as possible.
The United Nations Conference on Sustainable Development (Rio+20) to be held in June of this year will focus on two themes: a green economy in the context of sustainable development and poverty eradication; and the institutional framework for sustainable development. Rio+20 will provide a historic opportunity for the international community to launch new initiatives to meet the financing requirements of transitioning to a green economy and to global sustainability.
Tapping innovative sources of development financing
Shortfalls in traditional official development assistance vis-à-vis commitments and perceived needs to achieve the internationally agreed development goals and to combat climate change have led to a search for innovative sources of development financing. Fiscal austerity in many major donor countries is also threatening aid budgets in the coming years.
Over the past two decades, a number of innovative sources of financing have been tapped. Many of these have been used to finance global health programmes, such as the Global Fund to Fight AIDS, Tuberculosis and Malaria (GFATM), UNITAID and the Global Alliance for Vaccines and Immunisation (GAVI). These programs have been effective in immunizing millions of children and providing AIDS and anti-tuberculosis treatments to millions of people in the developing world. However, the capacity of these mechanisms to mobilize additional resources for development has been very limited to date.
Other options with greater resource mobilization potential, including through internationally coordinated taxes and international liquidity creation, deserve more serious consideration than they have received thus far. Many countries already impose domestic financial transaction taxes and the European Union is considering a Europe-wide tax.
Revenue-raising capacity depends on which financial services are taxed, at what rates, by how many countries. A small currency transaction tax could collect up to $40 billion annually from major markets. Another proposal is for the IMF to issue additional international liquidity in the form of special drawing rights (SDRs). ‘Seigniorage’, which now accrues to international reserve currency countries, could be skewed to developing countries. Over $100 billion a year of “idle” SDRs of reserve-rich countries could provide longer term development finance.