|DESA News Vol. 12, No. 06||June 2008|
Continuing credit crunch, declining U.S. dollar, rising prices for food and fuel all point to economic downturn
The year 2008 marks a major transition in global economic and social development with the waning of the era of cheap and plentiful fossil fuels, accelerating pressures on commodity prices, particularly those of food, and worsening impacts of climate change on livelihoods and well-being as well as a slow-down in the growth of the world economy from the 3.8 per cent registered in 2007 to an estimated 1.8 per cent in 2008.
These factors are increasing inequalities and risk compromising the achievement of the internationally agreed development goals, including the Millennium Development Goals by 2015. Bold and concerted policy action by both developed and developing countries can, however, serve to improve global economic and social performance in 2008 and 2009. Additionally, a reformed international reserve system and better financial regulation and safety nets would help improve financial conditions and confidence to prevent the recurrence of similar crises.
According to the World Economic Situation and Prospects 2008 mid-year update, the global economy is teetering on the brink of a severe economic downturn. The deepening credit crisis in major developed market economies, as triggered by the continuing housing slump, the declining value of the United States dollar vis-à-vis other major currencies, persisting global imbalances, and the soaring oil and non-oil commodity prices are slowing growth of the global economy.
Without aggressive and coordinated expansionary policies, a more pessimistic scenario could occur, which could trigger a disorderly unwinding of the massive global imbalances and have drastic implications for global trade and finance. In addition, the steep rise in food and energy costs is compounding the downside risks, particularly in view of the unfolding food crisis, which poses a threat to social and political stability. The dollar may still decline another 15 per cent in value under this scenario in 2008, although slackening demand may dampen further oil price rises so as to achieve an average price of $95 per barrel for the year.
What is needed in response to this crisis is a multilaterally-coordinated stimulus package centred on the expansion of domestic demand in surplus countries, while staying within existing fiscal capacity; deep reforms in mechanisms of international financial regulation and supervision; and meeting emergency food needs, while setting longer term strategies for alleviating supply constraints and improving food security. According to Rob Vos, Director of the Development Policy and Analysis Division, “the United Nations system, including a more inclusive IMF, should take the lead in forging concerted policy action and address the food crisis.”
A concerted macroeconomic policy action plan would involve reducing global imbalances while avoiding an economic downturn, including a rebalancing of domestic demand between surplus and deficit countries and a smooth realignment of exchange rates. More importantly, the root causes of the imbalances need to be addressed to prevent their reappearance in the future, through measures such as reforming the international reserve system and strengthening financial regulation and safety nets.
A multilaterally-coordinated stimulus package for the global economy would include the expansion of domestic demand in surplus countries as well as more proactive public policies. Several industrial economies such as Japan, Germany, Switzerland, the Netherlands, Norway and Canada, as well as the emerging market economies of East Asia and the main oil exporters can help through expansionary domestic fiscal and monetary policies.
Surplus countries can gain much from using their accumulated reserves to generate income, employment and improve wealth distribution at home. For its part, caught between addressing its twin trade and fiscal deficits and the grimmer prospect of a recession that may reduce GDP by 0.2 percent in 2008, the United States has opted for expansionary domestic monetary and fiscal policies. However, the recovery of the United States economy will also need the external stimulus of increased demand for its exports from its major surplus trading partners through an expansion of their economies.
Against the backdrop of the global macroeconomic slowdown, the present food crisis presents an additional threat to human well-being. Addressing the food crisis requires internationally-concerted measures. In addition to the emergency assistance spelled out by the World Food Programme, the Food and Agriculture Organization and the Office of the Humanitarian Coordinator, major policy reforms are required in developed and developing countries to achieve a sustainable solution to the crisis. Abolishing agricultural subsidies in developed countries will probably benefit farmers in developing countries in the long run, despite causing short-term world food price increases.
The food crisis reflects both a long unheeded problem of low agricultural productivity in developing countries and the poor’s lack of access to affordable food. In the long run, increasing productivity through investments in water supply, infrastructure, improved seeds and fertilizers, education and agricultural research and development will be essential not only to deal with the present food crisis, but to allay persistent and widespread rural poverty. Improving access of producers to agricultural land, affordable inputs, and infrastructure would increase the productivity of food production and lead to significant reductions in rural poverty and better nutrition. Agriculture must, therefore, become a policy priority at both the national and international levels.
For a lasting solution to the current global economic crisis, both financial regulation and the international reserve system also need to be revised. Reforms of both national and international financial regulation and supervision are needed and policy makers need to pay more attention to preventing the harmful effects of financial exuberance.
Under present banking and finance rules, risk assessments tend to react to problems after they have occurred rather than foreseeing or forestalling them. By way of example, lenders are required to raise more capital only after liquidity problems occur rather than in anticipation of them. Current national regulations and international regulations such as the Basel II agreements, which have been crafted on risk assessment models developed by commercial banks themselves, are insufficiently geared to address contagion effects of crises across countries and markets or the herd behaviour of financial markets. Deeper regulatory reform, motivated primarily by the public interest, is urgently needed to avert future crises such as the recent sub-prime mortgage debacle and the resulting housing slump.
The international reserve system, too, is in acute need of reform. Under the current system based on the United States dollar as the reserve currency, the only way for the rest of the world to accumulate reserves is for the United States to run an external deficit. Over time, such a pattern inevitably erodes the value of the dollar, enhancing costs for countries to continue to hold vast amounts of reserves, and this may well cause a run on the dollar, probably with strong destabilizing consequences that will be felt worldwide.
The emergence of a new, supranational currency, based on scaling up Special Drawing Rights, the international unit of account based on a basket of currencies, is probably the ideal solution for redesigning the global reserve system in a stable way, but will require nimble negotiation and considerable building of political will over the long-term.
The more immediate and feasible reform would be to promote an officially-backed multi-currency reserve system. By diversifying their reserve holdings away from the dollar, many surplus countries have started to move in this direction. This concept should prove as compelling as the pursuit of a multilateral trading system. Similar to multilateral trade rules, a well-designed multilateral financial system should create equal conditions for all parties and avoid unfair competition and an asymmetric burden-sharing of exchange-rate adjustments. It should also help to increase stability in the international financial system.
The way out of the present global economic crisis will involve coordinated domestic and international policy actions in the short term and deep reform of the financial and trading system in the long term. The present crisis cries out for the type of concerted and people-centred reform that only a truly multilateral system such as that of the United Nations can spearhead. The five-year review of the International Conference on Financing for Development in Doha from 29 November to 2 December provides a golden opportunity to chart out an authentically multilateral and just reform of the international financial system.
Likewise, a successful conclusion of the Doha Round of Trade Negotiations so as to favour economic and social development in all countries through a fairer trading system, will also contribute to more stable global economy. Ultimately, it is the active involvement of citizens in developed and developing countries, concerned about the negative welfare effects of financial and commodity crises such as the present ones, that can pressure their governments to effect such systemic reforms with human well-being in mind, rather than financial interests alone. Transparent and inclusive multilateral forums, particularly those of the United Nations system, with broad multi-stakeholder involvement, can show the way.
For more information: http://www.un.org/esa/policy /
Rob Vos, Director of the Development and Policy Analysis presents the mid-2008 update of DESA’s World Economic Situation and Prospects, accompanied by Jomo Kwame Sundaram, Assistant Secretary-General for Economic Development
Integrated approaches to economic growth, social progress, and environmental protection are once again in the spotlight as world events threaten well-being
The present economic slowdown, the rising price of oil, the growing food crisis, the worsening impacts of climate change and Africa’s difficulties in meeting the Millennium Development Goals all reflect the glaring neglect of sustainable development in developed and developing countries. There is a pressing need around the world for the effective integration of economic growth, social progress and environmental protection. This year, the United Nations is actively seeking to address this need by spearheading a renewed thrust for sustainable development.
Special meetings of the Economic and Social Council, Security Council, and the Food and Agricultural Organization devoted to the global food crisis, as well as the sixteenth meeting of the Commission on Sustainable Development, and the Secretary-General’s Task Force on the Food Crisis, have served to put sustainable agriculture back in the centre of the development agenda, where it belongs.
Member states have recognized that we need to concentrate efforts on minimizing greenhouse gas emissions, deforestation and global warming, while finding ways to promote investments in agriculture and maximize the use of agro-science and technology. The aim is to reduce the costs of production and substantially increasing the productivity and output of every hectare of arable land. There is need for greater investment in agriculture, particularly in Africa, which will require the best science, tools and technologies to optimize efficiency and boost production as well as policies that support land and resource ownership. Increased oil prices have played a role in rising food prices. A sustainable solution to the food crisis must therefore be linked to oil price stability and our efforts to tackle climate change.
The unprecedented global attention and commitment to forestalling climate change provides a unique opportunity for pursuing the sustainable development agenda. As DESA Under-Secretary-General Sha Zukang has noted, “Climate change is a sustainable development challenge,” rather than only a geophysical one. The increasingly development-oriented Bali-to-Copenhagen negotiation process of the United Nations Framework Convention on Climate Change, which aims to establish a post-2012 governance framework for climate change, and the stronger collaboration between the secretariats of this convention and those on biodiversity and desertification all signal a clear political will to go beyond the intergovernmental and national policy silos which have held back the integration of economic, social and environmental goals so far.
In order to provide further guidance to coordinating the many intergovernmental efforts on sustainable development, the 2008 Annual Ministerial Review of the Economic and Social Council is devoted to implementing the internationally-agreed development goals and commitments in regard to sustainable development. Global preparations for the review included a six-week electronic discussion which elicited 110 responses from experts, practitioners and policy makers from various regions and stakeholder groups and made specific recommendations for the Council’s action.
The e-discussion identified three major economic and financial constraints that have stymied sustainable development: the competing claims for limited resources, particularly in the least developed countries, undelivered pledges made at international conferences to finance sustainable development, and externalities such as increased oil prices, recurring violent conflicts and natural disasters that affect the development model. Participants recommended new and different vehicles for growth, tailored to specific country situations, government incentives to make the private sector a problem solver rather than a polluter, incentives to increase the use of labour in agriculture and diversity production from monoculture, encouragement of a circular system of production and consumption, relying on clean technologies without resource waste, instead of the classic linear system of production and consumption.
The Secretary-General’s report to the Council further reveals that sustainable development as a concept has been generally adopted in principle in public and private circles around the world but often not in practice. Some approaches offer benefits in all three areas of sustainable development – the economic, social and environmental – but often there are costs and trade-offs involved. Generally, while there has been some progress on the economic and social aspects of sustainable development, greater efforts are required, particularly on the long-term sustainability issues of climate change, desertification, deforestation, biodiversity and marine resources, areas where the situation is rapidly deteriorating. There is, therefore, an urgent need to implement effectively the global consensus on Agenda 21, the Johannesburg Plan of Implementation, and Millennium Development Goal number seven on environmental sustainability.
The Secretary-General’s report makes recommendations in a range of areas, including in strengthening governance, creating markets for sustainable development, strengthening global cooperation, increasing financial assistance and promoting the transfer of technology. Specifically, the report recommends that member states renew their commitment to sustainable development at the international and national levels, assess and replicate successful policies, all approve policy frameworks for integrating economic, social and environmental objectives, build international expert networks, establish an enabling environment for international carbon markets, expand the clean development mechanism, introduce environmental national accounts to internalise environmental costs in production and consumption decisions, promote an African green revolution, provide market incentives for protecting biodiversity and expand protected areas, and undertake a systematic review of financing for sustainable development. Technical and financial assistance should specifically target public sector capacities for integrating economic, social and environmental goals and activities.
The Council, as a neutral intergovernmental space devoted to economic, social and environmental matters, is ideally placed to channel and mainstream into the economic and social agenda the energies from the diverse intergovernmental bodies that focus specifically on sustainable development and environmental matters, including its own functional commission, the Commission on Sustainable Development, the conferences of parties of the conventions on climate change, biodiversity and desertification, the UNEP Governing Council, the executive boards of the funds and programmes, and the governing bodies of the specialized agencies with specific mandates in environmental sustainability. There are clearly important additional synergies yet to be realized within the sustainable development architecture of the United Nations. The landmark Annual Ministerial Review meeting on this topic is the next important step in realizing them.
Following through on the outcomes of the meeting, as well as on all other intergovernmental decisions on sustainable development, has to involve coherent actions not only in governing bodies but also at the operational level and in the practices of producers and consumers around the world. “Solutions cannot wait,” Secretary-General Ban Ki-moon warned at this year’s session of the Commission. “The world is looking for concrete action as well as new ideas on how to tackle the formidable challenges we face in the months and years ahead.” The crisis resulting from the effects of climate change and insufficient sustainable development makes such follow-through at all levels a moral imperative for humankind.
For more information: http://www.un.org/esa/sustdev/
Deputy Secretary-General, Asha-Rose Migiro, urged action on the food crisis during a special session of the Economic and Social Council on 20 May. The various causes – high oil prices, speculation, drought, bad weather and the trend toward bio-fuels – might be the subject of debate. But what is beyond debate, she said, is that much of the problem is man-made. To avoid facing the same crisis next year or the year after, “We need to rethink the failed policies of the past. We need new strategies for development that work.”
http://webcast.un.org/ramgen/ondemand/specialevents/2008/se080520pm.rm (9 minutes)
Audio http://www.un.org/radio/realfile/9681.asp (2 minutes)
Full coverage http://www.un.org/ecosoc/GlobalFoodCrisis/Statements.shtml