Expert voices Vol 22, No. 7 - July 2018

GDP growth, interest rates, global debt – is our economy sustainable?

The state of the global economy is currently showing mixed trends. Global GDP is expected to grow, but insufficient infrastructure, financial instability and increasing interest rates are holding many developing countries back from enjoying the revived economy. Trade growth is also accelerating, while the recent G7 summit witnessed crucial challenges to the multilateral trading system. To reach a more sustainable economy, what obstacles do we need to overcome? The team behind the World Economic Situation and Prospects report and monthly briefings in the Global Economic Monitoring Branch in UN DESA’s Economic Analysis and Policy Division, share their insights.

Global GDP growth is expected to reach 3.2 per cent this and next year, but not all countries are sharing this uptrend. How can we build a more equal global economy?

“While we have seen a relatively broad-based upturn of economic activity, we expect only modest growth in the coming years for many countries in Central, West and Southern Africa, Western Asia and Latin America and the Caribbean. In most cases, this subdued outlook reflects long-standing structural weaknesses such as fragile security situations, political instability, high commodity dependence and severe macroeconomic imbalances.

To overcome these obstacles, we need a combination of policy efforts at the national level, which aim to strengthen economic resilience and promote diversification, and a supportive international environment. The latter can only be guaranteed through a multilateral approach to international policy making. The international community needs to ensure that an open, fair and rules-based global trade system is preserved.

We also need to further strengthen global financial stability and ensure that available financial resources are channeled towards socially beneficial investment. And, there is an urgent need to help climate-vulnerable developing countries better cope with the impacts of climate change.”

In recent years, we have seen a notable increase in government debt levels across many developing economies. Is this a cause for concern?

“The extended period of low global interest rates has allowed many governments to increase debt levels with only a limited impact on debt servicing costs. As global financial conditions tighten, debt servicing costs are also likely to rise in many countries.

Notably, countries with large fiscal deficits, high levels of maturing debt, and a substantial amount of foreign-currency-denominated debt are particularly vulnerable to an abrupt tightening of global liquidity conditions, given their high exposure to refinancing and currency mismatch risks. In some cases, high interest burdens have already started to divert a growing share of public resources away from infrastructure, social protection, and other areas crucial to the achievement of the 2030 Agenda. Any cutback or delays to critical infrastructure investment will worsen existing structural bottlenecks and constrain productivity growth, impeding the realization of sustainable development.

In addition, rollbacks on policy measures to address structural challenges, including measures to tackle high unemployment and rising inequality, could risk triggering political and social unrest.”

The recent update to UN DESA’s World Economic Situation and Prospects report projected a sharp drop in global economic output if trade tensions continued to escalate. After the recent G7 summit, are we already on this downward spiral?

“The recent G7 summit was one of the clearest indications yet that the world economy is facing a fundamental challenge to the multilateral trading system and multilateralism more broadly. As a consequence, the world economy certainly has entered more treacherous territory and it remains to be seen how far the open trade disputes will escalate.

While the magnitude of specific tariff measures that have been introduced to date remain relatively limited, the move towards conducting policy-making in a selective and unilateral fashion leaves firms exposed to a high level of uncertainty in terms of the regulation and policy that they will face when buying and selling products in international markets. Anecdotally, this has already started to deter some investment, and increases the probability of a more severe shock to the world economy.”

Certain groups, such as women, youth, older workers, indigenous peoples and other vulnerable groups face higher unemployment rates and more workplace discrimination. Does this bear an economic cost, and how can we achieve a more inclusive economy?

“Discrimination can bear a heavy economic cost, over and above its impediment to social progress. In the workplace, we can distinguish between discrimination related to prejudicial hiring or promotion practices, and discrimination related to inequalities in opportunity, for example in terms of access to high-quality education, which impacts the relative qualifications and capacities of potential candidates. Regardless of when and where the discrimination occurs, the end result means that an economy’s most valuable resource – its human capital – is not used to its full potential, dampening economic activity.

The SDGs provide crucial guidance in this regard, including a range of targets to make the economy more inclusive, by leaving no one behind in all levels of education, by creating lifelong learning opportunities, by broadening access to finance, by opening-up the labour market to all social groups and by economically empowering all stakeholders of the society.”

Do you think we can reach SDG 8 “decent work and economic growth” by 2030 with the current economic growth rate? If not, what do we need to speed up?

“After a prolonged period of subdued growth, the world economy is currently strengthening and GDP growth projections have been revised upwards for the coming years. While this is a positive development, it is not sufficient to ensure a more sustained, widespread, and inclusive growth in the medium term. In fact, some countries and regions are not benefiting from the global cyclical upturn.

A critical step towards achieving SDG 8 of “decent work and economic growth” by 2030 is strengthening investment rates across both developed and developing countries. While we have seen a revival in investment in many countries since early 2017, this follows an extended period of relatively weak global investment growth since the global financial crisis, and the recovery has not yet brought investment rates up to the level needed to achieve a more robust and sustained growth.

The composition of investment is also not necessarily well-directed. For example, in many low-income countries investment remains concentrated in extractive industries, rather than laying foundations for a more diversified economy. Policies are needed that encourage both an adequate level and composition of productive investments, to support productivity growth and medium-term potential and accelerate progress towards sustainable development.”

We thank all the experts in the Global Economic Monitoring Branch for sharing their thoughts: Dawn Holland, Grigor Agabekian, Helena Afonso, Matthias Kempf, Poh Lynn Ng, Ingo Pitterle, Michał Podolski, Sebastian Vergara and Yasuhisa Yamamoto. 

Every month, this team brings you the latest in the global economy. You can find the latest issues here.

For more information:

UN DESA’s Economic Analysis and Policy Division 

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