After a year of fragile and uneven recovery, there are increasing signs of a widespread deceleration in the world economy in the second half of 2010. While many developing economies have shown a strong pace in the earlier stage of recovery, it will be difficult to sustain growth at the present pace if growth in the major developed economies continues to falter. The risk of a double-dip recession has increased. But even without a double-dip recession, the world economy most likely will be in for a protracted period of subdued growth, accompanied by elevated unemployment, which would equally be detrimental. The hangover from the impact of the global financial crisis, particularly the prolonged adjustment in the balance sheets of financial institutions and households, and the fading of government stimulus measures are the two major factors dragging the recovery. Policymakers worldwide will need to revisit the size and nature of stimulus measures in order to resurrect the global recovery. According to the most recent United Nations forecast, the world economy is expected to grow by around 3 per cent in 2010, but without additional policy action global growth likely will slow to a pace well below 3 per cent in the coming years. [1]
The world financial and economic crisis has taken a heavy human toll. Estimates by the United Nations Department of Economic and Social Affairs suggest that between 47 and 84 million people remained poor or were driven into extreme poverty in developing countries and economies in transition, than would have been the case had pre-crisis growth continued. The World Bank estimates that even a relatively small 0.5 percentage point decline in the rate of growth of potential output in low-income countries would – over a 10 year period – increase the number of people living on $2 dollars per day or less, by as much as 79 million. Some middle- income countries built up policy buffers in the years preceding the crisis and these buffers could be tapped into to stave off deeper economic downturn and setbacks in achieving their development goals. An increasing number of, especially low-income, countries will feel increasing financial stress with a weak and protracted recovery of the global economy.
A large number of countries responded to the economic and financial crisis with fiscal stimulus packages to support aggregate demand. These measures have been critical for stabilizing individual economies in 2009, but their contribution to the economic recovery has been uneven in part because of differences in the nature and size of the stimulus. While discretionary fiscal measures contributed to widening budget deficits, the direct impact of the recession (via lower tax revenues and/or higher unemployment benefit payments) has been larger. The stimulus measures by themselves are having only a very modest impact (less than 5 per cent according to IMF estimates) to the projected rise in debt-to-GDP ratios of the G20 countries.
Mainly because of the revenue losses, public indebtedness has increased significantly among most developed economies. In Southern Europe it has led to increased perceived sovereign debt default risk. As these countries are part of the Euro zone, the debt problems created turmoil in global currency and financial markets in the first half of the year. The calls for withdrawal of fiscal stimulus have been broader and central to the deliberations at the G20 summit in Toronto. With the recovery still feeble, countries now have to walk a fine line between ensuring sufficient support for recovery and avoiding major debt problems.
Nonetheless, most major economies still have significant fiscal space left for further stimulus. This should be used to secure global recovery and prevent a double-dip recession. As unemployment rates and output gaps are still persistently high, fiscal stimulus will provide a stronger impulse to aggregate demand if it can counteract unemployment to bring output back to potential. Past experience has shown that long-lasting demand expansions were able to achieve this, as well as lower public debt-to-GDP ratios from both the added output growth and the high tax revenues. It suggests that a prolonged demand stimulus by governments focused on job creation is not only necessary to avoid a weak and protracted recovery, but that this can be done without endangering fiscal sustainability.
Many middle- and low-income countries, however, possess much less fiscal space to implement countercyclical measures and pursue their poverty reduction strategies. While greater efforts are needed to enhance the domestic resource mobilization capacity in these countries, it is also clear that in the short-to-medium run many will have to rely on external financing sources to meet development needs. Over the next 20 years, the fight against poverty and financial inclusion could be hampered if countries are forced to cut productive and human capital investments because of lower development aid and reduced tax revenues.
On 20-22 September 2010, world leaders gathered in New York to reaffirm their commitment to achieve the Millennium Development Goals (MDGs). The Summit outcome document recognizes the threat the multiple crises pose to the hard-gained progress made by developing countries in their efforts to shake off the yoke of poverty. Also before the crisis, progress has been uneven across and within countries. The challenges are largest in the least developed countries, mostly in Africa and South Asia. Without additional efforts, several MDGs are likely to be missed.
World leaders agreed that a reinvigorated global partnership for development must be the centrepiece of additional collective efforts in the years ahead. Global development partnerships must be based on the premise that while each country has primary responsibility for development, national development efforts need to be supported by an enabling international economic environment, as emphasized in the 2002 Monterrey Consensus, the 2008 Doha Declaration on Financing for Development, the Outcome of the 2009 Conference on the World Financial and Economic Crisis and Its Impact on Development, and the outcome of the 2010 High Level Plenary Meeting of the UN General Assembly, entitled “Keeping the promise: united to achieve the Millennium Development Goals”.
The MDG Summit highlighted the need for enhancing domestic resource mobilization and fiscal space through modernized tax systems, more efficient tax collection, broadening the tax base, and effectively combating tax evasion and capital flight. While each country is responsible for its tax system, it is important to support such national efforts by strengthening international tax cooperation. The UN Committee of Experts on International Cooperation in Tax Matters has an increasingly important role to play. Upgrading the current Committee to a United Nations intergovernmental commission on tax matters would pave the way for more effective cooperation in tax matters, which in turn could mobilize significant amounts of fiscal resources for development.
Commitments to scale up official development assistance (ODA) for the poorest countries have not been met. There is still a gap of $20 billion to be filled to meet the Gleneagles commitments before the end of this year. Particularly worrisome is that most of the delivery shortfall ($16 billion) is on the promises made to Africa. World leaders agreed to meet these commitments, as well as to meet the longstanding UN target of increasing total aid to 0.7 per cent of national income of donor countries. These renewed vows are meaningless if not followed through and it will be important that delivery is also monitored as part of the G20 framework for strong sustainable and balanced global growth and IMFC deliberations about concerted efforts to rebalance the global economy.
In order to make aid flows less sensitive to annual budget considerations in donor countries, the Summit outcome document recognized the potential of innovativ
e forms of financing to mobilize the necessary funding to support the achievement of the MDGs, as well as for climate change mitigation and adaptation. There has already been success in using innovative forms of financing to support global health programmes. Further proposals under consideration include international levies on financial and currency transactions, carbon taxes, new issuance of special drawing rights (SDRs) to be allocated for development purposes, measures to repatriate illicit capital outflows and lower transaction costs of worker remittances. Such proposals should also be high on the G20 and IMFC agendas.
With existing debt initiatives (HIPC and MDRI) expiring, and many developing countries showing recurrent debt distress, in part as a consequence of the crisis, there is an urgent need for a new framework for debt relief and for a sovereign debt workout mechanism to avoid debt problems, which continue to be a strain on achieving the MDGs. The MDG Summit has called on the multilateral system to urgently elaborate such a new framework and mechanism.
An enabling trade environment is crucial for countries to effectively mobilize resources to achieve the MDGs. WTO Member States must increase their efforts to conclude a truly developmental Doha Round of multilateral trade negotiations. This implies significant progress on important trade measures, like reduced agricultural subsidies, greater market access as well as enhanced special and differential treatment for developing countries. Aid for Trade (A4T) can help developing countries build trade-related infrastructure and productive capacity. At their Toronto Summit, the G20 leaders committed themselves to maintaining A4T and called on international agencies to enhance their capacity and support for trade facilitation.
A genuine solution to the climate change challenge requires nothing less than a massive transformation of energy and transportation infrastructures, and a systematic and comprehensive reinvention and restructuring of productive processes. In order to shift the foundations of economic life onto a low-carbon path, it will be necessary to ensure that all countries have both the means and the incentives to undertake such far-reaching changes.
Regrettably, public and private investment levels towards sustainable development remain grossly inadequate. The public sector will have to lead the way in many sectors, particularly in infrastructure, transportation and technology innovation systems, in order to attract private investments, also offering new opportunities for economic development. More ‘green investment’ will enhance the productive capacity of the economy, create jobs and sustain economic recovery. The promotion of renewable energy has the potential to provide significant employment as this sector tends to be more labour intensive than the non-renewable sector. Likewise, improvement of public transportation can create potentially significant new jobs while reducing greenhouse gas emissions.
Three major hurdles have to be tackled to promote a greener global economy in the wake of the world financial and economic crisis. First, fiscal constraints to make the necessary investments in climate change mitigation and adaptation have to be addressed, particularly in developing countries. Second, present biases in fiscal subsidies and financial regulation of most countries against green investments and use of renewable energy will need to be removed. Finally, the present fragmentation of international climate and environmental funds has impeded the mobilization and more effective allocation of adequate resources.
Assuring that developing countries have access to the real financial resources required to cover the additional, incremental costs of shifting to low-carbon pathways is a core task for an effective global response. Estimates of general costs of meeting this burden vary widely, but for developing countries alone the estimates cluster around $150 billion to $200 billion per year in the coming decades[2], indicating that additional ODA for the poorest countries will be needed for this purpose. In this light, the $30 billion in climate financing for developing countries until 2013 and $100 billion by 2020, as agreed by a group of major economies in Copenhagen, may still fall short of what is needed. While large in absolute terms, any of these amounts constitute but a small fraction of world output. Thus, mobilizing such resources is mainly a matter of political priority.
It is in this spirit that the United Nations Secretary-General convened, shortly after the Copenhagen conference at the end of last year, a high-level Advisory Group on climate change Finance (AGF). The most efficient and effective response to stabilize climate and cope with the unavoidable consequences of climate change will be one that is globally coordinated, in line with the Bali Roadmap, and perceived by all parties to be fair in its distribution of the financial and social burden of adjustment, in accordance with the principle of common but differentiated responsibilities and respective capabilities. The United Nations Framework Convention on Climate Change (UNFCCC) provides the appropriate and fully legitimate venue for developing a truly comprehensive intergovernmental approach to global climate coordination. The United Nations Conference on Sustainable Development in 2012, also referred to as Rio+20 will also address the issue of climate change mitigation and adaptation finance when it discusses the theme of a green economy in the context of sustainable development and poverty eradication.
In response to the worst financial crisis since the Great Depression, the G20 Framework for Strong, Sustainable and Balanced Growth will require greater cooperation and coordination in economic policies and regulatory approaches, otherwise economic recovery will be based on reigniting the imbalances that will lead to another crisis. Last month’s agreement among the 27 countries in the Basel Committee on Banking Supervision to require banking institutions to triple core tier one capital ratios from 2 per cent to 7 per cent by 2019 is an example of a genuine reform effort. However, the record of previous Basel standards suggests that it remains to be seen whether all parties will implement it. More importantly, the reform still leaves out shadow banking, the root cause of the current crisis, and hence it needs to be seen whether the changes would contribute to future crisis prevention and resilience. Additionally, the ongoing financial regulatory and supervisory reforms must not unintentionally impede economic or financial growth in developing countries. Financial regulation in developing countries should aim at promoting both financial stability and inclusion.
1 For the details, see the forthcoming World Economic Situation and Prospects 2011 of the United Nations
2 For example, UNFCCC estimates indicate that financing for mitigation technologies in all countries needs to increase by $262 billion, to $670 billion annually, over current levels. It is projected that, of this increase, 40-60 per cent, or an additional $105 billion to $402 billion per year, will be needed in developing countries, indicating that additional ODA will be required for this purpose. According to the World Development Report 2010 (Chapter 6, p. 257), "The funding required for mitigation, adaptation, and technology is massive. In developing countries mitigation could cost $140 to $175 billion a year over the next 20 years (with associated financing needs of $265 to $565 billion): over the period 2010 to 2050 adaptation investments could average $30 to $100 billion a year (in round numbers)."