The ongoing global economic recovery remains uneven and is facing new headwinds. Global economic growth is expected to moderate in 2011 and 2012. At the expected pace of recovery, it would take at least five years to return to the pre-crisis level of global employment and regain the more than 30 million jobs that were lost during the crisis. Subdued growth in major developed economies continues to drag the global recovery. In contrast, developing countries and economies in transition have contributed significantly to the post-crisis expansion of the world economy, led by the large emerging economies in Asia and Latin America, particularly China, India and Brazil.
The outlook is filled with uncertainty. Financial sectors in developed countries remain fragile and credit availability for households and business to support consumption and investment remains limited. Sovereign debt problems, especially in Europe, continue to stir volatility in financial and currency markets. Fears for a growing public debt overhang have pushed many governments towards fiscal austerity, which is slowing the pace of the recovery. As argued in the UN’s World Economic Situation and Prospects 2011, in many instances this shift into austerity seems premature as private sector demand has not sufficiently picked up and most developed countries retain still ample fiscal space for additional stimulus. The increasingly diverging macroeconomic policy stances among major economies is further risking a slower recovery and, moreover, this has been a source of enhanced financial volatility, visible also in currency markets in emerging economies. This may stifle growth in the large emerging economies in Asia and Latin America, particularly China, India and Brazil, which are driving the post-crisis world economic recovery. Monetary easing and low interest rates in developed countries to compensate for fiscal austerity are also contributing to large capital flows into emerging market economies which is causing upward pressure on their exchange rates besides straining financial sector stability.
The political unrest in the Middle East and North Africa is posing a further risk for the world economy. So far, the impact on the global economy has mainly been through the surge in the prices of oil, which have increased by about 30 per cent since the unrests erupted at the beginning of 2011, and adverse impacts on regional labour migration. Given the still unfledged recovery in the world economy from the global financial crisis, further substantial oil price increases could derail the global recovery.
World food prices have reached all time highs. The World Bank has estimated that some 44 million people worldwide became impoverished since mid-2010 as a result of rising prices for basic foods. Many countries are trying to counteract the inflationary pressures by tightening monetary policy, which – along with the cost increases – could slow the global recovery. Countries might also be inclined to protect the domestic supply of food by imposing restrictions on exports of certain products. This could risk exacerbating the rise in world market prices.
In this context of continued global imbalances and increased uncertainty, it is critical to urgently agree on concrete steps towards the implementation of the G-20’s Framework for Strong, Sustainable, and Balanced Growth, launched at the Pittsburgh Summit in 2009. Clear and verifiable targets will need to be laid out to put the global economy on a development path that is both more equitable and sustainable.
At the MDG Summit (the High-level Plenary Meeting of the General Assembly on the Millennium Development Goals) of September 2010, world leaders committed themselves to making every effort to achieve the MDGs by 2015. The Summit outcome document recognizes the threat the multiple crises pose to the hard-gained progress. Even before the crisis, progress has been uneven across countries and targets. The challenges are greatest in the least developed countries, most of which are in Sub-Saharan Africa and South Asia and Small Island Developing States, especially due to global warming and climate change.
World leaders agreed that a reinvigorated global partnership for development must be the centrepiece of additional collective efforts in the years ahead. These renewed vows are meaningless, however, if not followed through. The modest Gleneagles target on aid delivery was missed by $20 billion last year and the shortfall could increase with announced cuts in aid budgets of many donor countries. The United Nations will further strengthen its framework to monitor delivery on commitments to the global partnership for development. The delivery on the commitments for financial support should also be monitored as part of the implementation of the G20 framework for strong sustainable and balanced global growth and IMFC deliberations about concerted efforts to rebalance the global economy.
The Summit outcome document stressed the importance of national ownership in the development process. The United Nations Department of Economic and Social Affairs (UN-DESA), in collaboration with other entities of the UN system engaged in economic and social development, seeks to assist national policymakers in their capacity-building efforts to integrate macroeconomic and social goals in policy formulation and better utilize available national policy space to pursue sustainable development goals in the face of external shocks.
The MDG Summit also 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. In the wake of the recent crisis, the global recession has depressed government revenues and aggravated budget deficits, while creating a need for stimulus packages and recovery measures in many countries. Meanwhile, pressure is mounting to address long-term development goals as well as new challenges related to climate change, population ageing, volatility of food and fuel prices, etc. Thus, donor countries have a strong renewed interest in helping developing countries to improve their tax revenues, as a way to reduce pressure for additional financing for development.
Due to its universal membership and legitimacy, the UN is a key forum for international cooperation in tax matters to the benefit of developed and developing countries alike. The Secretary-General has put forward a number of options, for consideration by ECOSOC, on how to strengthen institutional arrangements to promote international cooperation in tax matters. To support the implementation of the proposed measures, the UN Committee of Experts on International Cooperation in Tax Matters should be strengthened to better serve a new intergovernmental Commission on International Cooperation in Tax Matters.
Putting the global economy on a genuinely sustainable growth path will require massive transformation of energy and transportation infrastructures, and a systematic and comprehensive reinvention and restructuring of productive processes. The UN Conference on Sustainable Development (UNCSD), to be held in June 2012 in Rio de Janeiro, will address, as one of its major themes, “a green economy in the context of sustainable development and poverty eradication”. Building a global green economy and reducing greenhouse emissions requires the development and diffusion of sustainable technologies across a wide spectrum of economic sectors – including energy, transportation, agriculture, materials, buildings, water, and waste management – within a relatively short time frame and encompassing developed and developing countries alike. The core of this strategy should be a strong technology policy with a focus on adaptation and dissemination of green technologies and the treatment of green e
conomic activities as “infant industries” that require appropriate support (subsidies, preferably time-bound, access to credit and perhaps some level of protection).
The green economy concept carries the promise of a new economic growth paradigm that is friendly to the earth’s ecosystems and can also contribute to poverty alleviation. But it also entails risks and challenges, particularly for developing countries, for whom economic development becomes more demanding and the fear arises that the new concept could be used to reinforce protectionist trends, enhance the conditionality associated with international financial cooperation, and unleash new forces that would reinforce international inequalities. UNCSD 2012, commonly referred to as “Rio+20”, will be an opportunity to work together on understanding and mitigating these risks and foster the green economy potentials to protect the planet while promoting sustainable development.
Global cooperation for this purpose requires a three-pronged approach in which (1) the developed countries take the lead in changing their production and consumption patterns; (2) developing countries maintain their development goals but do so while adopting sustainable practices; and (3) developed countries commit to enable and support the developing countries’ sustainable development through finance, technology transfer and appropriate reforms to the global economic and financial structures.
The frequency of financial crises and lack of a global financial safety-net have led developing countries to accumulate foreign reserves. In that context, additional external financing to support the green economy might bring risks leading mainly to larger reserve accumulation without major effects on investment although reserve accumulation, if not sterilized, would increase money supply and hence lower interest rates for investment. Developing countries may be particularly reluctant if the additional financing comes in the form of lending, but they could respond in a similar way to additional transfers, as they may also generate appreciation pressures. They may be even more reluctant to receive the transfer in the form of subsidized imports if the imports of goods and services compete with the industrial policy objective of strengthening domestic capacities to build a green economy.
Thus, in terms of global financial support for the green economy, priority should be given to financing programs that generate strong synergies with domestic efforts and avoid raising costs associated with the new strategy. Perhaps the most important are global financial efforts that facilitate the free or low-cost access to technology, such as global financial technology funds that create knowledge that is made available as a public good, public sector purchase of relevant technology that is also made freely available, technical assistance in building technology capabilities, and human capital formation.
A second area may be mechanisms that facilitate long-term domestic financing in developing countries, thus overcoming its short-term bias. One possible way would be to use the capitalization of multilateral development banks to expand considerably their bond issuance and lending in the domestic currencies of the developing countries, and to support activities that contribute to domestic financial development in these countries, particularly domestic development banks’ capacity to extend the maturities of available domestic financing.
The Fourth UN Conference on the Least Developed Countries (UNLDC IV), to be held in Istanbul in May 2011, provides a timely opportunity to assess the progress made in LDCs since the adoption of the Brussels Plan of Action a decade ago and to lay out the roadmap for the next decade. Despite focused efforts, LDC progress to achieve the MDGs and other development targets has been slow. The main challenges identified a decade ago are still the ones facing these countries today: key structural impediments to development, including high vulnerability to economic shocks and natural disasters, low levels of human development, and weak and single-source economic dynamics are keeping these countries trapped in poverty. Although a number of LDCs experienced high rates of growth before the recent crisis, these were largely driven by primary commodity booms and other external factors associated with an unsustainable pattern of global expansion. The LDCs that showed resilience were aided by rebounding commodity prices and/or large amounts of official development assistance. The challenges for most LDCs are to create more remunerative employment opportunities for a rapidly growing labour force, step up resource allocation to ensure food security based on sustainable agriculture, and invest in infrastructure and technologies that will help build more diversified and resilient economies to cope with volatile world markets and climate threats.
In terms of financing for development, LDCs face key challenges such as low domestic savings and investment, capital flight, high aid dependency, weak country ownership and, in some cases, debt distress and vulnerability. These weaknesses, compounded with structural vulnerabilities, increase the likelihood for LDCs to remain in a low-development trap. The international community should maintain financial support for LDCs, to be properly aligned with national development strategies. More explicit recognition of the LDC category by the IMF and the World Bank in their lending practices would serve this purpose.
Innovative sources of finance have grown in number and size over recent years and have the potential to provide important development resources for LDCs. There is scope for scaling up and to ensure the “additionality” of innovative finance to traditional ODA. Similarly, Aid for Trade should also play an important role in providing additional help in developing the necessary infrastructure, institutions and technical capacity to harness the benefits and minimize the risks of trade liberalization. Aid for Trade can also enhance development through capacity-building in trade negotiations. At the same time, developed countries should also fulfil their commitment to duty-free quota-free access for all products from all LDCs.
Since the implementation of the HIPC Initiative and the MDRI, debt ratios in many LDCs had shown a marked improvement. However, the recent crisis has adversely affected debt indicators in many LDCs. Additional debt relief efforts should help ensure debt sustainability, including for post-completion-point HIPCs, 5 of which are part of the 20 LDCs now on debt distress or at high risk for debt distress. Since the bulk of the debt due is owed to non-Paris Club creditors, new modalities for equitable and fair dealing with non-Paris Club debt, that takes into account the interests of both debtors and creditors, are needed.
Fundamental weaknesses in the international financial system played a key role in the recent global economic crisis. Financial growth of the past decades lost track of the central function of a financial system: to intermediate efficiently between savers and investors and to provide long-term financing for investment. A number of options are available for creating a more stable financial system and a better environment for sustainable growth. Improved international financial regulation is needed to stem excessive risk-taking and capital flow volatility, including through appropriate capital controls and macro-prudential regulatory reforms. It is also recognized that the IMF in its surveillance activities needs to pay more attention to financial sector issues and to policy spillovers, especially those emanating from systemically important countries and financial centres. Another important focus of reform is the creation of an effective global financial safety net as an important backstop for safeguarding global economic and financial stability. Furthermore, the need to explore options for reform of the international reserve system, currently based on virtually one national curre
ncy, is now broadly accepted. It is generally agreed that the long-term issue of moving towards a more diversified, balanced and stable international reserve system, including an enhanced role for Special Drawing Rights (SDRs), should be kept under consideration.
The UN General Assembly has highlighted the need for more inclusive, transparent and effective multilateral approaches to managing global challenges and reaffirmed the central role of the United Nations in global economic governance. While the United Nations remains the only truly universal and inclusive forum for dialogue, it needs to adapt its structures so as to increase its effectiveness in responding to current global challenges. In particular, suggestions have been put forward to strengthen the role of the Economic and Social Council within that framework.
The IMF and the World Bank, which operate within the wider UN-system but have their own governance structures, have taken steps to redress imbalances in voice and representation and to move towards a more representative, responsive and accountable governance. The recent fourteenth IMF quota review resulted in roughly a 6-percentage-point shift in quota share within the membership so as to increase the share of emerging market and developing countries. Yet, according to many members, governance structures of the Bretton Woods institutions will need to be further improved in a continuous and dynamic process. Eventually, well-coordinated regional and sub-regional cooperation mechanisms can play an important complementary role.
As a result of the weaknesses of the current governance system, informal groupings like the G-20 have taken the lead in formulating and implementing coordinated economic policies which have far-reaching impact beyond their limited membership. There is a need to strengthen the engagement of the G-20 with the United Nations through consultations and other regular channels.