Reinvigorating the faltering global economic recovery
Recovery from the global financial crisis is faltering and the world economy is facing heightened risks of a serious relapse. Many developed economies in particular are in a perilous situation. Economic growth in the United States decelerated substantially in the first half of 2011, while the euro zone is facing economic stagnation with its largest members at the brink of a new downturn and the most debt-ridden economies trapped in protracted recession. Japan already entered another recession at the end of 2010, which deepened in the aftermath of the earthquake and tsunami of March this year. Growth in developing countries, in contrast, remains strong although slowing amidst heightening global economic uncertainty.
The precipitous sell-off in global equity markets and, more generally, escalated volatility in financial markets, along with growing fears of a double-dip recession and contagion from the sovereign debt crises in Europe, somewhat resembled the situation in the first half of 2008, just before the global financial crisis erupted. But things are better now in a number of respects, and there are no serious asset or credit bubbles to worry about. For instance, many banks in major developed economies have managed to dispose off a large proportion of their ‘toxic’ assets and increased their capital over the past two years, while households and firms have also, to some extent, scaled back their debt.
On other dimensions, however, the present situation could be worse. In 2008, stress in the private financial sector was the main concern, but the disquiet now comes with perceived reduced policy and fiscal space to respond with new stimulus measures to counteract recessionary pressures. Market and media pressures have caused most governments to adopt austerity measures that threaten to weaken growth even further. Most importantly, the high rates of unemployment, due to the weak recovery, are not only constraining demand and, hence, recovery, but are also increasingly endangering longer-term growth prospects as workers’ skills, lifetime earnings and savings decline the longer they are unemployed.
Meanwhile, policy makers of many developing economies have been trying to temper rising inflation, emerging asset price bubbles, surging capital inflows, and exchange rate appreciation by tightening monetary policies and imposing capital controls. Tighter monetary policy, reduced fiscal efforts, worsening income distribution and weakening demand from developed economies are moderating their growth prospects. The most recent drop in commodity prices comes as a mixed blessing: some developing economies will see inflationary pressures ease with lower food and energy prices, while commodity exporters will suffer revenue losses and bleaker growth prospects. However, the greater uncertainty and volatility in commodity prices and capital flows hurt all developing countries, affecting long-term investment decisions and complicating macroeconomic decision-making. Moreover, droughts and other natural disasters have inflicted much suffering in many low-income countries, especially in the Horn of Africa, while political unrest continues to drag on the economies in North Africa and West Asia.
The pessimistic scenario of the United Nations’ World Economic Situation and Prospects 2011, released at the beginning of the year, seems to be close to materializing. If so, this would mean global output growth of 1.7 per cent for 2011 and around two per cent in 2012. The risk of a double-dip recession among advanced economies has become alarmingly high, dimming growth prospects for developing countries as well.[1]
Macroeconomic policies worldwide are extremely challenged at this juncture. In a context of persistently high unemployment and anaemic domestic demand, the shift towards severe fiscal austerity in many advanced economies could well turn out to be the recipe for a new recession. For a few European economies, plans to restore fiscal sustainability are urgently needed due to weakened international or even regional solidarity as well as the absence of sovereign debt restructuring arrangements.
This, however, should not be the immediate priority in other developed economies as they retain fiscal space and are able to borrow at low interest in capital markets. Instead, their focus should be on dealing with the jobs crisis through redesigned fiscal stimulus packages and structural policies encouraging green and more labour-intensive growth. Credible plans for fiscal adjustment and debt reduction are needed, but should be phased in over the medium term once the additional stimulus takes hold. Measures to strengthen the capital positions of the banks and non-bank financial institutions are also needed, as much as concerted measures to stem volatility in currency markets.
Recent trends also reiterate the need for much more effective macroeconomic policy coordination at the international level as well as other reforms such as an effective and fair sovereign debt workout mechanism. The spillover effects of national policies are strong, and current stances, especially in the advanced countries, seem to be making things worse. Much more progress is needed in implementing the G-20’s Framework for Strong, Sustainable, and Balanced Growth and making it immediately effective for policy-making.
A year ago, at the 2010 MDG Summit, world leaders agreed that a reinvigorated global partnership for development must be the basis for collective efforts in the years ahead. The modest Gleneagles target on aid delivery was missed by $20 billion last year and the shortfall could increase with announced cuts in the 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. Delivery on such commitments for financial support should also be monitored in implementing the G20 framework for strong sustainable and balanced global growth as well as in IMFC and DC deliberations on concerted efforts to rebalance the global economy.
Stemming volatile international capital flows
Given the nature of the recent global crisis, many policy response measures have been in the area of financial market regulation. Much attention has focused on regulating finance at a national level, with insufficient attention to addressing risks associated with cross-border flows. Expansive monetary policy in advanced countries and stronger economic performance in developing countries have widened rate of return differentials pulling large, mostly short-term and speculative capital flows towards emerging market economies. These economies are particularly vulnerable to sharp reversals in short-term flows due to fluctuations in financial markets as these flows tend to be large relative to the size of their domestic financial sectors and economies.
These concerns have led to a number of emerging economies introducing measures to contain the negative impacts of short-term capital flow surges. The IMF’s recent recognition that capital account regulation can be helpful for managing such flows is an important step forward and should serve as a basis for including cross-border capital flows in the broader discussion of prudential regulation. However, the IMF’s prescription is for the use of capital account regulations only as a ‘measure of last resort’, that is after all other macroeconomic policy options have been exhausted. Yet, by using regulations from early on, countries can reduce volatility and avoid excessive reserve accumulation before it occurs. As such, capital account regulations can increase the effectiveness of other macroeconomic tools. In other words, they should not be seen as a substitute for developmental macroeconomic policies, but rather as an important complement to them. Furthermore, policy advice and international cooperation on capital flows should be even-handed, and target not only recipient countries, but also originating countries, taking into account their differential responsibilities for global financial stability. As capital account regulations have international repercussions, better multilateral management and coordination of capital flows would reduce the need to resort to such measures.
The G-20 has tabled a proposal to help emerging and developing countries respond to increased cross-border risks by broadening and deepening domestic capital markets. This can be helpful for many reasons, but should be implemented with the necessary caution. Deeper capital markets can also increase risks, as they may attract additional short-term speculative flows, thereby strengthening transmission of global market volatility and increasing the need for precautionary reserve holdings. Measures to encourage deepening domestic capital markets will thus need to be undertaken in conjunction with the use of capital account management techniques to discourage short term speculative flows.
Strengthening global economic governance
The inability of the international community to coordinate policies to reverse persistent payments imbalances in the lead-up to the current crisis originates from dangerous gaps in global economic governance. 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 UN remains the only truly universal and inclusive forum for dialogue, it needs to adapt its structures to increase its effectiveness in responding to current global challenges. In particular, there is a need to strengthen the role and improve the functioning of the Economic and Social Council (Ecosoc).
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 more representative, responsive and accountable governance. The fourteenth IMF quota review resulted in a roughly six percent shift in quota share within the membership increasing the share of emerging market and developing countries. Yet, according to many members, the governance structures of the Bretton Woods institutions will need to be further improved.
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 impacts beyond their limited membership. While more fundamental reforms are being worked out, there is a need to strengthen the engagement of the G-20 with the United Nations through consultations and other regular channels.
It is also important to recognize the potential of regional and sub-regional institutions and arrangements to strengthen the existing architecture of global economic governance. They are well-placed to capture and respond to specific needs and demands, especially for small countries. It is increasingly feasible to envisage a multi-layered framework of global economic governance with a strong network of regional and sub-regional institutions playing a complementary role.
Achieving sustainable development
Putting the global economy on a genuinely sustainable developmental path will require massive transformation of energy and transportation infrastructures, and systematic and comprehensive reinvention and restructuring of productive processes. Mobilizing the required investment financing for a green technological transformation will be central at the upcoming United Nations Conference on Sustainable Development (UNCSD), to be held in June 2012 in Rio de Janeiro. Sustainable global growth will require 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.[2]
Global cooperation for this purpose requires a three-pronged approach in which (1) developed countries take the lead in changing their production and consumption patterns; (2) developing countries strive to achieve their development goals while adopting sustainable practices; and (3) developed countries commit to enable and support developing countries’ sustainable development through finance, technology transfer and appropriate global economic and financial reforms.
The frequency of financial crises and lack of a global financial safety-net have led developing countries to accumulate foreign reserves. In this 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 additional financing comes in the form of more borrowing. They may be even more reluctant to receive transfers in the form of subsidized imports if the imports of goods and services compete with the industrial policy efforts to strengthen 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.
A second area may be mechanisms that facilitate long-term domestic financing in developing countries, thus overcoming its short-term bias. Multilateral development banks could considerably expand their bond issuances, lend in the domestic currencies of developing countries, and support activities that contribute to domestic financial development in these countries, particularly domestic development banks’ capacity to extend the maturities of available domestic financing.
Preparing for the post-2015 development agenda
Going forward, the sustainability of stronger, balanced growth in the world economy critically depends on reaching higher levels of human development in developing countries. Reaching the MDGs in 2015 is but a first step in that direction. While efforts must be stepped up to achieve the MDGs in the four remaining years left, there is need to initiate a process of collective thinking about how to shape the post-2015 development agenda.
Rio+20 will be an important milestone in the process of rethinking development. Balanced consideration of the economic, social and environmental stresses of our times, as well as focus on implementation and coherence will be centre stage at Rio. Discussions have started, both formally and informally at the UN, as part of an open and inclusive process of consultation involving both developed and developing countries with participation by government officials, communities, civil society organizations, academia and the private sector. Only such inclusiveness can ensure ‘development for all’ as we move towards and beyond 2015.
[1] The scenario and related policy challenges are described on pages 33-43 of the report, which can be accessed at http://www.un.org/en/development/desa/policy/, along with the mid-year and monthly updates.
[2] For an in-depth analysis of the required technological transformation, its national and international policy implications and financing requirements, see United Nations, World Economic and Social Survey 2011: The Great Green Technological Transformation (http://www.un.org/en/development/desa/policy/).
Recovery from the global financial crisis is faltering and the world economy is facing heightened risks of a serious relapse. Many developed economies in particular are in a perilous situation. Economic growth in the United States decelerated substantially in the first half of 2011, while the euro zone is facing economic stagnation with its largest members at the brink of a new downturn and the most debt-ridden economies trapped in protracted recession. Japan already entered another recession at the end of 2010, which deepened in the aftermath of the earthquake and tsunami of March this year. Growth in developing countries, in contrast, remains strong although slowing amidst heightening global economic uncertainty.
The precipitous sell-off in global equity markets and, more generally, escalated volatility in financial markets, along with growing fears of a double-dip recession and contagion from the sovereign debt crises in Europe, somewhat resembled the situation in the first half of 2008, just before the global financial crisis erupted. But things are better now in a number of respects, and there are no serious asset or credit bubbles to worry about. For instance, many banks in major developed economies have managed to dispose off a large proportion of their ‘toxic’ assets and increased their capital over the past two years, while households and firms have also, to some extent, scaled back their debt.
On other dimensions, however, the present situation could be worse. In 2008, stress in the private financial sector was the main concern, but the disquiet now comes with perceived reduced policy and fiscal space to respond with new stimulus measures to counteract recessionary pressures. Market and media pressures have caused most governments to adopt austerity measures that threaten to weaken growth even further. Most importantly, the high rates of unemployment, due to the weak recovery, are not only constraining demand and, hence, recovery, but are also increasingly endangering longer-term growth prospects as workers’ skills, lifetime earnings and savings decline the longer they are unemployed.
Meanwhile, policy makers of many developing economies have been trying to temper rising inflation, emerging asset price bubbles, surging capital inflows, and exchange rate appreciation by tightening monetary policies and imposing capital controls. Tighter monetary policy, reduced fiscal efforts, worsening income distribution and weakening demand from developed economies are moderating their growth prospects. The most recent drop in commodity prices comes as a mixed blessing: some developing economies will see inflationary pressures ease with lower food and energy prices, while commodity exporters will suffer revenue losses and bleaker growth prospects. However, the greater uncertainty and volatility in commodity prices and capital flows hurt all developing countries, affecting long-term investment decisions and complicating macroeconomic decision-making. Moreover, droughts and other natural disasters have inflicted much suffering in many low-income countries, especially in the Horn of Africa, while political unrest continues to drag on the economies in North Africa and West Asia.
The pessimistic scenario of the United Nations’ World Economic Situation and Prospects 2011, released at the beginning of the year, seems to be close to materializing. If so, this would mean global output growth of 1.7 per cent for 2011 and around two per cent in 2012. The risk of a double-dip recession among advanced economies has become alarmingly high, dimming growth prospects for developing countries as well.[1]
Macroeconomic policies worldwide are extremely challenged at this juncture. In a context of persistently high unemployment and anaemic domestic demand, the shift towards severe fiscal austerity in many advanced economies could well turn out to be the recipe for a new recession. For a few European economies, plans to restore fiscal sustainability are urgently needed due to weakened international or even regional solidarity as well as the absence of sovereign debt restructuring arrangements.
This, however, should not be the immediate priority in other developed economies as they retain fiscal space and are able to borrow at low interest in capital markets. Instead, their focus should be on dealing with the jobs crisis through redesigned fiscal stimulus packages and structural policies encouraging green and more labour-intensive growth. Credible plans for fiscal adjustment and debt reduction are needed, but should be phased in over the medium term once the additional stimulus takes hold. Measures to strengthen the capital positions of the banks and non-bank financial institutions are also needed, as much as concerted measures to stem volatility in currency markets.
Recent trends also reiterate the need for much more effective macroeconomic policy coordination at the international level as well as other reforms such as an effective and fair sovereign debt workout mechanism. The spillover effects of national policies are strong, and current stances, especially in the advanced countries, seem to be making things worse. Much more progress is needed in implementing the G-20’s Framework for Strong, Sustainable, and Balanced Growth and making it immediately effective for policy-making.
A year ago, at the 2010 MDG Summit, world leaders agreed that a reinvigorated global partnership for development must be the basis for collective efforts in the years ahead. The modest Gleneagles target on aid delivery was missed by $20 billion last year and the shortfall could increase with announced cuts in the 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. Delivery on such commitments for financial support should also be monitored in implementing the G20 framework for strong sustainable and balanced global growth as well as in IMFC and DC deliberations on concerted efforts to rebalance the global economy.
Stemming volatile international capital flows
Given the nature of the recent global crisis, many policy response measures have been in the area of financial market regulation. Much attention has focused on regulating finance at a national level, with insufficient attention to addressing risks associated with cross-border flows. Expansive monetary policy in advanced countries and stronger economic performance in developing countries have widened rate of return differentials pulling large, mostly short-term and speculative capital flows towards emerging market economies. These economies are particularly vulnerable to sharp reversals in short-term flows due to fluctuations in financial markets as these flows tend to be large relative to the size of their domestic financial sectors and economies.
These concerns have led to a number of emerging economies introducing measures to contain the negative impacts of short-term capital flow surges. The IMF’s recent recognition that capital account regulation can be helpful for managing such flows is an important step forward and should serve as a basis for including cross-border capital flows in the broader discussion of prudential regulation. However, the IMF’s prescription is for the use of capital account regulations only as a ‘measure of last resort’, that is after all other macroeconomic policy options have been exhausted. Yet, by using regulations from early on, countries can reduce volatility and avoid excessive reserve accumulation before it occurs. As such, capital account regulations can increase the effectiveness of other macroeconomic tools. In other words, they should not be seen as a substitute for developmental macroeconomic policies, but rather as an important complement to them. Furthermore, policy advice and international cooperation on capital flows should be even-handed, and target not only recipient countries, but also originating countries, taking into account their differential responsibilities for global financial stability. As capital account regulations have international repercussions, better multilateral management and coordination of capital flows would reduce the need to resort to such measures.
The G-20 has tabled a proposal to help emerging and developing countries respond to increased cross-border risks by broadening and deepening domestic capital markets. This can be helpful for many reasons, but should be implemented with the necessary caution. Deeper capital markets can also increase risks, as they may attract additional short-term speculative flows, thereby strengthening transmission of global market volatility and increasing the need for precautionary reserve holdings. Measures to encourage deepening domestic capital markets will thus need to be undertaken in conjunction with the use of capital account management techniques to discourage short term speculative flows.
Strengthening global economic governance
The inability of the international community to coordinate policies to reverse persistent payments imbalances in the lead-up to the current crisis originates from dangerous gaps in global economic governance. 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 UN remains the only truly universal and inclusive forum for dialogue, it needs to adapt its structures to increase its effectiveness in responding to current global challenges. In particular, there is a need to strengthen the role and improve the functioning of the Economic and Social Council (Ecosoc).
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 more representative, responsive and accountable governance. The fourteenth IMF quota review resulted in a roughly six percent shift in quota share within the membership increasing the share of emerging market and developing countries. Yet, according to many members, the governance structures of the Bretton Woods institutions will need to be further improved.
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 impacts beyond their limited membership. While more fundamental reforms are being worked out, there is a need to strengthen the engagement of the G-20 with the United Nations through consultations and other regular channels.
It is also important to recognize the potential of regional and sub-regional institutions and arrangements to strengthen the existing architecture of global economic governance. They are well-placed to capture and respond to specific needs and demands, especially for small countries. It is increasingly feasible to envisage a multi-layered framework of global economic governance with a strong network of regional and sub-regional institutions playing a complementary role.
Achieving sustainable development
Putting the global economy on a genuinely sustainable developmental path will require massive transformation of energy and transportation infrastructures, and systematic and comprehensive reinvention and restructuring of productive processes. Mobilizing the required investment financing for a green technological transformation will be central at the upcoming United Nations Conference on Sustainable Development (UNCSD), to be held in June 2012 in Rio de Janeiro. Sustainable global growth will require 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.[2]
Global cooperation for this purpose requires a three-pronged approach in which (1) developed countries take the lead in changing their production and consumption patterns; (2) developing countries strive to achieve their development goals while adopting sustainable practices; and (3) developed countries commit to enable and support developing countries’ sustainable development through finance, technology transfer and appropriate global economic and financial reforms.
The frequency of financial crises and lack of a global financial safety-net have led developing countries to accumulate foreign reserves. In this 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 additional financing comes in the form of more borrowing. They may be even more reluctant to receive transfers in the form of subsidized imports if the imports of goods and services compete with the industrial policy efforts to strengthen 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.
A second area may be mechanisms that facilitate long-term domestic financing in developing countries, thus overcoming its short-term bias. Multilateral development banks could considerably expand their bond issuances, lend in the domestic currencies of developing countries, and support activities that contribute to domestic financial development in these countries, particularly domestic development banks’ capacity to extend the maturities of available domestic financing.
Preparing for the post-2015 development agenda
Going forward, the sustainability of stronger, balanced growth in the world economy critically depends on reaching higher levels of human development in developing countries. Reaching the MDGs in 2015 is but a first step in that direction. While efforts must be stepped up to achieve the MDGs in the four remaining years left, there is need to initiate a process of collective thinking about how to shape the post-2015 development agenda.
Rio+20 will be an important milestone in the process of rethinking development. Balanced consideration of the economic, social and environmental stresses of our times, as well as focus on implementation and coherence will be centre stage at Rio. Discussions have started, both formally and informally at the UN, as part of an open and inclusive process of consultation involving both developed and developing countries with participation by government officials, communities, civil society organizations, academia and the private sector. Only such inclusiveness can ensure ‘development for all’ as we move towards and beyond 2015.
[1] The scenario and related policy challenges are described on pages 33-43 of the report, which can be accessed at http://www.un.org/en/development/desa/policy/, along with the mid-year and monthly updates.
[2] For an in-depth analysis of the required technological transformation, its national and international policy implications and financing requirements, see United Nations, World Economic and Social Survey 2011: The Great Green Technological Transformation (http://www.un.org/en/development/desa/policy/).
File date:
Thursday, 九月 22, 2011