Developed nations must boost
growth By Supachai Panitchpakdi
GENEVA - The global economy weakened
significantly towards the end of 2011 and further
downward pressure emerged in the course of 2012.
The growth rate of global output, which had
already decelerated from 4.1% in 2010 to 2.7% in
2011, is expected to slow down even more in 2012
to around 2.3%. Developed economies as a whole are
likely to grow by only slightly more than 1% in
2012, owing mainly to the recession currently
gripping the European Union.
This
contrasts with a much stronger performance in
developing and transition economies, where growth
should remain relatively high, at around 5% and 4%
respectively. However, even in these economies
growth is losing steam, showing that they cannot
avoid the impacts of economic
troubles in the developed countries.
On
top of already weak private demand, fiscal
tightening has been adopted in several developed
countries with a view to reducing public debt and
restoring the confidence of financial markets.
However, these policies have further weakened
domestic demand and growth, which is detrimental
to the goals of fiscal consolidation and improved
confidence.
Some governments are trying to
stimulate growth through increasing exports and
are working to improve their competitiveness by
reducing nominal wages and other costs. For
several European countries within the monetary
union, this would be the way to achieve a real
devaluation. The danger with this policy is that
it will severely damage domestic demand before it
can help to regain competitiveness, thus putting
into question the adjustment process.
Developed economies should therefore
change the focus of their policies from fiscal
consolidation and internal devaluation to
restoring growth, because this is the only way in
which they can avoid a recurrence of a financial
and fiscal crisis.
Countries with larger
fiscal space and current account surpluses should
take the lead by expanding their domestic demand.
This would be in line with their commitments at
the last Group of 20 Summit, and contribute to a
growth-friendly global rebalancing.
Most
developing and transition economies have actually
supported their growth by encouraging domestic
demand and pursuing countercyclical policies,
including the provision of fiscal stimulus and
expansionary credit. They have also succeeded in
preventing a significant rise in unemployment, and
have enabled the continued growth of real wages.
All this, together with public transfers
in several countries, has promoted private
consumption, and consequently, productive
investment, even though this has not always been
sufficient to avoid growth deceleration.
Indeed, the developing and transition
economies are being affected by slow growth or
economic contraction in the developed countries.
This is reflected in stagnating export volumes to
those markets and a declining trend in commodity
prices since the second quarter of 2011.
Moreover, financial instability and
excessive reliance on monetary policies in
developed countries is affecting financial flows
to emerging market economies and adding to the
inherent volatility of commodity prices.
Therefore, the risk of a new major shock
in global financial markets cannot be excluded,
with a potentially large impact on international
trade volumes, asset and commodity prices, risk
spreads, capital flows and exchange rates, all of
which would affect developing and transition
economies.
Some governments are looking to
implement structural reforms to overcome the
crisis. The United Nations Conference on Trade and
Development has always supported the need for
structural reforms, since no development process
can happen without changes in economic and social
structures. However, today, structural reforms are
often focused on attempts to introduce greater
labor market flexibility.
Yet, such
reforms would undermine the incentives for
investment and innovation. Indeed, if
less-efficient firms can compensate for their
lower profits by cutting wages, they are not
forced to increase their productivity to survive
and expand. Such reforms also threaten to further
undermine domestic demand.
In order to
revitalize sustained growth, governments must take
measures to reduce income inequality, by assuring
the participation of all social groups in
productivity gains stemming from economic and
technological advancement.
Labor market
reforms are not a way out of the crisis because
the crisis did not originate in the labor market.
Additionally, structural policies cannot be a
substitute for pro-growth macroeconomic polices.
Structural reforms have to address the very roots
of the present crisis, namely the fragility of the
financial system and the trend towards increasing
income inequality.
In contrast, the
structural reforms being adopted by a number of
developing countries have tended to create or
reinforce social safety nets and to expand the
role of public policies for supporting investment
and structural change. Most of these measures are
countercyclical, as they aim to safeguard
employment and support economic activity in
troubled times.
The renewed fragility of
the world economy, and the growing downside risks,
including for developing countries, have brought
us to the brink of a second recession. The
developing countries cannot bear the burden of
supporting global growth alone. Urgent action is
therefore needed to restore growth, particularly
in the developed world, and to take measures to
prevent a recurrence of the financial and economic
crisis.
Supachai Panitchpakdi is
the secretary-general of the United Nations
Conference on Trade and Development (UNCTAD).
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