A new report from UNCTAD looks at the lessons of the recent financial crisis for both developed and developing economies and considers the potential opportunities for trade and development that are opening up.
The Trade and Development Report 2009, released on 7 September by the Geneva-based UN Conference on Trade and Development, examines various policy options as responses to the global downturn. In addition, it looks at what needs to be done to mitigate the impact of climate change and the steps that should be taken towards achieving sustainable development.
The 218-page report comprises five major sections beginning with a survey of the “impact of the global crisis and the short-term policy response”. This is followed by sections on the “financialisation of commodity markets”, “learning from the crisis” and the “reform of the international monetary and financial system” before finally turning to “climate change mitigation and development”.
The initial observations on the prospects for the global economy appear quite gloomy, but the report identifies opportunities for growth in the adoption of new technologies in response to the challenge of climate change. It says the “likelihood of a recovery in the major developed countries that would be strong enough to bring the world economy back to its pre-crisis growth path in the coming years is quite low.” This is because neither consumption nor investment growth can be expected to revive significantly due to very low capacity utilization and rising unemployment. In addition, banks need to be recapitalized and their balance sheets cleaned of toxic assets before they can be guided back to their traditional role as providers of credit to investors in fixed capital. Until this is achieved, and in order to halt the contraction of GDP, it will be necessary to maintain, or even further strengthen, the expansionary stance of monetary and fiscal policies.
The report predicts that global GDP may fall by more than 2.5 percent in 2009, but may turn positive again in 2010 although it says growth is unlikely to exceed 1.6 percent.
UNCTAD expects GDP in the developed countries to contract by 4 percent in 2009 and growth in developing countries to decelerate from 5.4 percent in 2008 to 1.3 percent in 2009 implying a reduction of average per capita income.
Almost all developing countries have experienced a sharp slowdown of economic growth since mid-2008, and many have also slipped into recession. The channels through which the financial and economic crisis spread to developing countries have varied, depending on factors such as their initial current account and net foreign asset positions, degree of exposure to private international capital flows, composition and direction of international trade in manufactures and services, dependence on primary commodity exports and inflows of migrants’ remittances.
The global report was launched at different locations around the world. A pre-launch meeting was held in London on 1 September when Heiner Flassbeck, Director of the Division of Globalization and Development Strategies at UNCTAD, discussed the issues raised by the report, in particular the opportunities for rapid economic and technological growth presented by climate change.
In the Middle East, a launch meeting at the UN centre in Beirut was addressed Ibrahim Saif, an economist at the University of Jordan, who stated that “neither consumption nor investment growth can be expected to revive significantly anytime soon due to very low capacity utilization and rising unemployment.”
“In addition, banks still need to be recapitalized and their balance sheets cleansed of toxic assets before they can be guided back to their traditional role as providers of credit to investors in fixed capital,” he added.
Saif stressed the importance of stabilizing real exchange rates at a sustainable level. “Such a system would go a long way toward reducing the scope of speculative capital flows that generate volatility in the international financial system and distort the pattern of trade,” he said.
“This would prevent current crisis, because the main incentive for speculating in currencies of high-inflation countries would disappear, and over evaluation, one of the main destabilizing factors for developing countries over the past 20 years, would not occur,” he added.
Meanwhile, Nabil Safwat, chief of the economic development and globalization division at ESCWA, the UN regional agency for the Arab world, told the meeting that the region is divided into four categories. The first includes the oil exporting countries (Saudi Arabia, the United Arab Emirates, Qatar, Bahrain, Kuwait and Oman) which witnessed huge losses amounting to hundreds of billions of dollars in their markets, and are expected to record a deficit in their balance of payments during 2009, compared to the $400 billion of surplus scored in 2008.
The second category, he said, includes Egypt, Syria, Lebanon and Jordan, which have been affected by the global crisis through the return of a great number of expatriates and the decrease in the size of direct foreign investments.
As for the third category, he added, it includes Yemen and Sudan which are going to witness a great challenge resulting from the increase in unemployment which will prevent those countries from proceeding with their development goals by the year 2015.
The last category, according to Safwat, includes Palestine and Iraq which are suffering from a fragmentation in their economic and social infrastructures and are unable to develop even if at a slow pace.
The recommendations of ESCWA, said Safwat, include adopting measures that are necessary to boost the private sector with a special focus on small and medium enterprises (SMEs).
Some developing and emerging-market economies that had managed to avoid large current-account deficits, or even posted surpluses, for several years before the current crisis erupted have proved less vulnerable than in previous crises, the report states.
This is particularly true for several Asian and Latin American developing countries that were hit by financial and currency crises between 1997 and 2001. This time, due to better managed exchange-rate policies in the years leading up to the crisis, they were not only able to prevent substantial currency overvaluation, but also to accumulate foreign exchange reserves. This put them on a solid financial footing and helped them to prevent excessive exchange-rate depreciations when the crisis began. Their domestic banking systems have also remained resilient, because, in drawing lessons from previous financial crises, their financial policies sought to keep private sector indebtedness and the degree of leverage of the banking sector relatively low.
In Africa output growth is expected to slow down sharply in 2009, particularly in sub-Saharan Africa, where per capita GDP will actually fall. This will render it virtually impossible to achieve the United Nations Millennium Development Goals.
The impact of the financial crisis on developing and transition economies through the slowdown of trade was amplified by the sharp fall in international prices for primary commodities in the second half of 2008.
In order to improve the functioning of commodity futures exchanges in the interests of producers and consumers, and to keep pace with the participation of new trader categories such as index funds, closer and stronger supervision and regulation of these markets is indispensable.
This issue is of particular importance for food commodities, because, despite some recent improvements, current grain and oilseed inventories remain very low. This means that any sudden increase in demand or major shortfall in production, or both, will rapidly trigger significant price increases.
In 2009, food emergencies persist in 31 countries, and it is estimated that between 109 million and 126 million people, most of them in sub-Saharan Africa and South Asia, may have fallen below the poverty line since 2006 due to higher food prices.
Despite plummeting international food prices in the second half of 2008, domestic food prices generally have remained very high, and in some cases at record highs.
The report points out that forecasts by specialized agencies expect food prices to remain high in the longer run, mainly as a result of continuously rising biofuel demand and structural factors related to population and income growth.
Considering the policy response in developing and transition economies, UNCTAD says that several countries launched sizeable fiscal stimulus packages. On average, their size was even larger than those of developed countries: 4.7 per cent of GDP in developing countries and 5.8 per cent in transition economies, extending over a period of one to three years.
Meanwhile, the report says, other countries had to turn to the International Monetary Fund (IMF) for financial support to stabilize their exchange rates and prevent a collapse of their banking systems.
Current debt servicing and debt sustainability have become more problematic, not only for countries whose liabilities to commercial lenders have increased rapidly in recent years, but also for a number of low income developing countries, including several heavily indebted poor countries (HIPCs) which depend on borrowing from official sources.
In many countries, governments and central banks have set new precedents for supporting ailing financial institutions that had ended up in trouble on account of mismanagement. The need for such rescue operations has revealed that the huge profits and incomes earned from the financial activities of some market participants and managers over the past few years have been disproportional to the macroeconomic and social usefulness of the financial sector.
The report argues that the “current crisis is due to the predominance of finance over those productive sectors of the economy where real wealth is created, a predominance that was made possible by the euphoria over the efficiency of free markets. This euphoria led to excessive deregulation, an underestimation of risk and excessive leveraging in the years before the crisis,” it states.
Climate change is another major challenge that the report seeks to address. It concludes that there appears to be a huge potential for greater energy efficiency that could be exploited by wider dissemination of already existing technologies in both developed and developing countries.
However, the creation and application of new technologies and the development of alternative energy sources also need to be accelerated. Putting a price on emissions in the form of taxes or tradable emission permits, and thereby changing the incentive structure for producers and consumers, could help set in motion a process towards establishing low-carbon economies.
To date, it argues, there has been insufficient investment in public and private research for the development of alternative sources of energy and cleaner production methods, which has led to “carbon lock-in” in current modes of production and consumption. Proactive policies are therefore needed, including subsidies and public acquisition of patents, to advance technological progress and accelerate the process of catching up from past underinvestment.
The international community can support industrial development in this direction by allowing developing countries sufficient policy space in the context of relevant international agreements on climate change, trade, FDI and intellectual property rights.Global Arab NetworkReport appears in Arab-British Business, fortnightly of the Arab-British Chamber of Commerce.