This article is based on several UNCTAD and other UN agencies both international and regional as well as some experts’ contributions
on the issue of the economy and austerity policies; but first the start is with the UNCTAD 2017 World Trade and Development Report.
In sharp contrast to the ambitions of the 2030 Agenda for Sustainable Development, the world economy remains unbalanced in ways that are not only exclusionary, but also destabilizing and dangerous for the political, social and environmental health of the planet. Even when economic growth has been possible, whether through a domestic consumption binge, a housing boom or exports, the gains have disproportionately accrued to the privileged few. At the same time, a combination of too much debt and too little demand at the global level has hampered sustained expansion of the world economy. Austerity measures adopted in the wake of the global financial crisis nearly a decade ago have compounded this state of affairs. Such measures have hit the world’s poorest communities the hardest, leading to further polarization and heightening people’s anxieties about what the future might hold. Some political elites have been adamant that there is no alternative, which has proved fertile economic ground for xenophobic rhetoric, inward-looking policies and a beggar-thy-neighbour stance. Others have identified technology or trade as the culprits behind exclusionary hyperglobalization, but this too distracts from an obvious point: without signify ant, sustainable and coordinated efforts to revive global demand by increasing wages and government spending, the global economy will be condemned to continued sluggish growth, or worse.
The Trade and Development Report 2017 argues that now is the ideal time to crowd in private investment with the help of a concerted fiscal push – a global new deal – to get the growth engines revving again, and at the same time help rebalance economies and societies that, after three decades of hyperglobalization, are seriously out of kilter. However, in today’s world of mobile finance and liberalized economic policies, no country can do this on its own without risking capital flight, a currency collapse and the threat of a deflationary spiral. What is needed, therefore, is a globally coordinated strategy of expansion led by increased public expenditures, with all countries being offered the opportunity of benefiting from a simultaneous boost to their domestic and external markets.
The Sustainable Development Goals (SDGs) agreed to by all members of the United Nations two years ago provide the political impetus for this much-needed shift towards global macroeconomic policy coordination.
The Trade and Development Report 2017 calls for more exacting and encompassing policy measures to address global and national asymmetries in resource mobilization, technological know-how, market power and political influence caused by hyperglobalization that have generated exclusionary outcomes, and will perpetuate them if no action is taken.
This Reportargues that, with the appropriate combination of resources, policies and reforms, the international community has the tools available to galvanize the requisite investment push needed to achieve the ambitions of the SDGs and promote sustainable and inclusive outcomes at both global and national levels.
August 2007 Crisis
It is ten years since the world economy discovered the dangers of hyperglobalization. The sudden stop in interbank lending in August 2007, along with heightened counterparty risk, caused serious jitters in financial markets, plunged several financial institutions into an insolvency spiral and lit the fuse on a Great Recession. Most of these countries are yet to return to a sustainable growth trajectory.
Although the United States acted quickly to stem the financial collapse that came one year later, the subsequent recovery has been sluggish by historical standards, and unbalanced between the middle class and the wealthy, between Wall Street and Main Street, and between urban metropoles and smaller towns and rural communities. The crisis in Europe was more pronounced and has proved more obdurate, particularly in
some peripheral economies where the resulting economic turmoil has had devastating social consequences.
The rise in unemployment, in particular, has proved difficult to contain or reverse. A principal reason is that most developed countries, to varying degrees, retreated prematurely from the initial expansionary fiscal response to the crisis, relying instead on monetary policy. This helped banks and financial firms to stabilize and return to profit-making, but it was less successful in boosting consumer spending and investment. In response, policymakers have been nudging interest rates into negative territory in an unprecedented attempt to push banks to lend. Even so, a strong recovery has remained elusive.
Despite buoyant financial markets and signs of a cyclical bounce-back in Western Europe and Japan towards the end of the year, global economic growth in 2016 was well below the levels recorded in the run-up to the crisis.
The absence of a robust recovery in developed countries and renewed volatility of global capital flows have constrained economic growth in developing countries, albeit with considerable regional and country-level variation. In general, the rapid recovery from the initial financial shock of2008 has given way to a persistent slowdown since 2011. Growth in the world’s two most populous economies ? China and India ? remains relatively buoyant, but the pace is slower than before the crisis and faces some serious downside risks. The start of2017 has seen other larger emerging economies move out of recession, but with little likelihood of growth at the rates registered in the first decade of the new millennium.
Two factors have been exercising a major influence on growth. The fist is that oil and commodity prices, while emerging from their recent troughs, are still well below the highs witnessed during the boom years. This has dampened recovery in the commodity-exporting countries. Second, with developed economies abnegating responsibility for a coordinated expansionary push, austerity has become the default macroeconomic policy position in many emerging economies facing fiscal imbalances and mounting debt levels. This could worsen if an exit of foreign capital necessitates a cutback in imports in order to reduce trade and current account deficits that become harder to finance. Not surprisingly, anxious policymakers across the South, who are increasingly aware that they have limited control over some of the key elements of their economic future, are closely tracking the United States Federal Reserve’s interest rate policy, the actions of commodity traders and the predatory practices of hedge funds.
China’s current account surplus, which until 2010 was the largest in the world, has since been declining, albeit erratically. Germany has taken over running the largest surpluses, which have even increased recently.
However, unlike the Chinese expansion, which during the boom fostered growth in a range of other developing countries by drawing them into value chains for exporting products to the more advanced countries, the German expansion has not had similar positive impacts in most developing countries. The resulting adverse effect on the global economy has been compounded by a wider trend in the euro zone, where austerity policies have augmented the region’s current account surplus, exporting the euro zone’s deflation and unemployment to the rest of the world.
Finding quick and effective ways to recycle and reduce those surpluses is a singularly critical challenge for the international economic community, a challenge that will prove difficult to tackle as long as austerity remains the dominant macroeconomic mood in a hyperglobalizedworld. Since 2010, the majority of advanced economies have opted for “medium” to “severe” austerity, and even the countries that have considerable fiscal room for manoeuvre have resisted robust expansion. Until recently, some major emerging market economies were exceptions to this trend; but evidence suggests that they too are now curbing expenditure with a view to fiscal consolidation.
Significant long-term investments that enable expansion in lower income countries could be one means of reviving demand globally. It is, therefore, encouraging that Germany has recently announced its intention to launch a Marshall Plan for Africa. However, neither the scale nor the intent appears to match the original model that helped to rebuild post-war Europe. By contrast, China’s “One Belt, One Road” initiative seems more ambitious. If implemented as planned, the investments involved will be huge: an estimated $900 billion.
However, so far, much of the project is on the drawing board, and the pace of implementation as well as its impact will depend on how China manages its domestic imbalances, and on the mode of financing the proposed investments in participating countries.