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Saturday, November 27, 2021
DOHA, Dec 1 2008 (IPS) - The most severe financial crisis since the Great Depression needs massive economic stimulus packages that are coherent and linked with sustainable development imperatives, asserts a new report by top U.N. economists released Monday on the sidelines of the Monterrey Review conference in Doha.
The first chapter of The World Economic Situation and Prospects 2009 – to be launched in early January – calls for "deep reforms of [the] financial system" to counteract the "synchronised global downturn". The report urges a more inclusive global economic governance, to prevent against any future repetition.
The developed countries could enter into a deep recession in 2009, causing world output to fall and GDP growth in the developing world to drop to 2.7 percent, which would be dangerously low for the ability of countries to sustain poverty reduction efforts and social and political stability, the report warns.
Was this a crisis foretold?
According to Rob Vos, director of U.N. Department of Economic and Social Affairs (DESA), past issues of this annual report from the U.N. have repeatedly pointed out that the "apparently robust growth" of the last few years came with enormous risks.
"That analysts and policymakers are now expressing bewilderment at the extent of the crisis suggests not only a gross underestimation of the fundamental causes underlying the crisis but also unfounded faith in the self-regulatory capacity of unfettered financial markets," the report states.
What price for developing countries?
For developing countries, the cost of external borrowings has risen sharply and capital inflows are reversing. Also, prices of primary commodities have reversed sharply affecting export growth and the current account balance of many countries has shifted into the red.
The dollar has appreciated in the crisis, while currencies in a number of developing countries, particularly those that are commodity exporters, have fallen against the dollar substantially since mid-2008. The bailout packages in the U.S. and the flight to safety to the U.S. by many financial institutions resulted in the rebound of the dollar.
But Vos predicts the recent strength of the dollar will be temporary and the risk of a "hard landing of the dollar" in 2009 or beyond remains. Job creation will get significantly harder in most regions during the course of 2009. The concern of policymakers should be to stave off sharp downfalls in economic growth, the economists point out.
Growth prospects of developing countries will be severely hampered. Africa will suffer from lower commodity prices and weakening export demand. Growth in East Asia is affected by the weakening of global demand and the global credit crunch. Capital outflows and waning investor confidence will dim growth in South Asia.
Lower oil prices and the global slowdown will affect growth prospects in West Asia. While Latin American and Caribbean economies will slow markedly in 2009.
What is to be done?
U.N. economists see the crisis as an opportunity to create a new international financial architecture that will make for more inclusive participation of developing countries.
The report identifies the need for the creation of a "credible and effective mechanism" for international policy coordination to guide fundamental revisions of the governance structure and functions of the IMF and the World Bank, now led by the U.S. and EU.
In addition, fundamental reforms of existing systems of financial regulation and supervision that will lead to the creation of a new internationally coordinated framework to stem past excesses.
Economists also call for the reform of the present international reserve system to create a multilaterally backed multi-currency system that will end the almost exclusive reliance on the U.S. dollar.
And finally, "reforms of liquidity provisioning and compensatory financing mechanisms, backed, among others, by better multilateral and regional pooling of national foreign exchange reserves, and avoiding onerous policy conditionality."
Will the reforms find consensus in Doha?
U.N. Assistant Secretary General for Economic Development Jomo Kwame Sundaram asserts there is political will. "The EU and G-77 are prepared to accept the draft outcome document which makes a number of provisions including the call for a summit organised by the U.N. to respond to the crisis."
In addition, the United Nations High-Level Expert Commission to Study the Reform of the International Monetary and Financial System headed by well- known critic of neo-liberalism, Joseph Stiglitz, was recently set up by the President of the General Assembly Miguel d'Escoto Brockmann.
However, Sundaram qualifies, "there is continuing resistance to the initiative (for a summit) largely by some countries!" The buzz in the corridors at the conference in Doha suggests the spoiler is the United States.
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