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 percent in 2010 to 2.7 percent in 2011, is expected to slow down even more in 2012 to around 2.3 per cent. Developed economies as a whole are likely to grow by only slightly more than one per cent in 2012, owing mainly to the recession currently gripping the European Union (EU).

Supachai Panichpakdi

This contrasts with a much stronger performance in developing and transition economies, where growth should remain relatively high, at around five and four percent 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 G-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 (UNCTAD) 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 labour 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 revitalise 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. (END/COPYRIGHT IPS)

Supachai Panitchpakdi is the secretary-general of the United Nations Conference on Trade and Development (UNCTAD).

Although it remains the fastest growing region, Asia is already experiencing an economic slowdown, with gross domestic product (GDP) expected to fall from 6.8 percent in 2011 to slightly below six percent in 2012. Several countries – including China, India and Turkey – have been adversely affected by weaker demand from developed countries.

Supachai Panitchpakdi

Given the headwinds from the international economy, some developing countries have since relaxed their monetary conditions and many of them have applied countercyclical measures that are helping to boost household incomes and to maintain a much needed shift from external to domestic demand, alongside the role of investment.

China, for example, has played a critical role in global rebalancing, being the chief engine of world growth since 2009 and having reduced its surplus markedly (from 10 percent of GDP in 2007 to two percent in 2012) as it shifted its economy towards domestic demand.

In China and other major economies in the region, however, internal rebalancing remains unfinished as private consumption should take on a greater role relative to investment. High wage growth will help to support this goal as well as helping to promote further external rebalancing.

High and volatile commodity prices also present a risk to the rebalancing process for the Asian region, because they can be a drag on growth. Rising oil prices, for example, act as an immediate dampener on aggregate spending in fuel-importing countries, contracting spending more or less immediately, whereas any spending expansion from fuel-exporting countries occurs only after a lag.

However the main risk continues to be concentrated in the developed economies, where the United Nations Conference on Trade and Development (UNCTAD) has long been concerned that premature and excessive fiscal austerity is choking recovery and growth unnecessarily. The developing economies in Asia have played a major role stoking the engine of growth since the crisis, but this could be derailed if there continues to be a decline in consumer demand from their traditional markets in the advanced economies, and the effects of a reduction in this demand would of course have further spill-over effects if it provoked a downturn in Asian household and investment demand.

The second aspect of the rebalancing has occurred after the crisis. Global trade rebalancing has been largely due to the decrease in China’s exports and the increase in its domestic demand. Trade imbalances for many other East and South-East Asian (ASEAN) countries have not altered significantly. In 2011, the trade surplus of ASEAN as a whole had recovered to its 2007 level and it is currently similar in size to that of China, at about 100 billion dollars.

The rebalancing of the last three years has been due to a number of factors: the worsening terms of trade, especially for China, the decrease in international demand for products collaboratively (vertically) produced by East Asian countries, and the increase in domestic demand in China.

In practice, while China’s trade surplus is largely related to its trade with high-income markets, that of other East Asia countries is largely owing to trade with China. Indeed, the trade surplus of ASEAN countries with China has been increasing in the recent years.

The implications of this rebalancing are largely related to Chinese imports from the region. In this regard, the increase in Chinese domestic demand and the weak international demand for Chinese manufactures are resulting in a shift in the composition of Chinese imports. In practice, China imports relatively fewer goods to fuel its export sectors, and more consumption goods to meet the increasing domestic demand.

In this context, regional partners serving the Chinese export industry (those with vertical supply chain links with China) are likely to continue to be negatively affected as long as demand for Chinese exports remains weak. On the other hand, regional firms serving the Chinese domestic markets are likely to show continuous growth. However, a caveat is that China’s demand for final goods is still largely met by domestic producers, and thus the increase in domestic demand may not have large external spillovers.

A reduction in international demand for Chinese exports may also accelerate the transformation of the Chinese manufacturing industry towards higher value-added goods. This clearly depends on the extent to which Chinese firms are able to upgrade along the value chain and to capture market share in these segments.

If (or when) this occurs, it may have repercussions for the vertical integration of production processes in the region. In practice, Chinese firms could turn from vertically integrated partners into competitors of firms in more advanced countries. On the other hand, the process of manufacturing upgrading may benefit less advanced economies in the region, which are presently competitors of Chinese firms.

Ultimately, what is most important is that regional markets remain open, so that rising domestic demand in each country is met not only by domestic enterprises but also by those operating in other countries of the region. (END/COPYRIGHT IPS))

* Supachai Panitchpakdi is the secretary-general of the United Nations Conference on Trade and Development (UNCTAD).