Post-crisis policy challenges in the world economy

The United Nations Conference on Trade and Development (UNCTAD) released its annual Trade and Development report in the first week of September. While the report does not paint a totally gloom and doom picture, it states that the first half of 2011 showed a downward trend in global economic recovery as compared to 2010 levels.

UNCTAD warns that if developed countries continue to implement fiscal austerity measures, this downward trend could continue. Experts compared the current austerity policies to the fiscal tightening policies backed by the International Monetary Fund in the 1990s and 2000s, many of which did not lead to their intended results.

The report warned developed countries against repeating these steps, as the same difficulties could arise.

The report also states that the recent austerity measures taken by developed countries could only attack the symptoms of the financial crisis, rather than its root causes such as the deregulation of the financial sector.

Considering that it is accepted that the crisis was a result of financial market failure, the recent policy measures towards austerity were considered “surprising”. In the foreword to the report, the Secretary General of UNCTAD cautioned that “in light of the irresponsible behaviour of many private financial market actors” trusting the same financial institutions again by policy makers and some public could prove unwise.

The report entitled ‘Post Crisis Policy Challenges in the World Economy’ found that the global economy was likely to grow only by 3.1% in 2011 as compared to 3.9% in 2010. Developing countries except Northern Africa will grow at over 6% this year while the growth rate of the developed countries will be between 1.5 and 2%.

The strong expansion in the developing countries however will be affected by the sluggish economies of the West, particularly the US and the EU. Problems in the West coupled with the lack of significant reforms in financial markets could make developing countries susceptible to trade and financial shocks which could have a negative effect on the exports of developing countries.

The report also notes that revival of the international trade in goods and services in 2010 registering a 14% year-on-year increase will not be sustained in 2011 and the trade volume growth is expected reduce to single digits. Some of the developed countries continue to be among Sri Lanka’s major trading partners. As such, sluggish economies in such countries will have an effect on Sri Lanka’s exports in particular.

Commenting on an earlier report by the WTO about rising protectionist measures among the G20 countries, UNCTAD’s view was that they were modest, but that the new barriers add to fears that due to the problems in the developed countries and complaints of ‘currency wars’ by developing countries, developed countries may impose more import controls.

Among the recommendations made by UNCTAD in this report are stricter regulation of financial markets together with a restructuring of the financial sector as a whole to reduce systemic crises, more stimulus measures by governments of developed countries, particularly in the light of high unemployment and low wages in the developed countries.

(Manel de Silva holds an Honours Degree in Political Science from the University of Ceylon, Peradeniya and has engaged in professional training in Commercial Diplomacy at ITC and GATT. She has served as a trade diplomat in several Sri Lankan Missions overseas and was the first female Head of the Department of Commerce as Director General of Commerce.)