By A. S. Fatemi

Posted July 3rd, 2010

A document issued by a group connected to the United Nations has issued a statement which is critical of the global role of US dollar and dismissive about the outcome of globalization so far. World Economic Situation and Prospects (WESP) is a joint product of the Department of Economic and Social Affairs of the United Nations Conference on Trade and Development (UNCTAD) and the five United Nations regional commissions. It provides an overview of recent global economic performance and short-term prospects for the world economy and of some key global economic policy and development issues. One of its purposes is to serve as a point of reference for discussions on economic, social and related issues taking place in various United Nations entities during the coming year. UNCTAC was founded in 1964 as a result of efforts of Raul Prebisch, a prominent Argentinean economist who at the time was heading the United Nations Economic Commission for Latin America and the Caribbean. In the early 1960s, growing concerns about the place of developing countries in international trade and the appearance of deterioration of LDC's terms of trade, led many of these countries to call for the convening of a full-fledged conference specifically devoted to tackling these problems and identifying appropriate international actions. As an outcome of this conference UNCTAD was founded. It functions in close relationship with the so-called Group of 77 in voicing their common concerns. This group has 131 members currently. The relatively extreme positions taken by this report are indicative of its membership composition.

Regulate the markets and sack the dollar!

The Survey strongly advocates a new international agency to coordinate financial regulation along with deep reform of the global reserve system. WESS proposes a system that is less dependent on the United States dollar and which pools reserve holdings regionally and internationally to provide cheaper insurance to countries coping with economic shocks and payment problems. The new system would also be able to issue new international liquidity, including for financing development and fighting climate change. Accordingly, WESS proposes fundamental revisions of the existing institutions for global economic governance. They argue that for an effective more sustainable rebalancing of the global economy much closer coordination is needed across the trading system and a new form of international financial regulation. The authors over look the reality that reserve currencies are not dictated by governments and over regulation creates inefficiencies and leads to spread of illegal transactions and corruption.

Lackluster economic activity-Only China has benefited

The WESP report maintains that while the world economy has continued to improve in the first half of 2010, leading to a slight upward revision in the United Nations outlook for global growth, the pace of the recovery is too weak to close the global output gap left by the crisis. It also points out that the recovery is uneven across countries, with encouraging growth prospects for some developing countries, but lackluster economic activity in developed economies and below potential growth elsewhere in the developing world. It concludes that important weaknesses in the global economy remain, and draws attention to some of the policy challenges that need to be addressed to solidify and broaden the recovery.  According to this report world gross product (WGP) is estimated to have fallen by 2.2 per cent for 2009, the first actual contraction since the Second World War. With the proviso of continued supportive policy stance worldwide, a mild growth of 2.4 per cent is forecast in the baseline scenario for 2010. According to this scenario, the level of world economic activity will be 7 per cent below where it might have been had pre-crisis growth continued. It is the belief of the authors of this report that much of the rebound in the real economy is due to the strong fiscal stimulus provided by Governments in a large number of developed and developing countries and to the restocking of inventories by industries worldwide. Consumption and investment demand remain weak, however, as unemployment and underemployment rates continue to rise and output gaps remain wide in most countries. In the outlook, the global economic recovery is expected to remain sluggish, employment prospects will remain bleak and inflation will stay low. This report was prepared and issued prior to the decisions at the recent G-8 meeting in Toronto, Caned, where it was decided to slow down the stimulus projects and attempt to cut the deficit of major industrial countries by half prior to 2013 target year. On the contrary, this report highlights a number of risks and uncertainties to the outlook, including a premature exit from the stimulus measures  recommends continued fiscal stimulus measures in the short run.   The report maintains that there is no easy solutions in sight and any resolution of current difficulties will require major overhaul of present mechanisms that govern development assistance, trade and international finance.  The Survey says that the United States’ financial implosion, which that has affected livelihoods in every region of the world, underscored the interconnectedness of the global economy. This complex interdependence was induced by decades of globalization. It will be necessary to change the pattern of economic interdependence, states the Survey, because restarting the pattern of growth that led to the present crisis will only lay the seeds for future, possibly more harmful, crises. The crisis suggests that globalization as we know it is not sustainable and needs to change direction. The authors of the Survey believe that the global financial crisis has also exposed serious weaknesses in global economic governance. They point to the shortcomings in institutions and rules that were shaped, for the most part, more than 60 years ago at the Bretton Woods. This Survey maintains that the rapid growth in developing Asia has shifted the balance of global economic power, elevating the living standards of the recently advanced countries, while leaving others, especially in Africa, to fall farther behind. While the global number of poor living on less than $1.25aday decreased from 1.8 billion in 1990 to 1.4 billion in 2005, nearly the entire reduction was concentrated in China. In sub-Saharan Africa and South Asia, the number of poor actually increased. With few exceptions, income inequalities within countries have also escalated since the early 1980s. Redressing this global economic divergence, to prevent it from becoming a Source of tension and insecurity, will be a major challenge in the decades ahead, warns The Survey.

Demographic Challenge

Demographic changes in the coming decades will strongly increase global interdependence. Each year, the world population increases by more than 70 million. By2050, the global economy would need to provide a decent living to more than 9 billion people, 85 per cent of whom will be living in developing countries. By 2050, 1 out of 4 people in developed countries, and 1 out of 7 in present-day developing nations, will be over 65 years of age, putting pressure on pension and health systems. Further, the presence of declining and ageing populations in developed regions may result in migration flows much larger than today. By 2050, 70 per cent of the world’s population is projected to live in urban areas and mega-cities where further growth will create its own problems. The Survey points out that persistent widespread poverty and inequality among urban-dwellers may become sources of social and political instability. The interconnectedness of global financial markets has been well documented as a result of the recent global crisis which has crystallized the problem of contagion showing how problems in one part of the system can quickly cause shock waves elsewhere. In the light of these major challenges, WESS says the crisis provides an opportunity to re-examine and reform the system of global governance so that economic interdependence can be harnessed to overcome poverty instead of being the source of instability and the driver of increasing economic and political inequities.

Conclusions

The survey concludes by arguing that because of their complexity, solutions will not be easy. They will require new thinking and a new balance between national and global decision-making processes. According to WESS 2010, this will require major overhaul of present mechanisms that govern development assistance, trade and international finance. International aid and trade processes must be reformed to ensure that Governments have the needed policy space to experiment with solutions appropriate to the local situation. International regulation of capital flows to ensure stable, long-term financing for developing countries is needed. National Governments must also be supported in their efforts to raise greater revenue for domestic needs. This will require expanded information exchange on bank accounts and mutual assistance in the collection of tax debts. Based on an assessment of recent successful development experiences, such as those in parts of Asia, the WESS 2010 concludes that equity in income, assets and access to education and health is necessary for sustainable and accelerated growth. Providing equal opportunities for all and taking difficult decisions about reorienting their economies to simultaneously make economic growth more inclusive and environmentally sustainable while allocating sufficient resources for education, health and social protection will require strengthened Government capacities to formulate and implement national development strategies.