TWN Info Service on Finance and Development (Oct22/02)
5 October 2022
Third World Network

UNCTAD: Urgent course correction needed to address multiple global crises
Published in SUNS #9659 dated 4 October 2022

Geneva, 3 Oct (D. Ravi Kanth) -- The global economy is expected to grow at a rate of 2.5 percent this year, amidst the cost of living and other multiple crises, particularly exacerbated by the monetary and fiscal policy initiatives being pursued by the United States and other industrialized countries, the United Nations Conference on Trade and Development (UNCTAD) has said.

In its Trade and Development Report (TDR) 2022, released on 3 October, UNCTAD said the world economy is expected to record a deceleration in growth during 2023 by falling to 2.2%.

The world economy is confronted with a "perfect storm" and developing countries are at the receiving end because of the policy agenda adopted to fight inflation, said UNCTAD Secretary-General Ms Rebeca Grynspan.

Without a course correction, and coordinated multilateral policies, including substantial debt relief and large-scale social welfare measures, things are going to become much worse for the developing and low-income countries. The world economy is set to enter into a prolonged recession and stagflation, the TDR cautioned.

It says that the developing countries are going to be the worst sufferers due to the spate of monetary tightening and austerity policies to be followed due to high interest rates, particularly due to the strong US dollar.

UNCTAD's flagship report, titled "Development prospects in a fractured world: Global disorder and regional responses", could not have come a day too soon.

The 114-page report lays out its case in several chapters beginning with "too close to the edge - a year of serial crises", followed by "growth prospects through the fog of war and inflation," "multiple adverse supply shocks," "localized demand pressures," "wages and markups," "obscured by monetary clouds: towards a more sustainable agenda," including a box on "cereal killers: cracking down on commodity market speculation" in page 32, "regional trends" and so on.

It has offered policy guidance for developing countries on how to tackle the crises inflicted on them by continued market-oriented economic policies adopted in the advanced economies that led to the growing inequalities since the 1980s.

The TDR 2022 warns somewhat pointedly that the current multiple crises arising from the monetary and fiscal policies, along with the Ukraine war and climate stress, are much worse than the 2008 global financial crisis and the continuing COVID-19 pandemic that has claimed millions of lives across countries during the last two years.

The report argues that the current predicament of the world economy caused monetary policy initiatives, particularly the continued increase of interest rates by the US Federal Reserve, the world's most "systemically" important central bank, and other monetary authorities ostensibly for fighting inflation risk bringing global recession and stagnation that could wreak havoc in developing countries.

While market-fundamentalist periodicals like The Economist have predicted that the "dollar is crushing other currencies" and the continued rise in the US interest rate contributed to a "currency war", they remain silent on how the world economy has arrived at this increasingly explosive situation and why the developing countries have to be the victims of this monetary tightening policies.

That these policies of monetary tightening involving rapid interest rate increases and restrained fiscal policies based on the austerity mantra in advanced economies are being deployed at a time of "cascading" crises resulting from the COVID-19 pandemic and the war in Ukraine, says the TDR.

Over the years, UNCTAD's Trade and Development Reports have become a barometer to assess the health of the global economy as well as predict the ravages likely to be inflicted on developing countries due to market-oriented monetary policies being adopted by the advanced economies.

Richard Kozul-Wright, Director of the UNCTAD Division on Globalization and Development Strategies, also drew attention to the volatility of cryptocurrencies and the dangers arising from this financial asset.

PARALLELS BETWEEN COVID-19 AND NOW

It is somewhat ironic that there appear to be parallels between what is being done by the advanced economies during the COVID-19 pandemic and the current specter of monetary tightening based on increasing interest rates ostensibly to fight inflation.

During the COVID-19 pandemic, the US and other G7 countries like Germany, France, and the United Kingdom infamously adopted what was called the "me-first" approach for availing of vaccines to fight the deadly SARS-CoV-2 virus, leaving the developing countries without vaccines, the World Health Organization's director- general Dr Tedros Adhanom Ghebreyesus had argued.

In a similar vein, UNCTAD's secretary-general, Ms Grynspan, who released the TDR on 3 October, said somewhat bluntly that "the monetary tightening in advanced economies (steep rises in interest rates effected by advanced economies without undertaking appropriate ameliorative policies) is hurting the most vulnerable, especially in developing countries and risks tipping the world into recession."

The inflation-pivot policies of the American Federal Reserve seem to follow the principle set in motion in 1971 that the "dollar is our currency, but your problem."

The TDR said that a decade of ultra-low interest rates (including negative interest rates) adopted by the Federal Reserve and other central banks "consistently fell short of inflation targets and failed to generate healthier economic growth."

It is against this backdrop that the report warns that attempts to bring down prices through high interest rates are misplaced and somewhat delusionary in the current context.

The report calls this current approach an "imprudent gamble."

Worse still, it said that amidst falling real wages, fiscal tightening, financial turbulence, and lack of sufficient multilateral support and coordination, "excessive monetary tightening could usher in a period of stagnation and economic instability for many developing countries and some developed ones."

It is hardly surprising that Britain, the supposedly seventh largest world economy, is being drowned in an unmitigated crisis because of market fundamentalist policies such as a huge 40-billion-pound tax cut for the richest segment of its population while pursuing monetary tightening policies that would squeeze public expenditures, according to various economists.

Due to public pressure, the new British government was forced to abandon the tax giveaways on Sunday, according to media reports.

The TDR warns somewhat distressingly that the current interest rate hikes in the United States, including the latest rise last week that increased US interest rates to 3%, are "set to cut an estimated $520 billion of future income for developing countries (excluding China) and signal even more trouble ahead."

According to UNCTAD's Secretary-General, Ms Grynspan, "there's still time to step back from the edge of recession."

Countries have the tools to calm inflation and support all vulnerable groups, she said, adding that "this is a matter of policy choices and political will."

With worsening prospects for the global economy in 2023, which is expected to decelerate further to 2.2% while leaving real GDP still below its pre-pandemic trend by the end of next year and a cumulative shortfall of more than $17 trillion or 20% of the world income, all regions are expected face huge consequences, according to the TDR.

The report notes that middle-income countries in South America and low-income countries will witness the sharpest slowdowns in 2022.

Already, debt distress has wreaked havoc in Sri Lanka, Zambia, Surinam, as well as in Pakistan, which witnessed the worst floods recently.

According to the report, Africa's economies, which are expected to witness 2.7% growth in 2022 and 2.4% in 2023, remain at high risk due to debt distress, and millions of Africans are expected to fall back into poverty caused by the acute risk of food insecurity.

The TDR says that Asia's growth is expected to decelerate significantly due to worsening global conditions.

Apparently, China's greater-than-expected slowdown due to the zero COVID policy followed by the Chinese government in Shanghai and other cities coupled with the weaknesses of the global economy, and policy shifts in advanced economies pose serious threats to growth in the Asian region.

In a similar vein, the continued volatility in global energy markets could adversely impact the economies of South and West Asia, according to the report.

Countries in Latin America and the Caribbean could be stymied due to external constraints. The report suggests that economic growth in Latin America is expected to decelerate from 6.6% in 2021 to 2.6% in 2022, and fall further to 1.1% in 2023.

WORRIES OVER ALARMING LEVELS OF DEBT & UNDER-INVESTMENT

The TDR points to a grim picture of how net capital flows to developing countries "have turned negative with the deterioration of financial conditions since the last quarter of 2021. On net, developing countries are now financing developed ones."

The US is exporting its inflation to other countries by making it difficult to import for other countries through its higher interest rates, it said.

The report said that some 90 developing and low-income countries have experienced a huge drop in their currencies against the US dollar. Little wonder that the foreign exchange reserves of developing countries, according to some estimates, have depleted by more than $200 billion in the recent period.

In addition, bond spreads are widening with a growing increase in yields of 10 percentage points higher than US Treasuries, the report noted.

Not surprisingly, some 46 developing countries are severely exposed to multiple economic shocks, and another 48 are seriously exposed, the report suggested, pointing to the heightened threat of a global debt crisis.

According to the report, the developing countries are forced to release an estimated $379 billion from their foreign exchange reserves to support their falling currencies due to the havoc caused by the US dollar foreign currency exchange markets.

Also, the sudden spike in commodity prices over the last two years, particularly of food and energy prices, seems to be further exacerbated by the continuing Ukraine war, the report said.

Given the quagmire in which the developing countries are being pushed by the advanced economies, UNCTAD has offered a blueprint to assist developing countries in a systematic manner.

The policy suggestions offered by UNCTAD include:

1. Increasing Official Development Assistance (ODA), a larger, more permanent, and fairer use of Special Drawing Rights (SDRs), including doubling the SDRs from the recent level of $379 billion.

2. Hedging mechanisms to deal with exchange rate volatility.

3. Enhanced leveraging of multilateral capital to support developing countries with comprehensive social welfare programs.

4. More importantly, stepping up progress on a multilateral legal framework for handling debt restructuring, including all official and private creditors.

5. Bringing about an urgent course correction for tackling inflation as it has been exacerbated by the COVID-19 pandemic in advanced economies while inflation has been largely driven by commodity prices, especially energy.

6. With large multinational corporations having egregiously benefited from the current crisis, the report warns that "harking back to the 1970s or to later decades marked by austerity policies in response to today's challenges is a dangerous gamble."

7. "The real problem facing policymakers is not an inflation crisis caused by too much money chasing too few goods, but a distributional crisis with too many firms paying too high dividends, too many people struggling from a paycheck, and too many governments surviving from bond payment to bond payment," according to Richard Kozul-Wright, head of the team in charge of the TDR.

8. UNCTAD calls for a course correction due to the easing of inflation in the US and other advanced economies.

9. The need of the hour, as part of course correction, is to pursue policy measures targeting price spikes in energy, and other vital areas directly.

10. It says the Black Sea Grain Initiative led by the United Nations, in which the UNCTAD Secretary-General took part, has had a significant impact on lowering prices.

Without mentioning the neo-liberal order that has become the lynchpin for financialization and rapid increase in inequalities since the 1980s, the TDR says that it is important to reclaim the future by tackling the multiple crises faced by the global economy due to a policy agenda that has failed on its major promises to deliver economic stability and boost productive investment in both public and private sectors.

To fight economic and environmental crises, it calls for reclaiming the future with "innovative, ambitious policies, political will and private and public support" so as to achieve the ambitious development goals.

On a positive note, the report emphasizes a strategy of increased cooperation among developing countries, accompanied by reforms to the multilateral architecture, that could bring about a shift in the global economy in the right direction. +