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Info Service on Finance and Development (Oct23/02) Yerevan, 5 Oct (D. Ravi Kanth) — The world economy is apparently in dire straits with rising risks almost every day, contributing to a deceleration in global economic growth to 2.4 per cent this year from 3 per cent in 2022 and requiring a paradigmatic shift in reforming the international financial architecture, the United Nations Conference on Trade and Development (UNCTAD) said in its flagship report released on 4 October. UNCTAD’s Trade and Development Report (TDR) 2023 warns that “elevated commodity prices” are harming “the most vulnerable and creating food insecurity for 350 million people worldwide.” Addressing the challenges in the global trading system, it calls for “a new paradigm” that “goes beyond the traditional boundaries of globalization and trade liberalization.” Over the years, the TDR has assumed enormous importance, as a barometer for assessing the overall strengths and weaknesses in the world economy. It calls for pragmatic policies to tackle inflation, inequality, and sovereign debt, as well as suggests stronger oversight of key markets because of some worrisome developments in the financial markets. STALLING GLOBAL ECONOMY Aside from these important messages, the TDR issued several warnings about the stalling international economy, particularly Europe being the ailing patient. It notes that the US economy is likely to experience a soft landing, while Japan, China, Brazil, Mexico and Russia are expected to buck the stalling trend but not strongly. Although inflation has come down from its highs in late 2022, the report cautions that it’s an uneven descent, largely due to the easing of supply-side pressures as well as the recent oil price hikes. According to the report, the cost of living and insufficient wage growth continues to squeeze household budgets across countries. More disturbingly, the TDR says somewhat emphatically that “the current wrong-footed international financial architecture and global trading system undermines the pursuit of the harmonious and stable order required to meet the goals of Agenda 2030 (the UN Sustainable Development Goals) or the Paris Agreement targets.” Worse still, the TDR also said somewhat ominously that “international trade and its related power asymmetries have contributed to further worsening global labour income share”, as well as “unilateral shifts in industrial policies in developed countries (the United States) are generating tensions among trading partners, (while) hampering prospects for structural transformation in developing countries.” The TDR said that tighter monetary policy has so far contributed little to price easing and at a steep cost in terms of inequality and damaged investment prospects. In light of these dynamics, it proposed some key messages for governments to follow over the next 12 months, including: * Building a new consensus for international trade that can better accommodate policy priorities such as building resilient supply chains, achieving a just energy transition, delivering decent jobs, tackling corruption and corporate tax avoidance, and developing a secure digital infrastructure. * Revisiting existing international trade agreements to create policy space for countries to redesign their production, consumption and trading profiles to face contemporary global challenges. * Strengthening South-South trade cooperation, for instance, by revitalizing the Global System of Trade Preferences (GSTP). * Establishing effective mechanisms for debt restructuring and relief based on the participation of all developing countries with agreed procedures, incentives and deterrents. Speaking on the salient features of the report, the Secretary-General of UNCTAD, Ms Rebeca Grynspan, said that governments must avoid past policy mistakes so as to “safeguard the world economy from future systemic crises.” “We need a balanced policy mix of fiscal, monetary and supply-side measures to achieve financial sustainability, boost productive investment and create better jobs,” she said. “Regulation needs to address the deepening asymmetries of the international trading and financial system,” she emphasized. MAJOR ECONOMIES NOT ALIGNED The TDR notes that while the US is heading for a softer landing due to “a combination of mild fiscal expansion and intermittent quantitative easing (even as interest rates have risen and remain high),” Europe is the ailing economy of the world right now with all the major countries slowing sharply from last year and Germany in recession. It said that even inflationary pressure remains high in European countries. According to the TDR, “Monetary tightening and policy rates at their peak since the euro’s debut have been compounded by fiscal contraction and weak consumer spending. Investment growth in Europe is of particular concern as the region struggles to embark on an energy transition and continues to rely on exports for its growth.” The TDR said that the world’s largest economy China is expected to grow “more than 10 times faster than the Eurozone, albeit not as fast as expected during its first year of post-lockdown recovery.” China apparently needs stronger policies to hit its 5 percent growth target next year. In contrast, the World Bank, in its report released on 3 October, said that China is expected to grow at 4.4 percent in 2024 compared with India’s 6.3 percent. The TDR notes that stuttering growth for the period 2022-24 will fall short of the pre-Covid rate in most regions of the world economy. There is a danger of repeating the missed opportunity for reforms that the 2008-09 Global Financial Crisis offered, it suggested. DEBT BURDENS The TDR cautions about rising debt burdens and how they are crushing “too many developing countries but the stress is less on emerging markets but rather frontier markets that started to tap international capital markets mostly after GFC (Global Financial Crisis of 2008).” During the last ten years, according to the TDR, “external public and publicly guaranteed (PPG) debt in Frontier Markets tripled, reaching $651 billion in 2021. The increasing debt service obligations have strained public finances significantly. Debt service on external public debt relative to government revenues surged from nearly 6% to 16% between 2010 and 2021.” GLOBAL TRADING SYSTEM Meanwhile, in chapter two of its report, titled “International Markets: Trade, Capital Flows, Commodities,” UNCTAD noted that “the asymmetry of gains from the international trading system, apparent in both the advanced and developing countries, has been building into a backlash against the rules of global governance and, increasingly, the very idea of free trade.” “This backlash,” according to the TDR, “is prompting policymakers to reassess their strategic prioritization of the role of free trade.” It suggests that ongoing shifts in international trade have given rise to a “new lexicography”, with a series of buzzwords such as “fragmentation”, “de-globalization”, “slowbalization”, “re-shoring”, “near-shoring”, “friend-shoring”, “de-risking”, “de-coupling”, “open strategic autonomy” and “new industrial policy” among others. It notes somewhat prophetically that, “If history is any guide, as national security and geopolitical considerations move to the center of the policy stage, not only will multilateral options struggle for attention, but many developing countries risk being caught in the crossfire of trade disputes or face growing pressure to take sides in economic conflicts they neither want nor need.” The TDR warned that “the rise of protectionist unilateral trade measures and the more widespread use of industrial policies in large economies can adversely impact developing economies’ exports and hinder their prospects for structural transformation.” Commenting on the “green investment boom” that may bring opportunities for some fortunately-endowed countries, such as exporters of strategic minerals, the TDR pointed out that “sustainable developmental success will require parallel support to promote access to reliable (and cheaper) sources of finance, a re-balancing of trade rules and leveling the playing field.” Against this backdrop, the TDR argued that a “healthy trading system is crucial for meeting the 2030 Agenda.” The report, however, notes that “it remains unclear whether there is the political will among key trade partners to guide it through its current difficulties.” Therefore, it said, “for the future outcome to be positive, policymakers will need a bold pro-developmental and cooperative approach to address the fault lines in the international trading system, both old and new.” According to the TDR, “the ideal response is neither to double down on free trade nor to return to the situations in place prior to the COVID-19 shock. Building such an approach means revisiting existing agreements at the bilateral, regional and multilateral levels to create policy space for all countries to redesign their production, consumption and trading profiles to face contemporary global challenges.” At a time when the WTO Director-General and the General Council chair have allegedly glossed over the ten specific multilateral trade agreements that have been identified by the G90 developing countries at the WTO, the TDR underscores the need for an immediate agreement on them. The G90’s ten-Agreement specific proposals cover the Agreement on Subsidies and Countervailing Measures (ASCM), the Agreement on Trade-Related Investment Measures (TRIMs), and the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) among others. The TDR said that “the G90 proposal seeks to strengthen existing flexibilities for developing members to make them more precise, effective and operational so that they may more effectively address development aims of members,” while warning that “a failure to address these concerns may result in growing asymmetries, which will make it even more difficult for the world to deliver on its Agenda 2030.” For securing the requisite “policy space” for developing countries, it said that “reforms should build upon some of the core General and Special Principles (GSP) that Member States agreed upon at the creation of UNCTAD in 1964.” The GSP scheme remains relevant to the governance of international trade relations and trade policies in support of development, namely “policy space”, “special and differential treatment” and “voice and solidarity”, the TDR suggested. Against the backdrop of a proliferation of industrial policy initiatives in major developed countries that could shorten their existing supply chains, the TDR urges the developing countries “to look for new outlets to diversify their export markets.” It advocated for “regional trade as well as South-South trade”, noting that “South-South merchandise trade has grown faster than global trade and faster than North-South trade.” According to the TDR, in 2022, “South-South trade accounted for around 54 per cent of South’s total trade” and “South-South trade has also grown steadily in food, fuel, ores and metals, and fertilizers, with many developing countries, including Brazil, China, India, Indonesia and Thailand playing major roles.” The report cautioned that while “South-South trade should not be seen as an alternative to North-South trade, it can provide an opportunity for developing countries to diversify their production and export basket.” It said that “regional integration programmes – such as the African Continental Free Trade Area (AfCFTA) – to the extent they support diversification and the benefits are broadly shared – can also mitigate the negative effects of the current situation, including with respect to climate change and food insecurity.” The TDR pointed out that “to further boost South-South trade, the Global System of Trade Preferences (GSTP) initiative of UNCTAD can play a critical role by providing an opportunity to negotiate inter alia tariff reductions among developing countries in products based on mutual preferences.” “GSTP can also support a just green transition in the developing countries by focussing on green products and facilitating green technology transfers. Doing so will, however, need a more integrated policy nexus of financial- investment-industrial-technology-trade cooperation among developing countries,” it argued. “There is a need to revisit existing agreements at the bilateral, regional and multilateral levels to create policy space for all countries to redesign their production, consumption and trading profiles to face contemporary global challenges,” it concluded. +
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