Info Service on WTO and Trade Issues (Sept19/13)
Geneva, 27 Sep (Kanaga Raja) – A Global Green New Deal is needed to reverse the polarization of income within and across countries, create a stable financial system that serves the productive economy, mitigate the threats and seize the opportunities associated with new technologies, and undertake massive investments in clean energy, transportation and food systems.
This is one of the main conclusions highlighted by the UN Conference on Trade and Development (UNCTAD) in its latest Trade and Development Report 2019 (TDR-2019).
The report amongst others makes a powerful case for delivering the 2030 Agenda through a Global Green New Deal with the public sector playing a leading role.
According to the UNCTAD report, a spluttering North, a general slowdown in the South and rising levels of debt everywhere are hanging ominously over the global economy; these, combined with increased market volatility, a fractured multilateral system and mounting uncertainty, are framing the immediate policy challenge.
The macroeconomic policy stance adopted to date has been lopsided and insufficiently coordinated to give a sustained boost to aggregate demand, with adjustments left to the vagaries of the market through a mixture of cost-cutting and liberalization measures.
Ephemeral growth spurts and financial volatility have been the predictable results. But there are deeper challenges ahead that are truly daunting for people and the planet.
Financial insecurity, economic polarization and environmental degradation have become hallmarks of the hyper-globalization era, UNCTAD points out.
Moreover, these are closely interconnected and mutually reinforcing, in ways that can give rise to vicious cycles of economic, social and environmental breakdown.
This threat coincides with a worrying erosion of political trust, as income gaps have widened across all countries and the policy agenda is perceived as catering to the interests of the winners from hyperglobalization, with scant attention paid to those who have seen limited gains or have fallen further behind.
Even after the global financial crisis (GFC), the rules of the game that had generated high levels of inequality, insecurity and indebtedness prior to that crisis have remained largely intact, adding further layers of resentment, often aimed against outsiders, and widening political divisions. This breakdown in trust has occurred at the very moment the collective actions needed to build a better future for all depend on a greater sense of shared responsibility and solidarity.
According to UNCTAD, the SDGs, agreed at the United Nations in 2015, were designed as a guide to that future. But with their delivery – planned for 2030 – already behind schedule, frustration is growing across different policy communities and at all levels of development.
The perceived problem is a shortage of finance to achieve the scaling-up of investments on which the 2030 Agenda ultimately depends. With government finances burdened by increased debt levels and a fractured politics impeding long-term planning, pushing the financial envelope from billions to trillions of dollars each year will, it is claimed, have to rely on tapping the resources of high-wealth individuals and private financial institutions.
The current global economic environment – where austerity is the macroeconomic default option, liberalization the favoured policy tool for effecting structural change and debt the main engine of growth – is heading in the wrong direction when it comes to delivering on the ambition of the 2030 Agenda, UNCTAD argued.
Accordingly, the report seeks to make an alternative case for delivering the 2030 Agenda through a Global Green New Deal with a leading role for the public sector.
According to UNCTAD, the report has recast the Depression era’s signature policy on a global scale – a Global Green New Deal – as the right policy framework to make a clean break with years of austerity and insecurity following the global financial crisis, help bring about a more equal distribution of income and reverse decades of environmental degradation.
It proposes a series of reform measures to make debt, capital and banks work for development and finance a deal.
A BLEAK PICTURE FOR THE WORLD ECONOMY
At a media briefing, Mr Richard Kozul-Wright, Director of the UNCTAD Division on Globalisation and Development Strategies, highlighted a “fairly bleak” picture for the world economy right now.
“Obviously, a lot of people are focusing on the tariff tensions,” he said, adding that the recent G7 summit in France did not relieve those anxieties.
“But we continue to insist that the trade tensions are as much a symptom of the problem as a cause of the problem,” and the causes of the problem remain an overly financialized global economy which is fragile, global demand weak, investment extremely sluggish, and multilateralism essentially disabled.
The current multilateral structures cannot deal with the trade problem, cannot deal with the threat of currency wars, cannot deal with the problems of increasing indebtedness and they certainly cannot deal with the problems of technology transfer which has become a major issue for many developing countries, said Mr Kozul-Wright.
As UNCTAD has been arguing since the financial crisis (in 2008-2009), “we need to see a much greater emphasis on fiscal expansion, and income re-distribution if the world economy is going to re-balance in an effective way.”
Mr Kozul-Wright emphasised that the fixation with footloose capital has been damaging for many developing countries.
“People think that private capital flows to developing countries are a one-way flow. They are not. They come at a cost. There are costs as well as benefits to hosting private capital and the costs can be very large.”
The cost of accessing financial flows for many developing countries is much higher than the returns on those flows. Many developing countries, in response to the volatility of those flows, have to hold very large reserves, he explained.
These are reserves that are often invested in US Treasuries and other fairly reliable assets that do not give very large returns.
So the asymmetry of returns in terms of what they get on those assets and what they must pay out on their liabilities is a very high cost to developing countries, he said.
UNCTAD estimates (these costs) in the order of $440 billion a year is channelled from developing countries to developed countries as a consequence of that asymmetry.
“We are fully aware now of the problems of illicit financial flows and tax evasion by very large multinational corporations – huge costs to developing countries.”
UNCTAD estimates on the order of $200 billion a year is lost by developing countries as a consequence of various forms of tax evasion and illicit financial flows by multinational corporations.
According to Mr Kozul-Wright, The Financial Times, drawing on a recent study by the IMF, is now talking about “phantom FDI” – FDI that carries no real investment in the economy but is largely financial manipulation to avoid paying taxes – estimates that sums in the order of $600 billion a year of FDI to the South is of that nature.
He also said that the digital economy is making life very difficult for many developing countries, referring in this context to the ongoing debate in the WTO in terms of tariffs on electronic goods and whether to retain the current moratorium (on customs duties on electronic transmissions).
UNCTAD estimates that developing countries are losing in the order of $680 billion a year in terms of these lost revenue that flow from developing countries to advanced economies.
Mr Kozul-Wright also pointed out that 75 years after the Bretton Woods Institutions were set up to control speculative, footloose capital, they are clearly failing on the job.
He also said that the debt issue is a huge challenge for developing countries. Global debt stocks have risen 14-fold since 1980.
According to Mr Kozul-Wright, another important message from the report is that taking the first four SDGs (no poverty, zero hunger, good health and well-being, and quality education), whether under the current debt scenario, developing countries can realistically meet those four SDGs.
“Essentially, we show that to do so, they would have to borrow to make the investments required to undertake those public goods. They would have to borrow on international markets to a level that is clearly unsustainable,” he said.
It would mean their debt levels rising above 200% of their GDP to levels that are not sustainable.
Alternatively, they could grow their way very rapidly, via domestic resources to finance those four SDGs but that would require many of these countries growing in excess of 10-11% a year which is clearly not going to happen in many of the most vulnerable developing countries.
So in terms of growth or borrowing, these SDGs are already out of the reach of developing countries, he said.
“That to us says we need to revisit the whole discussion of debt relief, debt restructuring, and the need for an international debt workout mechanism.”
“If you look at the debt profile as it has evolved over the last twenty years, the SDGs are already out of reach for many developing countries,” Mr Kozul-Wright concluded.
KEY ISSUES AT STAKE
According to the UNCTAD report, the global financial crisis left deep and lasting scars on the societies it touched. Those scars have only been deepened by a decade of austerity, sluggish productivity growth, stagnant real wages, rising levels of household and corporate debt, and increasing inequality. Disparities of wealth and income have grown, and local communities are fragmenting under the dynamic and destructive forces of hyperglobalization. Thousands of lives are being lost to “deaths of despair” each year, and trust in political institutions has evaporated.
Growth has slowed in most developing countries, albeit with considerable variation across regions. The struggle to create good jobs has intensified, with rapid urbanization, premature deindustrialization and rural stagnation widening the gap between the “haves” and the “have nots”.
All over the world, anxiety over the prospect of economic breakdown is compounded by the impending threat of environmental collapse. The Intergovernmental Panel on Climate Change (IPCC) has raised the stakes by giving the world just 10 years to avert climate meltdown; but this is just part of a growing recognition of a wider and deeper ecological crisis. Thousands of species are going extinct every year, soils are being degraded, oceans acidified and entire regions desertified.
The international community has agreed upon a series of goals in an attempt to ensure an inclusive and sustainable future for people and the planet. But with little more than a decade left to meet the 2030 Agenda for Sustainable Development Goals, these efforts have fallen drastically short of their proponents’ ambitions.
Today, there is widespread agreement that there is just one option left: a coordinated investment programme on an unprecedented scale across the entire global commons. The numbers are daunting. Cost estimates have gone from “billions to trillions” according to the World Bank, to an additional $3 trillion a year for developing countries alone, according to UNCTAD estimates.
Mobilizing investment on this scale will be challenging for many national policymakers. This is certainly true in most developing countries where there have been long-standing resource constraints on development ambitions; but in recent years, sluggish investment, particularly in the public sector, has also been a concern for policymakers in advanced economies, with many acknowledging serious deficits in their infrastructure provision. Moreover, the macroeconomic and financial pressures that are likely to accompany any big investment push require policy coordination that goes well beyond countries simply putting their own house in order to include revitalized international support and cooperation.
According to UNCTAD, rising indebtedness presents a challenge to those attempting to deliver on the 2030 Agenda. A consensus is emerging that with public finances under stress, the required resources must be provided by the private sector. Whether by appealing to their “better angels” through narratives of social responsibility or to their economic self-interest through the use of impact investment, champions of the SDGs are now focused on finding ways to entice high-net-worth individuals and corporations to provide the financial resources necessary to meet these goals.
“At the same time, the scale of the economic, social and environmental challenges requires us to go beyond simply redeploying existing resources to mobilize new ones as well,” said the report.
This means taking up the call to reform the multilateral system and to find new ways to finance public goods at both national and global levels. The preferred solution is, once again, to appeal to the private sector to provide these resources – often by creating innovative financial products that can reduce the risks associated with big investment projects.
“The bias towards private financing has continued to go unchallenged, even as such schemes have consistently failed to deliver desired outcomes for the productive economy, whether in the private or the public sector.”
Instead, the report suggests that meeting the financing demands of the 2030 Agenda requires rebuilding multilateralism around the idea of a Global Green New Deal, and by implication forging a collective financial future very different from that of the recent past.
The first step towards building such a future is to seriously consider a range of public financing options, as part of a wider process of repairing the social contract on which inclusive and sustainable outcomes should be based, and out of which can emerge a more socially productive approach to private financing.
Financial liberalization has not consistently led to more credit for productive investment. Rather, in periods of financial euphoria, increased access to credit has fuelled the growth of speculative activities, rather than productive investment. Even when bank credit has expanded to non-financial businesses, it has been used to finance activities (such as mergers and acquisitions and stock buybacks) that have not established new productive capacity.
While some of these activities do stimulate economic growth in periods of rising asset prices – through “wealth effects” that induce higher spending on goods and services – they also slow down longer-term growth of output and productivity.
The emergence of the privatized credit system has allowed the financial sector to transact more and more with itself, creating a complex network of closely interconnected debtor-creditor relations that cannot easily be re-engineered for productive investments (private as well as public) without a fundamental reorganization of the financial system. At the same time, these flows have produced a highly unstable environment that is subject to short-term speculative trading, boom and bust cycles and highly unequal patterns of income distribution. When prices inevitably fall, financial booms leave behind large debt overhangs that delay the recovery of the real economy, sometimes for decades.
There is, moreover, abundant empirical evidence that public financing of domestic public goods, particularly infrastructure, is cheaper, more sustainable and more conducive to financial stability. This is unsurprising, as the kind of long-term investment required to finance big infrastructure projects is not attractive to private investors given the high risks and relatively low economic returns.
There is also unambiguous evidence that public incentives aimed at encouraging private investment in infrastructure over the last several years (e.g. through subsidies and risk guarantees) and efforts to marry public and private resources (through public-private partnerships [PPPs] and blended finance) have failed to unlock available pools of private capital, said the report.
Thus, in today’s highly financialized world, there seems little likelihood that the expansion of such instruments will bear additional fruit, especially in what are seen as the riskiest environments (such as in least developed countries or for climate-related challenges). Even in the best-case scenario, such tools are simply likely to increase funding for “mega projects” rather than the smaller, more inclusive and environmentally sustainable ones.
The report also said as the global crisis made clear, financial deregulation and integration can introduce severe fragility to the financial system. These trends can also inhibit transparency and frustrate attempts to assess risk in the financial system.
The crises that inevitably result from financial market liberalization provide frequent and abrupt reminders of how quickly the value of these assets can evaporate. The bailouts that tend to follow the crises have perverse distributional outcomes as they socialize private risk. Such an analysis should cast serious doubts on the leading desirability of private financing as the mechanism for delivery of the SDGs.
According to UNCTAD, there is no disputing that the multilateral trade, investment and monetary regime is in need of urgent reform if the 2030 Agenda is to move from rhetoric to results.
Moreover, the response to the crisis has further increased income disparities. Fiscal austerity has had a disproportionate impact on welfare programmes, while loose monetary policy designed to mitigate the effects of high levels of debt has boosted asset prices and thus the wealth of the already rich.
Even as unemployment has dropped, real wages have remained stagnant in flexible labour markets. Banks that were too big to fail are bigger still (if somewhat better-capitalized), while financial services have become the preserve of a small number of giant firms in asset management, credit rating, accounting, business consultancy, etc. Under these circumstances, it is difficult to see how extending the market option will now bring about more inclusive and sustainable outcomes.
The report noted that rolling back financialization is often casually dismissed as “old thinking” or “backward looking” – at odds with the technological opportunities of the twenty-first century. However, the hyperglobalized world is not an inevitable product of technological progress or disembodied market forces, but of ideological persuasion, institutional reform and policy choice.
These same pressures that were once used to promote financialization must now be used to roll it back, in order to forge a global new deal that can halt environmental breakdown and economic polarization, and establish a new social contract with sustainable development at its core.
A GLOBAL GREEN NEW DEAL
The New Deal, launched in the United States in the 1930s and replicated in distinct ways elsewhere in the industrialized world, rolled back the laissez-faire model of the interwar years and, in doing so, built a new social contract that fostered decades of equal and sustainable growth.
This contract was centred on four broad components: relief from mass unemployment; sustained economic recovery; regulation of finance; and redistribution of income. These elements were consistent with more specific policy priorities tailored to particular economic and political circumstances. But all in all, the New Deal policies of the post-war period facilitated the emergence of a virtuous circle of job creation, expansion of productive investment, faster productivity growth and rising wages.
The internationalization of the New Deal through the Bretton Woods regime was only partially directed at development and environmental challenges and certainly not with the urgency or on the scale required today.
The Global Green New Deal must learn from the mistakes, as well as the successes, of its forerunner, said the report.
Under the Global Green New Deal, states will have greater space to implement proactive public policies to boost investment and raise living standards. Such policy space is also a prerequisite for encouraging those states to cede, where appropriate, sovereignty to international bodies to establish international regulations and forge collective action in support of the global commons. Building this Global Green New Deal to meet the ambition of the SDGs will certainly require much greater participation of developing countries in international decision- making than that seen at Bretton Woods.
As before, the Global Green New Deal will be driven by an expansion in the space for public action, in “a pragmatic and non-ideological attempt to restore the balance between government, markets and civil society based on a new social contract between voters and elected officials, between workers and companies, and between rich and poor”. Financial sector reform will be critical to such a project.
The underlying intent of reviving the public option in finance is not to extinguish private finance, but rather to find pragmatic ways to make it once again serve the public interest.
De-financialization will no doubt take different forms in different countries, but the fundamental goal is “a smaller, simpler financial services system that is better adapted to the needs of the non-financial economy”.
Regulating private financial flows will be essential to steering private finance towards social goals and curtailing predatory and restrictive business practices will be key to reining in rentierism and crowding in private investment to productive activities including in the green economy. But just as importantly, it will require promoting alternative mechanisms of delivering finance in support of a more inclusive and sustainable growth path.
A healthy global economy is a prerequisite for such a reform agenda – and this cannot be taken for granted, said UNCTAD.
By way of an alternative, UNCTAD proposes a globally coordinated reflation strategy with a focus on development and environment recovery, in which the public sector plays a pivotal role.
A significant, well-planned and stable pattern of public expenditure can exert a lasting and positive effect on private investment (crowding-in), support employment creation, decent work conditions and wages, and trigger technological advances for a “green” productive transformation. What is more, an effective public sector can help lift supply constraints, especially in developing economies, and ensure that credit creation and financial conditions serve the real economy, rather than the other way around.
Policy coordination is essential to resolve trade-offs between growth targets, financial stability and environment protection, and to prevent national policy actions that could trigger a regulatory race to the bottom.
Given that credit will be essential to supporting such a massive investment push, sovereign debt sustainability will be key to achieving a more balanced economy.
UNCTAD said the current challenges to external debt sustainability will have to be resolved quickly and smoothly through increased official development assistance and the restructuring of debts, if the international community is serious about meeting the SDGs on time.
Given their procyclical nature, the inherent volatility of financial markets and the predatory behaviour of financial institutions, private capital flows can just as readily extract resources from as add resources to the productive economy. Developing countries are more vulnerable than developed countries to such outcomes, but the threat is a ubiquitous one.
To mitigate such risks, many developing countries have accumulated large foreign-exchange reserves. This strategy has high opportunity costs, causing a resource transfer from developing to developed countries and widening rather than bridging the finance gap.
Governments have, moreover, lost sizeable fiscal revenue from so-called “tax-motivated illicit financial flows” as a result of multinational enterprises reducing the payment of corporate income tax (CIT) through a shift of their profits to affiliates in tax havens or by exploiting tax loopholes in domestic legislation or international tax treaties.
Such leakages have been further augmented by digitalized economic transactions that make the current CIT norms less and less apt to determine where taxable value is created and how to measure and allocate it between countries.
A radical overhaul of these norms could significantly improve countries’ capacity for domestic resource mobilization, said UNCTAD.
An ambitious programme of financial reform is required to shift the focus away from financial speculation and towards the financing of productive investment. Within a more stable financial framework, the state can manage credit in a variety of ways.
Direct credit controls became unfashionable in the era of “efficient markets”. Yet incentives (e.g. placing government deposits) and disincentives (e.g. portfolio restrictions) can be effective in steering credit to the most productive investment opportunities. Governments can achieve this even more directly by setting up their own development banks, which would have a greater capacity than retail banks for “patient lending”.
At the same time, governments can actively promote a variety of alternatives to traditional banking to tap new development opportunities, simultaneously promoting more equitable development, said UNCTAD.
COORDINATION IS KEY
According to the report, strategies towards sustainable development and economic growth can take a variety of paths, depending on the structural conditions and constraints of each country.
If policymakers succeed in raising the shares of labour income towards the levels of a not-so-distant past, growth will increase between 0.25 and 0.75 per cent per year depending on the country.
International coordination is key to ensure buy-in by all countries as well to facilitate transmission of demand and productivity effects by enhancing trade and financial networks.
A similar observation can be made about assessing the impact of a combined fiscal reflation financed by progressive tax increases and credit creation. Government spending multipliers for individual countries range from 1.3 to 1.8. In a globally or regionally coordinated agenda, these effects are amplified.
Significant public investment in clean transport and energy systems is imperative to establish low-carbon growth paths and to transform food production for the growing global population, as well as to address problems of pollution and environmental degradation more generally. This will need to be supported by effective industrial policies, using a mix of general and targeted subsidies, tax incentives, loans and guarantees, as well as accelerated investments in research, development and technology adaptation, and a new generation of intellectual property and licensing laws.
Specific measures and support will be required in developing countries to help them leapfrog the old and dirty development path followed by today’s advanced economies.
Considering the estimates reviewed, and assuming an effective degree of international policy coordination (including South-South cooperation), it seems realistic to envisage that a policy package consisting of redistribution, fiscal expansion and state-led investment push will yield sustained growth rates of GDP in developed economies at 1-1.5 per cent above of what can be experienced under current patterns.
For developing economies, excluding China, the growth rate increases above the projection of current patterns may be between 1.5 and 2 per cent per annum. Growth above the baseline in China may be more moderate, close to an increase of about 1 per cent per annum.
Based on current trends in employment creation, a successful global growth strategy of this kind will increase employment by approximately 26 million jobs in developed countries and 146 million jobs in developing countries (40 million of which would be in China) by 2030, said UNCTAD.