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Trade and Development report 2022
Development propects in a fractured world
'Worse damage than the financial crisis in 2008.' Wealthy countries could trigger a global recession, UN says
https://finance.yahoo.com/news/worse-damage-financial-crisis-2008-213208344.html
By Tristan Bove;
Governments around the world are determined to bring down inflation whatever the cost, but a growing chorus of voices is pointing out that aggressive monetary policies could have some serious and long-lasting consequences on the world economy.
Central banks in the U.S., Europe, and the U.K. have pursued relentless monetary tightening policies this year to reduce domestic inflation, but transnational institutions including the World Trade Organization and the International Monetary Fund have warned that this approach could push the world into a long period of low economic growth and persistently high prices, according to a Monday report.
“The world is headed towards a global recession and prolonged stagnation unless we quickly change the current policy course of monetary and fiscal tightening in advanced economies,” the UN Conference on Trade and Development (Unctad) cautioned in an annual global trade forecast report released on Monday.
The report predicted that current monetary policies in wealthy nations could spark an economic downturn worldwide, with growth slipping from 2.5% in 2022 to 2.2% next year. The UN says that such a slowdown would leave global GDP well below its pre-pandemic norm, and cost the world economy around $17 trillion, or 20% of the world’s income. And developing nations will be the most negatively impacted, according to the report, and many might be facing a recession worse than any financial crisis in the past 20 years.
“The policy moves that we have seen in advanced economies are affecting economic, social, and climate goals. They are hitting the poorest the hardest,” Unctad director Rebeca Grynspan said in a statement accompanying the report’s release.
“They could inflict worse damage than the financial crisis in 2008,” Grynspan said.
A ‘policy-induced’ recession
The UN agency made clear it will hold central banks around the world responsible for causing the next global recession.
“Excessive monetary tightening and inadequate financial support” in advanced economies could backfire spectacularly, resulting in high levels of public and private debt in the developing world, the report says.
Rising interest rates and fears of a coming recession have sent the value of the U.S. dollar soaring against all other currencies this year. And while this has been great news for American tourists traveling abroad, it’s a fiscal nightmare for developing countries, where import prices are rising fast and servicing dollar-denominated debt is becoming untenably expensive.
Debt levels in emerging markets have been hitting record highs for months, but the strong dollar has exacerbated uneven balances and raised inflation in developing nations as well, according to a separate economic report from the UN published on Monday.
With debt becoming more expensive to service, emerging economies have fewer funds available to invest in health care, climate resilience, and other critical infrastructure, the Unctad report warned, which could lead to a prolonged period of economic stagnation.
“We may be on the edge of a policy-induced global recession,” Grynspan said.
The report urged advanced economies to consider ways to reduce inflation other than raising interest rates. Grynspan insisted that inflation in every country today is because of a “distributional crisis,” caused by supply-chain bottlenecks unresolved from the pandemic-era, and recommended wealthy nations invest more in developing nations and optimizing supply chains around the world.
Grynspan also called for more debt relief and restructuring packages for emerging economies that are struggling to service their debt.
Unctad joins a growing number of transnational institutions calling on wealthy nations to consider what their efforts to reduce inflation at home is doing to the global economy. Last week, World Bank president David Malpass urged wealthy countries to focus on the supply side of the inflation problem by investing more in production in developing nations and in optimizing supply chains.
This story was originally featured on Fortune.com
Trade and Development report 2022
Development propects in a fractured world
The world is headed towards a global recession and prolonged stagnation unless we quickly change the current policy course of monetary and fiscal tightening in advanced economies.
Supply-side shocks, waning consumer and investor confidence and the war in Ukraine have provoked a global slowdown and triggered inflationary pressures.
All regions will be affected, but alarm bells are ringing most for developing countries, many of which are edging closer to debt default. Climate stress is intensifying, with mounting loss and damage in vulnerable countries who lack the fiscal space to deal with disasters, let alone invest in their own long-term development.
Global slowdown will affect all regions
but impact developing countries most
UNCTAD projects that world economic growth will slow to 2.5% in 2022 and drop to 2.2% in 2023. The global slowdown would leave real GDP still below its pre-pandemic trend, costing the world more than $17 trillion – close to 20% of the world’s income.
Despite this, leading central banks are raising interest rates sharply, threatening to cut off growth altogether and making life much harder for heavily indebted firms, households and governments.
The global slowdown will affect all economies. But developing countries are exposed most to the cascade of debt, health and climate crises. Middle-income countries in Latin America and low-income countries in Africa could suffer some of the sharpest slowdowns this year.
The average growth rate for developing economies is projected to drop below 3% – a pace that is insufficient for sustainable development and will further squeeze public and private finances and damage employment prospects.
Lost economic potential
UNCTAD calls for
- 1Central banks in developed economies to revert course and avoid the temptation to try to bring down prices by relying on ever higher interest rates.
- 2Advanced economies to avoid austerity measures.
- 3International organizations to reform the multilateral architecture to give developing countries greater fiscal space and fairer say in decision-making processes.
A widespread
debt crisis in developing countries is a real risk
With 60% of low-income countries and 30% of emerging market economies in or near debt distress, the possibility of a global debt crisis is high.
Countries that were showing signs of debt distress before the pandemic – including Sri Lanka, Suriname and Zambia – are being hit especially hard by the global slowdown. And climate shocks are heightening the risk of economic instability in indebted developing countries.
The situation in developing countries is worse than recognized by the Group of 20 major economies (G20) and other international financial fora. Developing countries have already spent an estimated $379 billion of reserves to defend their currencies this year, almost double the amount of new Special Drawing Rights recently allocated to them by the International Monetary Fund (IMF).
UNCTAD calls for
- 1International financial institutions to urgently provide increased liquidity and extend real debt relief for developing countries.
- 2The IMF to allow for a larger, more permanent and fairer use of Special Drawing Rights, an international reserve asset created to supplement the official reserves of its member countries.
- 3Countries to prioritize a multilateral legal framework for handling debt restructuring, including all official and private creditors.
Interest rate hikes
are hitting the poorest hardest
Interest rate hikes by advanced economies are hitting the most vulnerable hardest. Some 90 developing countries have seen their currencies weaken against the dollar this year – over a third of them by more than 10%.
The prices of necessities like food and energy have soared in the wake of the war in Ukraine. And a stronger dollar makes the situation worse, raising the price of imports in developing countries. The consequences are devastating for the poor across the globe, especially in a time of stagnant wages for most workers.
This year’s interest rate hikes in the United States, for example, could cut $360 billion of future income for developing countries (excluding China).
Capital gains and labour pains
UNCTAD calls for
- 1Governments to increase public spending and use strategic price controls to directly target energy, food and other vital areas.
- 2Public and private investors to channel more money into renewable energy research and development.
- 3Stronger global support for the UN-led Black Sea Grain Initiative set up to reintroduce vital food and fertilizer exports from Ukraine to the rest of the world.
More must be done to
calm commodity markets and address price speculation
Prices of commodities – particularly food and energy – climbed for much of the last two years, posing significant challenges for households everywhere. Added upward pressure on fertilizer prices means the damage could be lasting since it’s the top input cost for many small farmers around the world.
Although the war in Ukraine has contributed to this situation, commodity markets have been in a turbulent state for a decade.
The Black Sea Grain Initiative led by the United Nations has had a significant impact in lowering global food prices. However, insufficient attention has been paid to the role of speculators and betting frenzies in futures contracts, commodity swaps and exchange traded funds.
Also, large multinational corporations with considerable market power appear to have taken undue advantage of the current context to raise markups to boost profits on the backs of some of the world’s poorest people.
Energy price indices
- 1Governments to include tighter commodity market regulation as part of their policy mix to curb price spikes that are hitting consumers in the developing world hard.
- 2Governments to deploy a pragmatic strategy, including price controls, anitrust measures and windfall taxes on excessive corporate profits and to use these funds to support the most vulnerable.
