World needs policies for demand-led recovery from global financial crisis, argues UNCTAD study presented to G-20
Weaker global demand and not new trade barriers or supply-side difficulties are responsible for the slow growth in international trade, an UNCTAD study presented to a G-20 working group on January 21-22 contends. An expansion of trade would come with the recovery of demand and output, the study argues, and not the other way round.
More than five years after the onset of the global financial crisis, the world economy has not recovered a strong, sustainable or balanced growth path explains the UNCTAD study, called “Macroeconomic Strategies and Trade from a Global Perspective”.
The lack of dynamism is most visible in output, employment and investment figures, the study explains, but it is also apparent from the very sluggish growth of international trade.
However, trade facilitation and other supply-side measures cannot reignite trade and growth without a strong expansion of demand – including through income redistribution, particularly in major surplus economies.
Meanwhile, some policy measures, such as spending cuts and wage compression, are counterproductive, the study argues.
The trade facilitation agreement reached by the World Trade Organization in Bali in December 2013, while a welcome sign that multilateralism is still alive, did not address the main constraints on trade, contends the UNCTAD study, which was presented at a meeting in Quebec, Canada, of the G-20 Framework Working Group for Strong, Sustainable and Balanced Growth.
Policy choices aimed at spurring exports, such as “internal devaluations”, including wage reductions, would be self-defeating – especially if followed by several trading partners at the same time – the G-20 meeting heard.
The UNCTAD study also says that in order to be sustainable, demand growth must be based on household spending and supported by rising labour incomes (whose share in the GDP declined in most countries in the last two or three decades).
Rising private consumption, combined with public investment and expenditure in public services, would provide the basis for increased private investment, the study argues. This would be in contrast with the pre-crisis pattern of boosts in private spending based on consumer credit and asset bubbles, which contributed to internal and external imbalances and to the financial crisis.
In an interdependent global economy, the manner in which domestic demand spills across different countries is of paramount importance, according to the UNCTAD study.
One isolated country or group of countries can try to exit the crisis through net exports, even if other components of domestic demand remain anaemic; but if this strategy is followed by many trading partners, it creates a “fallacy of composition” whereby too many goods chase too few consumers.
A wider revival of economic growth and trade could conceivably follow from surging demand in a number of systemically important economies, the UNCTAD report contends.
However, demand must be geographically distributed in a way that is consistent with the reduction of global imbalances. This requires that surplus countries take the lead in expanding domestic demand and make possible an expansionary adjustment – in contrast with the recessionary bias of balance-of-payment adjustments that may put the entire burden on deficit countries.
Since 2010, UNCTAD has participated as an observer in several meetings of the G-20 Framework Working Group on Strong, Sustainable and Balanced Growth and has submitted several technical papers.
UNCTAD’s contributions to the G-20 aim to highlight the issues of interdependence and the need for systemic coherence in international monetary, financial and trade affairs, all of which are of vital interest to all member States of the United Nations.