Economic Highlights
New
Delhi, 10 October 2015
Global
Demand Shrinks
UNCTAD
FOR DRASTIC CHANGE
By Shivaji
Sarkar
The global demand is shrinking. The
Public-private-partnerships (PPP) are a drain on government finances. This
stagnation and global slowdown is triggered by rich countries. The FDI has to
be looked at with caution as it leads to high external outflows.
The above are some of the warnings
that the Trade and Development Report 2015 (TDR) of United Nations Conference
on Trade and Development (UNCTAD) has given. The report calls for a number of
course corrections amid predictions that global growth may be unchanged at 2.5
per cent. For India,
it agrees with the official figures of above 7 per cent growth.
In short, the TDR wants a new
economic order that is not exploitative, creates demand and ensures
affordability – euphemism for checking prices. The close ties between economic
prices increase the danger of a downward deflationary trend. The report is
particularly concerned about the advanced economies experiencing a long-term
slowdown, fall in consumer demand, decline in private investment and wages by
almost 10 per cent and widening income disparity.
The UNCTAD terms the failure of
growth in many developed countries despite pro-large borrower oriented
accommodative monetary policy as a “new abnormal”. It says the economy of these
countries relies unduly on mounting debt and asset bubbles. “Eight years after
the financial crisis, the world has clearly not found how to shift gears for
global inclusive and sustainable economic development”, the TDR notes.
The ongoing financial instability
due to malfunctioning of international monetary system (IMS) may hit the
sustainable development goals (SDGs). It is a pointer to a serious global
situation and TDR calls for fundamental monetary reforms. It calls for large
swings that the dollar causes in exchange rates.
It also points to less dependence of
developing countries on IMF for development assistance. Instead, since 1997-98
these countries favour accumulating large foreign exchange reserves as a first
line of defence against external shocks.
India may learn from the Latin
American experience. The region is facing a slowdown since 2011 owing to a drop
in external demand. Growth has fallen to less than one per cent in 2015. Lower
export prices have affected tax receipts – something which India is too
witnessing, but not to that critical a level.
Growth in Australia,
Canada, Japan and Africa
is in dire straits. Oil exporting sub-Saharan countries such as Nigeria and Angola are cutting public
expenditure. The Euro zone crisis has emerged out of macro-economic imbalances
because of excessive foreign capital inflows as it surged private sector
consumption and housing investment at historically low interest rates that
added to financial fragilities.
India needs to understand the
criticalities of high capital infusion and lowering of interest rates. The real
estate bubble has already hit the banking sector. The high profit motives,
higher prices and large unsold or incomplete housing units have created islands
of largest uninhabited “cities” such as Noida, Greater Noida and other parts of
the national capital region.
The TDR lists four waves of
financial crisis in the 1980s -- Latin America, 1994-95, Mexican crisis,
1997-98, South East Asian crisis and the 2008 sub-prime crisis in the West. It
observes each of these crises was preceded by large negative surge in the
current account balance and domestic credit booms. Since 1980s, crises in
emerging economies have been preceded by a surge in capital inflows
A significant observation is that
post 2008 crisis, many developed countries adopted policies for generating more
liquidity in the private sector. However, this only led to limited growth
returns.
Indeed, the world continues to be in
difficult situation. Global financial markets were spooked by recessions in Brazil, the Russian
Federation and South Africa. China is weakening and the US is in an
uncertain situation.
Undeniably, it is a fragile state.
The global economy depends on debt. During the years of “great moderation”,
1985-2005, global debt rose from $21 trillion in 1984 to $87 trillion in 2000,
and to a staggering $ 142 trillion by 2007. The 2008 Euro-US crisis has added
another $57 trillion debt.
External corporate debt has tripled
since 2008 to over $2.6 trillion. The entire debt situation, TDR warns, can
turn sour as markets are volatile and vulnerable. It calls to work out an
international debt mechanism.
The impact of these issues is seen
in stagnant world merchandise trade. It has grown only 0.3 per cent in 2014
against annual rate of 7.2 per cent during 2003-2007. Trend for 2015 is also
not said to be bright. “World trade is in doldrums”, it says. Falling labour
income and reducing public spending could worsen rather than solve the
problems. External shocks may hit many economies simultaneously.
To tide over the situation it lays
emphasis on development banks. These can have long-term economic and social
returns. It also wants greater South-South cooperation, which it feels is more
equitable. Sovereign wealth funds (SWF) holding more than $7 trillion assets of
which $ 6 trillion is held by developing countries, offer another source to
boost long-term financing.
In its bid to change the
international monetary system it says that despite the fact that PPPs have
garnered much attention for financing infrastructure projects, in many case
these have not actually created additional finance but increased obligations
for the government budgetary system. The lion’s share of investment in
infrastructure in developing countries remains public, not private.
The PPPs have not relieved the State
responsibilities, which has to bear 75 per cent to 90 per cent investment
costs. Even in European Union private partners contribute a very small share.
It is not shy of stating that the
private partners benefit and the public system is burdened with debt and other
obligations. It simply says that such partnerships are not in the interest of
governments. The PPPs are generally more costly than traditional procurement
through public sector.
Strongly arguing for moving away
from PPPs, it is also critical of credit rating agencies. They follow
prejudices and are often not objective in their assessments. Over-reliance on
ratings are of concern and be avoided.
The global system needs
institutional changes. New multilateral arrangements are required to resolves
biases in terms of inequity and asymmetry. It suggests moving away from dollar
standard as that creates excessive imbalances. It wants the International
Monetary Fund to be involved to meet the needs of developing countries and
surveillance to reduce global volatility, increase demand, better wages so that
the stagnation is over. For boosting the world economy it wants modalities of
coordination to be worked out fast so that there are more countries like India with
higher GDP growth. ---INFA
(Copyright,
India News and Feature Alliance)
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