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TRADE AND DEVELOPMENT
REPORT, 2011
Post-Crisis Policy Challenges
in the World Economy
EMBARGO
The contents of this Report must not be quoted or summarized
in the print, broadcast or electronic media before
6 September 2011 17:00 hours GMT
2
Recovery of the world economy is slowing
down, with strong downside risks
10
8.6
8.0
7.4
8
6.3
5.4
6
4.0
2
4.1 4.4
3.9
4
5.4
3.1
2.6
2.5
2.5
1.8
1.7
0.3
0
-2
-2.1
-4
-3.6
-6
-6.7
-8
World
Developed countries
2007
2008
2009
South-East Europe and CIS
2010
2011 (forecast)
Developing countries
3
The "two-speed recovery" continues
Real GDP at market prices, 2002–2011
(Index numbers, 2002 = 100)
World import volume, Jan. 2000–Apr. 2011
(Index numbers, 2000 = 100)
Note: Linear trends correspond to 2002–2007.
4
Commodity prices have recovered amidst
high volatility
Monthly evolution of selected commodity prices, January 2002–May 2011
(Price indices, 2000 = 100)
5
Risks remain on the downside
• The shift towards fiscal and monetary tightening
represents a major risk of a prolonged period of
mediocre growth in developed economies – if
not of an outright contraction.
• Given the economic weakness in developed
economies and the lack of significant reforms in
international financial markets, developing
countries are vulnerable to trade and financial
shocks (trade volumes; prices of primary
commodities)
6
Fiscal imbalances were not a driving
factor but a result of the crisis
Government revenues and expenditure and fiscal balance, 1997–2010, in % of GDP
7
Recent trends in public debt in
developed and developing countries
Ratio of public debt to GDP in developing countries, by income group, 1970–2010
(Median, in per cent)
8
IMF-sponsored programmes systematically underestimate their
negative impact on GDP growth and fiscal balances
Growing out of debt
• The best strategy for reducing public debt ratios is to promote
growth and maintain low interest rates
• Fiscal retrenchment seeking to cut fiscal deficit and thus "regain
the confidence of financial markets" is likely to be self defeating,
as it affects GDP growth and further reduces fiscal revenues.
• Fiscal space for applying pro-growth policies is not a static
variable: an expansionary fiscal policy generates higher fiscal
revenues
• To change the composition of public expenditure or public
revenues can maximize their economic impact without necessarily
modifying the total amount of expenditure or the fiscal balance
• Fiscal expansion tends to be more effective if
– higher spending takes precedence over tax cuts
– spending targets infrastructure and social transfers
– tax cuts target lower income groups (higher propensity for
spending)
10
Financial deregulation was one of the main
factors leading to the global crisis
• Financial deregulation:
– Led to a large, opaque and undercapitalized “shadow banking
system”
– Increased the concentration in the traditional banking segment
in a few “to big to fail” (and “too powerful to regulate”)
institutions
– Reduced the diversity of the financial system and increased the
systemic risk
• While government regulation has weakened, its lender-oflast-resort support to the financial system has increased, and
even extends to the shadow banking system.
11
Financial Re-Regulation and Restructuring
• Strong re-regulation is urgently needed. It must:
– Be tighter with the “too-big-to-fail” institutions
– Cover the “shadow banking” and avoid regulation arbitrage
– Incorporate a macro-prudential dimension, with anti-cyclical
capital requirements and capital controls
• In addition, the financial system must be restructured
– Re-regulation alone will not orient credit to real investment or
make it accessible to small and medium-sized firms
– Banking restructuring should aim at more diverse financial
systems, with a bigger role for public and cooperative institutions
– Giant institutions must be sized down
– The activities of commercial and investment banking should be
clearly separated, in order to reduce the risk of contagion
12
The financialization of commodity markets
has continued unabated
Commodity investment, assets under management, 2005–2011 ($bn)
450
400
350
300
250
200
150
100
50
0
2005
2006
2007
2008
2009
2010-1st 2010-2nd 2010-3rd 2010-4th 2011-1st 2011-2nd
quarter quarter quarter quarter quarter quarter
Herd behaviour of money managers
probably caused oil-price gyrations
Ratio of money managers’ long and short positions and WTI-oil price, 2009–2011
20
120
18
110
100
14
90
12
80
10
70
8
60
6
50
4
40
2
0
06/01/2009
05/01/2010
Money manager positions
04/01/2011
Price (right scale)
30
24/05/2011
$ per barrel
Ratio of long to short positions
16
Policy recommendations to improve
commodity market functioning
• Increase transparency in physical and
derivatives markets
• Arrange for internationally coordinated tighter
regulation of financial investors
• Consider occasional direct intervention to
avert price collapses and deflate price bubbles
15
Exchange rates have become disconnected from
macroeconomic fundamentals
Real effective exchange rate, selected countries, January 2000–May 2011
(Index numbers, 2005 = 100, CPI based)
16
EMU: divergent unit-labour costs had enormous
and cumulative impact on trade flows
Unit labour costs in EMU, 1999–2010
Current-account balances in EMU, 1991–2010
(Index numbers, 1999 = 100)
(Per cent of GDP)
Chart 6.8 and
Chart 6.9
Leaving currencies entirely to market forces entails
considerable risks for both the global financial
system and the multilateral trading system
• Instead, a rules-based managed floating can deliver
– sufficient stability of the real exchange rate to enhance international
trade and facilitate decision-making on fixed investment in the tradable
sector
– sufficient flexibility of the exchange rate to accommodate differences in
the development of unit labour costs or national inflation rates across
countries
• Such a system could be based in two approaches:
– Adjustment of nominal exchange rates to inflation differentials. This
would address more directly the need to avoid imbalances in trade flows.
– Adjustment of nominal exchange rates to interest rate differentials. This
is more directly related to limiting financial speculation in the currency
markets.
• This currency regime can be practiced as a unilateral exchangerate strategy but would be of greatest benefit to international
financial stability if applied at multilateral level
18
Trade and Development Report 2011
Post-Crisis Policy Challenges in the World Economy
Growth in developed economies
remains very sluggish
6
4
4
3
2.9
2.4
2.3
2.1
1.8 1.9
2
0.5
0.4
0
-0.4
-2
-1.2
-2.6
-4
-4.2
-6
-6.3
-8
Japan
2007
United States
2008
2009
2010
European Union (EU-27)
2011 (forecast)
20
Developing economies
driving the recovery
12
11.1
10
9 .4
8 .9
8
7.8
8
7.2
6 .9
7
6
5.9
5.9
5.6
5.4
5.9
4 .5
2
5.2
4 .8
4 .2
4
4
6 .4
6
5.8
5
4 .7
4 .4
6 .6
3 .5
1.8
1
0
-0 .8
-2
-2 .2
-4
Africa
Latin
Am erica
and the
Caribbean
2007
Eas t As ia
2008
2009
South As ia
2010
South-Eas t
As ia
2011 (forecas t)
Wes t As ia
21