Financial crisis jeopardizes UN agency's development goals

MANILA, Philippines - The contraction experienced by the global economy resulting from the financial crisis now makes it virtually impossible to attain the United Nations Millennium Development Goals by 2015, according to a new report by the United Nations Conference on Trade and Development (UNCTAD).

The UN trade report said since September 2008, the financial crisis has led to an economic recession affecting virtually all markets and countries, either through direct financial contagion or through falling export earnings and lower migrants´ remittances.

“As a result, the world economy is experiencing its first contraction since the Second World War, with attendant effects on employment in all countries. The contraction now makes it virtually impossible to reach the United Nations Millennium Development Goals by 2015, UNCTAD´s Trade and Development Report 2009 pointed out.

The report said almost all developing countries have experienced sharp slowdowns in economic growth since mid-2008, and many have slipped into recession. But some developing and emerging market economies have proved less vulnerable than in previous crises. These are economies in Asia and Latin America that had built relatively strong macroeconomic positions before the current crisis erupted: they had avoided large current-account deficits, or even posted surpluses, in the preceding years.

By contrast, it said many other emerging market economies, including several in Eastern Europe, felt the impact of the crisis through a general loss of confidence in financial markets worldwide and in Eastern European markets´ abilities to cope with external financial exposure

Developing regions most severely hit by the global crisis include Latin America, where GDP (gross domestic product) is likely to fall by around two percent in 2009, with Mexico undergoing a particularly deep recession. Also strongly affected are West Asia, where several economies have been hurt by tumbling prices for financial assets, real estate, and oil, and Southeast Asia, where many countries rely heavily on exports of manufactures.

According to the report, these regions are expected to see negative GDP growth in 2009.

In Africa, output growth is expected to slow sharply in 2009, but remain positive, with anticipated growth of three percent in North Africa and one percent in sub-Saharan Africa.

“In the latter region it has now become virtually impossible to achieve the United Nations Millennium Development Goals by the stated 2015 deadline,” the UN trade report warned.

It added that East and South Asia are expected to grow by three-four percent during 2009. The leading economies of these regions — in particular China and India — have resisted recessionary forces better than others because their domestic markets play a more important, and increasingly growing, role in total demand.

Moreover, the rebound in China in the second quarter of 2009 proves the efficacy of government deficit spending if it is applied quickly and forcefully.

So far, most public resources committed to the crisis have been devoted to sustaining the financial sectors of developed countries. Monetary easing and large bailout operations may have prevented a meltdown of the financial system, but they have been insufficient to revive aggregate demand and halt rising unemployment.

To stimulate demand, counter-cyclical fiscal policy measures that have a direct effect on aggregate demand are indispensable, and many developed and emerging market economies have indeed launched sizeable fiscal stimulus packages.

 “By contrast, many other developing and transition economies that had to seek financial support from the International Monetary Fund (IMF) are being given insufficient fiscal space, and must follow pro-cyclical policies as a condition for receiving the funding; while this type of conditionality appears to be applied to restore the “confidence” of the financial markets,” the report said.

In the current dramatic crisis situation, the report pointed out that low-income countries require more support in the form of an internationally coordinated effort to increase official development assistance (ODA).

In addition, a temporary moratorium on these countries´ debt owed to official creditors would help them better to maintain needed levels of public expenditure and imports.

 “This would not only help beneficiary countries and their populations overcome the crisis, but would provide a counter-cyclical stimulus that could help spur global demand,” the report said.

The report cautioned that the “likelihood of a recovery in the major developed countries that would be strong enough to bring the world economy back to its pre-crisis growth path in the coming years is quite low.”

 “That is because neither consumption nor investment growth can be expected to revive significantly anytime soon due to very low capacity utilization and rising unemployment. In addition, banks still need to be recapitalized and their balance sheets cleansed of toxic assets before they can be guided back to their traditional role as providers of credit to investors in fixed capital,” it added.

UNCTAD economists cite deregulation of financial markets as the main cause of the global financial and economic crisis. Absence of regulation allowed uncontrolled innovation in financial instruments that obscured creditor-debtor relations and invited irresponsible risk taking

As a result, the report said finance came to predominate over the “real” economy; a large part of the financial sector became detached from productive sectors; and the influence of speculative forces — not only in financial markets, but in currency and commodity markets was strengthened.