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Global demand shrinks, UNCTAD calls for drastic change

The global demand is shrinking. Public-private-partnerships (PPP) are drain on government finances. Stagnation and global slowdown is triggered by rich countries. The FDI has to be looked with caution as it leads to high external outflows.

These are some of the warnings that Trade and Development Report 2015 (TDR) of United Nations Conference on Trade and Development (UNCTAD). The report calls for a number of course corrections amid predictions that global growth may be unchanged at 2.5 percent. For India, it agrees with the official figures of above 7 per cent growth.

In short, the report wants a new economic order that is not exploitative, create demand and ensures affordability – euphemism for checking prices. The close ties between economic prices increase the danger of a downward deflationary trend.

It 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 percent and widening income disparity.

The UNCTAD calls 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 is 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”, TDR notes.

The ongoing financial instability due to malfunctioning of international monetary system (IMS) may hit the sustainable development goals (SDGs). It is 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 slowdown since 2011 owing drop in external demand. Growth has fallen to less than one per cent in 2015. Lower export prices have affected tax receipts – something though not to that critical level India also is witnessing.

Growth in Australia, Canada, Japan and Africa are in crisis. Oil exporting sub-Saharan countries like 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 understand that 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” like Noida, Greater Noida and other parts of the national capital region.

The TDR lists four waves of financial crisis in 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. It only led to limited growth returns.

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 uncertain situation.

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 market 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 simultaneously many economies.

To tide over the situation it stresses on development banks. They can have long-term economic and social returns. It also wants greater South-South cooperation, which it feels is more equitable. Sovereing wealth funds (SWF0 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 they 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 biasies in terms of inequity and asymmetry. It suggests moving away from dollar standard as that creates excessive imbalances. It wants 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.

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