UNCTAD Trade and Development Report 2009Presenting a grim global economic outlook in the context of the ongoing global financial and economic crisis, UNCTAD’s Trade and Development Report 2009 (TDR 09) looks at the channels through which the crisis is spreading from developed countries to developing and transition economies: through financial flows, international trade and commodity prices, migrants’ remittances and external debt.
Subtitled Responding to the global crisis and Climate Change Mitigation and Development, the report notes that climate change mitigation does not contradict development goals but is a process of structural change worldwide that offers enormous economic opportunities for enhancing development.
TDR 09 also stresses that more effective regulation and supervision of financial market activity is indispensable to prevent a repeat of the current global financial and economic crisis; however, equally important is a reform of the international monetary and financial system aimed at reducing the scope for gains from currency speculation, and at avoiding large trade imbalances.
In analysing the causes of the crisis, the Trade and Development Report 2009 focuses on the role of excessive risk-taking made possible by financial deregulation and innovation in obscure financial instruments.
In analysing the causes of the crisis, the Trade and Development Report 2009 focuses on the role of excessive risk-taking made possible by financial deregulation and innovation in obscure financial instruments.
It highlights the problem of the predominance of financial markets over the fundamentals of the real economy, noting that many of the new financial instruments have weakened the capacity of financial institutions to manage risk and have favoured the development of a non-transparent, poorly regulated and undercapitalized shadow financial system.
The report suggests that the experience with this crisis proves that free financial markets do not lead to optimal social and macroeconomic outcomes, and suggests that the relationship between the State and market forces needs to be fundamentally reviewed.
TDR 09 discusses why and how the overall effectiveness of strengthened financial regulation will depend on the way in which measures for financial reform at the national level are combined with a reform of the international monetary and financial system.
UNCTAD draws attention to a number of elements in need of reform within international financial architecture: effective capital account management, strengthening the role of special drawing rights, and a multilaterally agreed framework for exchange rate management.
UNCTAD argues that a new monetary system based on multilaterally agreed principles and rules is needed for macroeconomic stability in the globalized economy and for a level playing field for international trade.
UNCTAD draws attention to a number of elements in need of reform within international financial architecture: effective capital account management, strengthening the role of special drawing rights, and a multilaterally agreed framework for exchange rate management.
UNCTAD argues that a new monetary system based on multilaterally agreed principles and rules is needed for macroeconomic stability in the globalized economy and for a level playing field for international trade.
The report points to the importance of stabilizing real exchange rates at a sustainable level. Such a system would go a long way towards reducing the scope for speculative capital flows that generate volatility in the international financial system and distort the pattern of trade. A stable real exchange rate (RER) at a competitive level would achieve a number of targets simultaneously:
• It would curb speculation, because the main trigger for currency speculation is inflation and interest rate differentials, which would be compensated for by changes in nominal exchange rates.
• It would prevent currency crises, because the main incentive for speculating in currencies of high-inflation countries would disappear, and overvaluation, one of the main destabilizing factors for developing countries over the past 20 years, would not occur.
• It would prevent fundamental and long-lasting global imbalances and avoid subsequent debt traps for developing countries.
• It would avoid procyclical conditionality attached to International Monetary Fund (IMF) supported stabilization programmes, such as cutting government expenditures and raising interest rates. Countries facing strong depreciation pressure could automatically receive financial assistance through swap agreements or through symmetric intervention by countries facing the corresponding appreciation pressure.
• It would reduce the need to hold international reserves to defend exchange rates and could be combined with a stronger role for special drawing rights (SDR), if allocations are made in light of a country’s need for international liquidity to stabilize its real exchange rate at a multilaterally agreed level.
Such a multilateral system would tackle the problem of speculation and destabilizing capital flows at its source, the TDR says.
These reforms, UNCTAD notes, imply a fundamental rethinking of global financial governance to stabilize trade and financial relations by reducing the potential for gains from speculative capital flows; however, such reform will reduce the likelihood of similar crises in the future and help create a stable macroeconomic environment conducive to growth and smooth structural change in developing countries.
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, TDR 09 cautions. 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.
• It would curb speculation, because the main trigger for currency speculation is inflation and interest rate differentials, which would be compensated for by changes in nominal exchange rates.
• It would prevent currency crises, because the main incentive for speculating in currencies of high-inflation countries would disappear, and overvaluation, one of the main destabilizing factors for developing countries over the past 20 years, would not occur.
• It would prevent fundamental and long-lasting global imbalances and avoid subsequent debt traps for developing countries.
• It would avoid procyclical conditionality attached to International Monetary Fund (IMF) supported stabilization programmes, such as cutting government expenditures and raising interest rates. Countries facing strong depreciation pressure could automatically receive financial assistance through swap agreements or through symmetric intervention by countries facing the corresponding appreciation pressure.
• It would reduce the need to hold international reserves to defend exchange rates and could be combined with a stronger role for special drawing rights (SDR), if allocations are made in light of a country’s need for international liquidity to stabilize its real exchange rate at a multilaterally agreed level.
Such a multilateral system would tackle the problem of speculation and destabilizing capital flows at its source, the TDR says.
These reforms, UNCTAD notes, imply a fundamental rethinking of global financial governance to stabilize trade and financial relations by reducing the potential for gains from speculative capital flows; however, such reform will reduce the likelihood of similar crises in the future and help create a stable macroeconomic environment conducive to growth and smooth structural change in developing countries.
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, TDR 09 cautions. 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.
Given the weakness in macroeconomic fundamentals, the upturn in financial indicators in the first half of 2009 is more likely to signal a temporary rebound from abnormally low levels of prices of financial assets and commodities following a downward overshooting that was as irrational as the previously bullish exuberance.
The upturn is not a reflection of strengthened macroeconomic fundamentals, the report says, but of a restored "risk appetite" among financial agents, which could be reversed at short notice.
Another pressing preoccupation for peoples and governments around the world continues to be the threat of global warming, which implies considerable risks for living conditions and developmental progress.
Another pressing preoccupation for peoples and governments around the world continues to be the threat of global warming, which implies considerable risks for living conditions and developmental progress.
Against this background, the report is addressing the question of how increased efforts aimed at climate change mitigation can be combined with forward-looking development strategies and rapid growth in developing countries.
UNCTAD notes that climate change mitigation should be associated with a process of global structural change, in which demand will shift from greenhouse gas-intensive modes of production and consumption to more climate-friendly modes. The challenge for developing countries will be to seize the growth opportunities created by the new and fast-growing markets in “environmental goods.”
“There is considerable scope for developing economies in the years and decades ahead to gain from the opportunities that will emerge from the structural change towards renewable sources of energy, climate-friendly technologies, low-carbon equipment and appliances, and more sustainable modes of consumption,” the report notes.
“There is considerable scope for developing economies in the years and decades ahead to gain from the opportunities that will emerge from the structural change towards renewable sources of energy, climate-friendly technologies, low-carbon equipment and appliances, and more sustainable modes of consumption,” the report notes.
Successful participation in these new markets could help developing and transition economies to combine climate change mitigation policies with faster growth. But this process cannot be left to the market alone: it requires well-conceived industrial policies that foster the creation of capabilities for producing such goods, or spur participation in their production and subsequent upgrading.
The report notes that the creation and strengthening of industries for green technology and environmental goods can be supported by research and development in public institutions, by easing access to patents, and by fiscal and financial support for the production of climate-friendly equipment, appliances, and consumer goods.
The report notes that the creation and strengthening of industries for green technology and environmental goods can be supported by research and development in public institutions, by easing access to patents, and by fiscal and financial support for the production of climate-friendly equipment, appliances, and consumer goods.
Well-targeted foreign direct investment (FDI) policies can also be part of an industrialization strategy aimed at taking advantage of the global move to a low-carbon economy. A proactive industrial policy with a special focus on climate-friendly innovation and on the production of green technology and environmental goods is of particular relevance in the context of forward-looking development strategies, because the policy space for support measures in this area is greater than in other areas, because it is less narrowly circumscribed by multilateral agreements, the report says.
The international community would also need to mobilize additional financial resources, not only to help developing countries adapt to the consequences of climate change, but also to support their contribution to climate change mitigation.
