The UNCTAD’s Trade and Development Report gives a fresh perspective to the policy challenges that governments around the world have been facing since the 2008 global financial crisis. It questions the prevailing orthodoxy, the growing practice of governments resorting to tight monetary and fiscal policies. In the recovery phase, economic growth has been uneven across the world. The “two speed” recovery – developing countries have outstripped the developed ones and remain the engine of growth – is based on different sets of economic circumstances prevailing in the two broad categories. Most striking is the vast difference in domestic demand. In developing countries, strong wage growth and public support have sustained the recovery in investment and consumption demand. For countries such as India, the task before policymakers is to rebalance demand from consumption to investment by inducing more people to save. On the other hand, in most developed countries, private demand is subdued because of stagnating wages and high unemployment. The report disapproves of the fiscal-tightening measures the developed countries led by the United States seem keen on adopting. At this juncture not only will such belt-tightening be counter-productive, but when adopted by some of the biggest economies, it will pose a major risk for the global economy.
Policymakers do not appear to have learnt the right lessons from the crisis. There is hardly any justification for the current shift towards austerity, says the report. Fiscal imbalances were not the cause, but the consequence, of the crisis. Fiscal retrenchment, especially the moves to cut the fiscal deficits, and curbing public debt are inappropriate responses and, when projected as something that needs to be done to regain the confidence of the financial markets, self-defeating. The much anticipated reform of the global financial and monetary systems, especially the regulatory aspects, has been slow in coming. It is well recognised that financialisation of commodity markets has affected the prices of such basic goods as food staples and energy. Urging greater transparency in derivatives, the report wants an internationally-coordinated, tighter regulation of financial investors. To remove the mismatch between foreign exchange markets and macroeconomic fundamentals, the report calls for a rules-based system to monitor exchange rate movements at the multilateral level. These suggestions are by no means original. But seldom has a U.N. agency so eloquently called for a check on the unbridled expansion of global finance as UNCTAD has done now.