Friday, December 03, 2010

Economy: Developing Nations Alone Cannot Drive Global Recovery

Rob Vos of the UN Department of Economic and Social Affairs | Credit: UN

By Richard Johnson

Courtesy IDN-InDepth NewsAnalysis

GENEVA (IDN) - Developing countries continue to drive the global recovery but are not in a position to make up for slowdown in the advanced countries. Consequently, 2011 does not hold out much hope for the world economy, says a new report by the United Nations.

The UN report, titled 'World Economic Situation and Prospects 2011' (WESP), finds that because of the slowdown in the advanced countries and the phasing out of stimulus measures, output growth in the developing countries is expected to shrink to 6 per cent during 2011-2012, down from 7 per cent in 2010,

Painting a gloomy picture of the performance of the global economy next year, WESP projects worldwide growth to be a meagre 3.1 per cent, followed by 3.5 per cent in 2012. These rates are insufficient to spur the recovery of the jobs that were lost during the financial crisis.

"We are not out of the woods yet and still major risks are looming," says Rob Vos, the Director of the Development Policy and Analysis Division of the UN Department of Economic and Social Affairs (DESA), who led the team of UN economists that prepared the report.

"The road to recovery -- we expect to be long and bumpy still. The speed of the recovery as we have seen starting in the middle of 2009 has started to decelerate in the middle of this year particularly owing to weaknesses in the major developed economies, but we also expect that to drag down the growth in developing countries," Vos told a news conference at UN Headquarters in New York on December 1.

The lack of employment continues to put a damper on economic recovery, according to the report prepared by the (DESA), the UN Conference on Trade and Development (UNCTAD) and the five UN economic commissions.

The report says that serious risks to the global economy include waning cooperative spirit among major economies, which has weakened the effectiveness of responses to the crisis. It notes that uncoordinated monetary responses have become a source of turbulence and uncertainty in financial markets.

The United States has been on a recovery trajectory, yet the pace of that rebound has been the weakest in the country's post-recession experience, says to the report. At 2.6 per cent in 2010, growth in the U.S. is expected to decline to 2.2 per cent in 2011 before improving slightly to 2.8 per cent in 2012.

That sluggish pace of growth is unlikely to make much of a dent in unemployment rates, and recovering the jobs lost in the U.S. during the crisis would take at least another four years.

Prospects for Europe and Japan are even dimmer, the report notes. Assuming continued, albeit moderate, recovery in Germany, the gross domestic product (GDP) growth in the Euro area is forecast to virtually stagnate at 1.3 per cent in 2011 and 1.9 per cent in 2012.

According to the report, Japan's initially strong rebound, fuelled by net export growth, started to falter in the course of 2010 as a result of persistent deflation and elevated public debt. The Asian country's economy is expected to grow by a meagre 1.1 per cent in 2011 and 1.4 per cent in 2012.

Among the economies in transition, GDP (gross domestic product) of the Commonwealth of Independent States (CIS) -- comprising the former Soviet Union -- and Georgia rebounded by about 4 per cent on average in 2010, up from the deep contraction of more than 7 per cent in 2009. In 2011 and 2012, the pace of recovery in South-Eastern Europe is expected to be rather subdued.


Though developing countries in Asia, led by China and India, continue to show the strongest growth performance, it is expected to moderate to around 7 per cent in 2011 and 2012, according to the report.

Growth in Latin America is projected to remain relatively strong at around 4 per cent, though less robust than the GDP (gross domestic product) growth of 5.6 per cent estimated for 2010. Brazil, the engine of regional growth, continues with strong domestic demand to boost export growth of neighbouring countries. The sub-region also benefits from strengthened economic ties with the emerging economies in Asia, says the report.

In the Middle East and other countries in Western Asia, recovery is also expected to decline from 5.5 per cent in 2010 to 4.7 per cent in 2011 and 4.4 per cent in 2012. The average annual output growth will be lower than the pre-crisis rate.

"Recovery has been solid in most of Africa, where the rebound is expected to continue at about 5 per cent per year in 2011 and 2012, but this is well below potential, and conditions vary across the region," the report points out.

"The economies in East Africa are showing strong growth, but several of the poorest countries, especially those in the Sahel region, have suffered from droughts and conditions of insecurity, which is causing hunger and hampering the recovery of their economies," it adds.

The report offers some suggestions that might lead to sustainable recovery. These include providing additional fiscal stimulus and redesigning the stimulus and other economic policies to lend a stronger orientation towards measures that directly support job growth, reduce income inequality and strengthen sustainable production capacity on the supply side.

Other options include finding greater synergy between fiscal and monetary stimulus, while counteracting damaging international spill-over effects in the form of increased currency tensions and volatile short-term capital flows; ensure that sufficient and stable development finance is made available for developing countries; and finding ways for credible and effective policy coordination among major economies.

The findings of the new report do not come as a surprise: "The recovery from the current economic downturn is fragile," speakers at a UN event in Geneva said on September 16, warning that a second downturn may occur if countries do not coordinate their responses, if economic stimulus plans are phased out too quickly and if unemployment is not reduced."

Efforts to rejuvenate the banking and financial sector to stimulate the broader economy have not had the desired result, Supachai Panitchpakdi, UNCTAD Secretary-General said. Banks are turning healthy profits, he said, but mostly through trading. The institutions are not lending to businesses that might use funds to expand production or hire more workers.

Supachai was addressing this year's high-level segment, focusing on the theme 'Towards sustainable recovery' of UNCTAD's Trade and Development Board, which guides UNCTAD's activities from year to year.

Many of the jobs being created in developing countries are in the informal sector and provide neither the long-term security nor higher wages than can stimulate domestic demand and economic growth, he added.

Supachai cautioned that no major import market has emerged to replace the United States, and that a lack of coordination -- including at the Group of 20 (G20) level -- threatens economic recovery.