The first videoconference of the Vi's fall semester linked core Brazilian member, the University of Campinas (UNICAMP), with Heiner Flassbeck, Director of UNCTAD’s Division on Globalization and Development Strategies and lead author of UNCTAD's flagship publication, the Trade and Development Report (TDR).
About 40 lecturers and students from various UNICAMP economics programmes joined the presentation of this year's TDR, subtitled "Post-crisis policy challenges in the world economy."
Flassbeck presented the findings of the report in the context of discussions held in Washington, D.C. during the meetings of the Group of 20 (G20) and the 2011 Annual Meetings of the World Bank Group and the International Monetary Fund (IMF), from which he had just returned.
"The world is facing a dramatic situation," he said. While there is still some dynamic in emerging countries, the industrialized world is faced with a slowdown, as a recovering GDP is not generating the normally associated new jobs and wage increases.
"For the first time in the last 40 or 50 years, the expectations of average households in the United States with regard to wage increases have dropped to zero," he added. "No instrument can now stop the advanced economies from sliding into, at best, stagnation."
The TDR warned about such a situation before. If wages do not rise, consumption, which now accounts for about 80 percent of GDP, will not increase either, and without prospects of increasing consumption, there will be no investment. If governments cut down on expenses instead of stimulating the economy, prospects of short to medium-term recovery for the world are unlikely, he said.
"Monetary policy alone cannot overcome zero expectations. Fiscal policy is needed, but this is politically blocked at the moment," he added, explaining that mainstream policy now advocates the "confidence channel" approach -- cutting public expenditure and government deficits to increase confidence, and re-launch growth.
"UNCTAD does not share this view," Flassbeck said. "Why? Because the crisis has not been triggered by unsound government spending – it was a financial crisis which increased debt, particularly in developed economies which came to the rescue of their financial (private) sector."
Against this approach is also past experience showing that IMF-sponsored structural adjustment programmes advocating cuts in public expenditure to restore confidence did not have the intended result, since fiscal tightening did not lead to growth, nor to fiscal consolidation. For instance, Thailand recorded a 10 percent drop in GDP as a result of adjustment, he explained. This fact has later been recognized by the IMF itself.
UNICAMP's Vi member coordinator, André Biancareli, also noted that the 1980s crisis in Brazil did not improve as a result of adjustment, but because new sources of growth had been identified.
"UNCTAD maintains that fiscal retrenchment is not the appropriate recipe in the midst of a crisis which was not caused by irresponsible fiscal policies," Flassbeck said. "Growth-promoting fiscal policies should be used instead.”
He also spoke about the initiative launched by French President Nicolas Sarkozy to tackle the international monetary system and the financialization of commodity markets.
“Unfortunately, the discussion in the G20 on global financial flows concentrated on global liquidity, a concept that does not mean anything,” he said. “This bypassed the more crucial issues of factors which influence global capital flows, in particular speculation and carry trade.”
According to the TDR, there is a need for a constant real exchange rate at a global level. This real exchange rate should be based on interest rate differentials (not inflation differentials where data is only available with a time lag, and where immediate adjustment is not feasible).
The presentation was followed by a discussion about the reasons for the short duration of the "Keynesian" period in developed-country economic policies as a response to the crisis; the comparison of situations in developed and developing countries; the implications of having external debt denominated in foreign currency; global liquidity; and fiscal repression.
Biancareli concluded by saying that the TDR is extremely important for courses at UNICAMP and for discussions among researchers and lecturers. Its findings and positions coincide with the thinking of his institution, he added.