The second videoconference of the fall 2011 Vi season, held October 6, gathered 77 participants from five Russian universities around a presentation by a co-author of this year’s UNCTAD Trade and Development Report (TDR), Diana Barrowclough.
Issues like fiscal policy and fiscal consolidation, addressed by the TDR, are on the news of the day and it is in this context that Barrowclough set her presentation of the report.
The videoconference involved students and lecturers from five Russian universities in Saint Petersburg and Moscow -- the Moscow State Institute of International Relations (MGIMO), the Higher School of Economics (HSE), the St. Petersburg State University (SPSU), the St. Petersburg State University of Economics and Finance (FINEC), and the North-West Academy of Public Administration. The event was hosted by MGIMO and SPSU.
Although the world economy has seen a recovery after the fall in 2009, growth is slowing down, Barrowclough said. The "two-speed recovery" continues, with emerging economies operating at much higher levels than developed economies. As developing countries grow based on domestic and regional demand, the developed suffer from stagnating wages and the absence of job creation, which constrain consumption and lead to social unrest such as in the U.S. or Greece, she explained. Russia is somewhere between the two cases, with a forecasted growth of 4.5 percent made possible by higher commodity prices.
But, "the world is now in a very dangerous phase," she said, citing a similar warning from the International Monetary Fund and findings from the TDR, which sees a strong threat for the world economy in the currently observed fiscal tightening.
"The research undertaken for this year's Trade and Development Report shows that it is still too soon to pull back stimulus packages," Barrowclough said. "In addition to the issue of premature timing, UNCTAD research shows that fiscal tightening does not address the underlying global imbalances and financial deregulation that were among the root causes of the crisis. The crisis was not caused by fiscal imbalances - these occurred as a consequence of the crisis, due to bailouts of failing banks and the stimulus packages."
The world can draw useful lessons from history, she added, referring to the experience of IMF-sponsored structural adjustment in the 1990s crisis, when countries which followed the fiscal tightening prescriptions experienced much worse outcomes than what was predicted. "In 1998, a GDP growth of 5 percent was forecast for Indonesia but in fact it experienced minus 13 percent growth; Thailand was expected to achieve 3.5 percent growth but actually growth contracted by 10.5 percent. Russia is one of the few exceptions where the forecasted growth of 4 percent coincided with reality. And yet, in the 2000s' crisis, IMF asked the countries again to implement the same policies. Latvia, Ukraine, Hungary and Georgia, among other countries, found that actual GDP growth was significantly worse than predicted."
In the current conditions, where there is a vacuum of private sector activity and growing concerns about unemployment, UNCTAD argues that growth should be the weapon to reduce debt, rather than fiscal tightening. Fiscal retrenchment is likely to be self-defeating as it affects growth and employment and further reduces fiscal revenues. "We need to go back to a more dynamic way of thinking about fiscal space," she said. "Countries should be able to use their fiscal space in a more functional way, considering the impact that different spending policies or taxes will have in terms of generating future consumption and future fiscal revenues." The TDR, therefore, calls for the continuation of development-friendly fiscal policies at the core of the post-crisis cooperation in the G20.
The report also emphasizes the need for tightening and regulating financial markets. "UNCTAD has long been concerned that overly liberal financial deregulation has led to the emergence of a 'casino' economy where the banking system became more oriented towards speculation than productive investment and lending," she said. With the growth of financial derivatives markets and excessive speculation, commodity prices have become highly volatile, she explained. "This phenomenon is important for Russia," as the country benefits from higher prices due to its reliance on oil and gas exports, but may also suffer from the reduced purchasing power of importing countries resulting from the same price hikes.
"The G20 and UN member countries are looking into ways of reducing price volatility," Barrowclough said. "UNCTAD is contributing to these processes, researching measures that can help to increase transparency in physical and derivative markets, including improving the regulation of financial investors."
Another major policy area in which UNCTAD research is contributing to debate includes exchange rates, which have become completely disconnected from underlying macroeconomic fundamentals.
"Leaving currencies entirely to market forces presents risks for both the global financial system and the multilateral trading system," she said.
Consequently, UNCTAD research supports new forms of global exchange rate regulation -- including a rule-based managed float regime whereby exchange rates could be kept in line with underlying purchasing power parity through adjustment measures that are calibrated according to interest rates or wage rates differentials.