Ten researchers from Vi Brazilian member, the Institute for Applied Economic Research (IPEA), joined Heiner Flassbeck, Director of UNCTAD’s Division on Globalization and Development Strategies, in a videoconference discussion based on this year’s Trade and Development Report (TDR), October 31.
Flassbeck, lead author of the TDR, framed the findings and recommendations of the report in the context of the current world economic situation and the ongoing meetings of the G20.
UNCTAD's view on the prospects of the world economy has proved correct, Flassbeck said. All major developed countries are faced with a "Japanification" scenario, a combination of stagnation and deflation which has been observed in the Japanese economy for the past 20 years.
“In the US, the neoclassical paradigm of flexible labour markets is hitting a wall,” he said, referring to growing unemployment and the lowest household income expectation in history. The TDR refers to this phenomenon as the "wageless recovery." At the same time, alternative policy instruments are either not available (the nominal interest rates in most developed economies are already close to zero) or are politically unfeasible (the use of fiscal instruments).
"The situation in Europe is worse than in the US,” Flassbeck added “EU leaders have tried to save the euro, but did not come to the crucial questions. UNCTAD’s view is that the recommended fiscal tightening -- cutting public expenditure and wages and increasing taxes, such as in the case of Greece -- in a moment when economies are in depression will only deepen the depression and create more deficits.
Given the weight of the three developed regions in the world economy, with more than 80 percent share of private consumption in their GDP, he said that if there should be any chance for a worldwide recovery it is important to encourage stable private consumption in these countries. For this, ensuring people's expectation that their income will grow is indispensable.
Recent evidence also shows that the assumption that private expenditure will step in to compensate for cuts in public expenditure has not materialized. Countercyclical fiscal policy therefore needs to be kept to revive growth.
On the issue of financial markets and the international financial architecture, the TDR concludes that the current financial system produces wrong price signals, both with regard to commodities and currencies. This inflicts damage on economies even without speculative bubbles. Brazil is a good example of such situation, benefiting from high commodity prices but suffering from overvaluation of its currency.
To reduce this damage, UNCTAD proposes that financial markets should be regulated, and that their exposure to purely financial investors be reduced. A multilateral or regional system(s) should be created to keep exchange rates at an equilibrium level - at par with the price (PPP) or interest rate differentials. This would eliminate the incentives for carry trade and speculation.
The academics from IPEA inquired whether it was feasible to find a political consensus within the G20, to which UNCTAD has been providing analysis and inputs, and reconcile the diverging interests of the various G20 countries.
Flassbeck said that at the beginning of 2011, bold initiatives in this area were put forward by Brazil and France, and back then he was optimistic about these initiatives to be discussed. However, the original ambitions did not materialize and the debate concentrated on smaller, more technical topics instead.
UNCTAD has nevertheless achieved a big political success when its analysis of the financialization of commodity markets was taken up by Dominican Republic President, Leonel Antonio Fernández Reyna, who launched an initiative to limit commodity speculation in an effort to maintain stable and reasonable food and energy prices for the world's populations. This initiative has subsequently been tabled by the G77 and China as a draft General Assembly resolution on which a decision should be taken during its current session.