UNCTAD’s Alfredo Calcagno, of the Division on Globalization and Development Strategies (GDS), opened the November 24 Vi videoconference on this year’s Trade and Development Report (TDR) for Pontificia Universidad Católica del Perú by “rebaptizing” the report.
“It is subtitled ‘Post-crisis economic policy challenges’, but it should read ‘Challenges after the beginning of the crisis’ -- because it has not ended,” he said.
The videoconference was attended by about 60 participants from Peru, including students, teachers, and members of the private and public sectors. Also joining the discussion were Alan Fairlie, PUCP Vi member coordinator; Edgar Vasquez, of Peru’s Ministry of Foreign Trade and Tourism; and Luz Caballero and Katia Angeles, of the Permanent Mission of Peru to the United Nations Office in Geneva.
Initial policy response to the crisis followed Keynesian policy prescriptions -- aggressive government action to stabilize the economy -- and prevented a deeper recession, Calcagno explained.
“Peru has been doing well in the recent crisis,” commented Vasquez. “We have used counter-cyclical policies in the form of fiscal packages stimulating the economy, targeting infrastructure and social transfers -- in line with UNCTAD recommendations.”
However, the global recovery is currently slowing down, as evidenced by this year’s contraction of the Japanese economy and deceleration in growth in the United States and Europe. At the same time, growth in developing countries, though slower than the previous year, still shows relatively positive results. The forecast for Latin America in 2011 calls for 4.7 percent a growth, down from 5.9 percent in 2010. China and India remain important engines of growth.
“The world is experiencing a two-speed recovery,” Calcagno said.
UNCTAD warns that premature fiscal retrenchment currently under way in developed countries poses great risks, because the world is not yet out of the recession. The question for developing countries is whether they can maintain their current level of growth if developed countries, which still remain important markets for their exports, fall back into recession.
According to UNCTAD, the crisis is not due to fiscal irresponsibility, i.e. high public deficits before the crisis. As a matter of fact, since the mid 90’s, the level of internal debt (ratio of public debt to GDP) has been falling. The growing deficits currently observed in developed countries are a consequence of the crisis.
The fact that reduction of public expenditure does not generate growth has been confirmed by UNCTAD's analysis of IMF structural adjustment programmes – through a comparison of predictions at the moment when countries signed the stand-by agreements with the IMF and the reality afterwards. It appears that the forecasts have systematically been more optimistic than the reality: the actual growth was lower, or the expected fall was deeper than predicted. The exceptions were Russia (in 1999) and Iceland (in 2009), which did not really follow IMF prescriptions, since they entered into debt default.
UNCTAD argues that countries need to achieve growth to be able to reduce public deficits. The current policies give the impression that "we have not learned anything." Fiscal policies, instead of cutting expenditure in the phase of crisis, should support growth.
“It is possible to do so without increasing deficits by changing the structure of expenses in favor of those with a higher multiplication effect,” Calcagno said.
Looking more closely at the causes of the crisis (and possible remedies), UNCTAD concludes that financial deregulation was one of the main causes, as it led to the emergence of an opaque and under-capitalized shadow banking system, and made the traditional banking system more fragile.
Based on this diagnostic, UNCTAD proposes measures in two areas:
- To strengthen the regulation of the financial system by introducing stricter rules for institutions that are "too big to fail;" extending regulation to include the shadow banking system; and adopting macro-prudential measures, including capital controls which should restrict the pro-cyclical international capital flows.
- To restructure the financial system so as to re-focus it on its original purpose of providing financing for productive investment. This would entail diversification of the banking system to have a larger variety of public and cooperative institutions and specialized banks (such as for SMEs, retail trade, agriculture); the separation of commercial banks from investment banks; and the breaking up of too-large financial institutions. Some of these ideas are at an initial stage of application in the United States and the United Kingdom.
UNCTAD has also been closely following the evolution of commodity prices, which have been highly volatile in the past years. An increase in prices occurred in 2010-2011, and commodity prices are now generally higher than 10 years ago. This is partly due to long-term factors such as the growing demand in emerging economies, but partly also to the increasing financialization of commodity markets, which generates an important volatility.
With regard to recommendations relating to commodity markets, UNCTAD calls for increased transparency and better regulations, regulation of purely financial investors, and possibly occasional direct intervention in derivative markets to avoid price collapses or bubbles.
The TDR videoconference was organized by PUCP’s Faculty of Social Sciences and the UNCTAD Virtual Institute. It was also supported by an interdisciplinary student group, TIDEP (Integration and Development Workshop of Peru).
Among the participants in Peru were representatives from the Ministry of Agriculture, the European Union Delegation, the Center for Economic Studies of the Association of Exporters (ADEX), undergraduate students and faculty members from the Economics, Management, Sociology and various programs of the PUCP Graduate School.