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Study Tour for students from the University of International Business and Economics (Beijing)

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Study Tour for students from the University of International Business and Economics (Beijing) Geneva, 26 September 2011 TRADE AND DEVELOPMENT REPORT 2011: – PowerPoint PPT presentation

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Title: Study Tour for students from the University of International Business and Economics (Beijing)


1
Study Tour for students from the University of
International Business and Economics
(Beijing) Geneva, 26 September 2011
TRADE AND DEVELOPMENT REPORT 2011 Post-Crisis
Policy Challenges in the World Economy
  • Jörg Mayer
  • UNCTAD

2
Main messages
  • Economic recovery is losing steam, particularly
    in advanced economies
  • A shift from fiscal stimulus towards fiscal
    tightening at this time is self-defeating
    fiscal space is a largely endogenous variable
  • Comprehensive financial reform is needed more
    than ever unambitious efforts initiated after
    the crisis have failed

2
3
Global economic recovery is slowing down, with
strong downside risks
3
4
Two-speed recovery pattern continues
Real GDP at market prices, 20022011 (Index
numbers, 2002 100)
Note Linear trends correspond to 20022007.
4
5
Developing countries cannot lead the global
recovery
  • They have insufficient weight, relatively low
    absorptive capacity and cannot issue
    international currencies
  • Most large emerging economies face demanding
    domestic adjustment needs which require
    significant domestic resources
  • They also face significant external risks because
    of continued economic weakness in developed
    economies and the lack of significant reforms in
    international financial markets they are
    vulnerable to decline in trade volume and sharply
    fluctuating primary commodity prices

5
6
Global imbalances remain a risk to sustained
economic recovery
  • Post-crisis unwinding has been short-lived
  • Country-specific evolution depends on whether
    domestic demand (BRIC) or net exports (Germany,
    Japan) drive recovery
  • Exchange-rate movements have sometimes enlarged
    imbalances

6
7
Premature fiscal tighteningis counterproductive
  • The best strategy for reducing public debt ratios
    is to promote growth and maintain low interest
    rates
  • Fiscal space is a largely endogenous variable
  • Fiscal retrenchment is likely to be self
    defeating, as it affects GDP growth and reduces
    fiscal revenues
  • Functional finance changing the composition of
    revenues and expenditure can further extent
    fiscal stimulus and maximize multiplier effects
  • Fiscal expansion tends to be most effective if
  • higher spending takes precedence over tax cuts
  • spending targets infrastructure and social
    transfers
  • tax cuts target lower income groups

7
8
Developing countries post crisis increase in
public debt was relatively small
Ratio of public debt to GDP, selected income
groups, 19702010 (Median, in per cent)
8
9
IMF-sponsored programmes systematically
underestimate their negative impact on GDP growth
and fiscal balances
10
Proactive incomes policy is a key element of
growth-friendly macroeconomic policies
  • Wages should grow in line with productivity
    growth (plus an inflation target) to pave the way
    for a steady expansion of domestic demand as a
    basis for expanding investment while containing
    cost-push inflation risks
  • An individual country may strengthen its
    international competitiveness through wage
    compression but a simultaneous pursuit of this
    strategy by many countries causes deflationary
    pressure

10
11
Financial deregulation was one of the main
factors leading to the global crisis
  • Financial deregulation
  • Led to a large, opaque and undercapitalized
    shadow banking system
  • Concentrated the traditional banking segment in a
    few too big to fail (and too powerful to
    regulate) institutions
  • Reduced diversity of financial system and
    increased systemic risk
  • While government regulation has weakened, its
    lender-of-last-resort support to the financial
    system has increased, and even extends to the
    shadow banking system

11
12
Financial reform agenda remains uncompleted
  • Strong re-regulation is urgently needed. It must
  • Be tighter with the too-big-to-fail
    institutions
  • Cover the shadow banking and avoid regulatory
    arbitrage
  • Incorporate a macro-prudential dimension, with
    anti-cyclical capital requirements and capital
    controls
  • In addition, the financial system must be
    restructured
  • Re-regulation alone will not orient credit to
    real investment or make it accessible to small
    and medium-sized firms
  • Banking restructuring should aim at more diverse
    financial systems, with a bigger role for public
    and cooperative institutions
  • Giant institutions must be sized down
  • The activities of commercial and investment
    banking should be clearly separated, in order to
    reduce the risk of contagion

12
13
Commodity prices have recovered amidst high
volatility
Monthly evolution of selected commodity prices,
January 2002May 2011 (Price indices, 2000 100)
13
14
Many explanations are available for recent
commodity price movements
  • Changes in fundamentals
  • Demand rapid income growth in emerging economies
    (intensity of use dietary habits) biofuels
  • Supply increased production cost earlier low
    rates of investment
  • Increased participation of financial investors
    who treat commodities as an asset class
  • Index investors (passive, long positions in range
    of commodities)
  • Money managers (active, short and long positions
    in specific or range of commodities)

15
Financial investment continues to rise
AUM/global GDP ratio doubled in 200507 and rose
4-fold in 200810
Commodity investment, assets under management,
20052011 (bn)
16
Why does financialization matter?
  • Financialization risks impairing appropriate
    functioning of commodity exchanges
  • Uncertainty (price trends disconnected from
    fundamentals high volatility) deters investment
    and supply growth
  • Financialized commodity markets may cause
    pre-mature macroeconomic tightening and declining
    demand

17
Policy recommendations to improve commodity
market functioning
  • Increase transparency in physical and derivatives
    markets
  • Arrange for internationally coordinated tighter
    regulation of financial investors
  • Consider occasional direct intervention to avert
    price collapses and deflate price bubbles

17
18
Exchange rates have become disconnected from
macroeconomic fundamentals
Real effective exchange rate, selected countries,
January 2000May 2011 (Index numbers, 2005 100,
CPI based)
18
19
Leaving currencies entirely to market forces
entails considerable risks for both the global
financial system and the multilateral trading
system
  • Instead, a rules-based managed floating can
    deliver
  • Sufficient stability of real exchange rate to
    enhance international trade and support fixed
    investment in the tradable sector
  • Sufficient flexibility of exchange rate to
    accommodate differences in cross-country
    developments of unit labour costs or inflation
  • Such a system could be based in two approaches
  • Adjustment of nominal exchange rates to inflation
    differentials emphasizes need to avoid trade
    imbalances
  • Adjustment of nominal exchange rates to interest
    rate differentials emphasizes limiting currency
    speculation
  • Rules-based managed floating may be practiced
    unilaterally, regionally or (preferably)
    multilaterally

19
20
Thank you!joerg.mayer_at_unctad.org(http//www.unc
tad.org)
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