Fear of flying: Policy stances in a troubled world economy UNCTAD G-24 Technical Meeting Luxor, 10-11 March 2014 Session 1 Global Economy A weakening economic performance reflects inability to address systemic problems 13 8 3-2 World Developed Countries South East Europe & CIS Developing Countries of which: China -7 2007 2008 2009 2010 2011 2012 2013
Global growth scenarios Scenario1 = Treading water: Continuation of slow and below-par recovery Scenario 2 = Unsustainable growth: Relatively faster growth through a renewal of debt-driven cycles Scenario 3 = Instability redux: Recovery derailed by chaotic unwinding of monetary impulses and financial shocks Scenario 4 = Coordinated recovery: Combined expansionary monetary and fiscal measures, income redistribution and financial regulation Main policy stances and adjustment patterns Policy action, constrained by the burden of debt (private or public) and perceived market response leans towards austerity measures Export-led recovery strategies based on competitiveness and lower (wage) costs drive down global demand Renewed poles of credit-driven spending on the back of asset appreciations Ongoing vulnerability to the vagaries of capital flows, speculation and commodity price shocks
Fiscal stances: in developed countries austerity was the usual response to debt burdens Government expenditure gap in 2012 (Per cent of GDP) -5 0 5 10 15 PRT ROULTU LVA SVN CYP HUN BGR SVK POL GBR LUX NZL NLD USA DEU ISL CZE ESP NOR AUS AUT FRA CAN EST FIN SWE DNK CHE MLT ISR BEL 0 1 Government debt in 2010 (Per cent of GDP) ITA GRC Government spending gaps: examples 8 8.2 8.4 8.6 8.8 USA 19 19 2000 2005 2010 year 5.8 6 6.2 6.4 6.6 ln (Gen. Gov. Exp.), real terms The impact on aggregate 19-2010 trend UK 19 19 2000 2005 2010 year ln (Gen. Gov. Exp.), real terms demand can be considerable 3.8 4 4.2 4.4 4.6 19-2010 trend Portugal 19 19 2000 2005 2010 year ln (Gen. Gov. Exp.), real terms 19-2010 trend
while public debt often reflected faults in private sector behaviour Private net lending in 2006-07 (Per cent of GDP) -30-20 -10 0 10 IRL JPN USA GRC ESP GBR CHE NLD DEULUX ISR SWE AUT FRABEL ITA CAN FIN SVN POL CZEDNK SVK MLT PRT AUS ROM CYP LTU NZL ISL LVA BGR -15-10 -5 0 5 Government net lending in 2011 (Per cent of GDP) EST HUN In developing and transition economies the picture is varied Government expenditure gap in 2012 (Per cent of GDP) -20-10 0 10 20 LBY TTO GNQ SDN STP GEO MNE DMA AZE CPV SWZ MLI BDI VCT LBR BWA IRN TCD UGARM TJK BIH UKR VNMALB VUT HRV SRB BLZ ATG GRD ARE BHR AGO KWT ZAFYEM BTN GNB MHL GIN BRNRUS MUS SAU COL EGY KAZ CHL GTM CRI HND HTI PER MDA SLB ETH KHM CAF KOR MWI NPL SEN TZAMOZ IND SLV BRA BRB TWN MEX PHL LAO MDV MKD FSM BEN JOR HKG THA CODKEN IDN TUR QAT URY PAN BHS PAK SGP CMRRWA BFA CHN MDG LSO SLEFJIKGZ TKM LCA NIC IRQ GUY NGA TUN MYS GMB PRY DOM CIV NAM SUR BOLGHA DJI MAR UZB NER COM ZMB ARG DZAECU GAB TGO SYC MMR VEN OMN ZWE MRT COG JAM LBN ERI 0 1 200 Government debt in 2010 (Per cent of GDP) KNA
Interactions between public and private sector balances in developing countries are complex Private net lending in 2006-07 (Per cent of GDP) - -20 0 20 KIR ERI TUV TTO MYS LBY NGA VEN DZA BHR EGY SUR TKM CHNBOL NAM LBN MMR BWAGAB ARG BRA AFG IRN QAT HKG IND BGD PHL TCD LKA GNB MAR CIV IDNECU PRY PAKMNG ZAR NPL THA HTI YEMEX IRQ KEN BRB KHM TUN COL URY BLZ PER KOR LSO ARM UKR RUS GHA MWI KGZ SLVGTM DOMTURCHL CRI HND GUY VNM MUS ETH RWA COM CPV GMB HRV ALB UGA ZWE TJK MKDSDN SEN MOZ TZA JAM ZAF TGO PNGMHL BLR VUT BEN GIN FSM SYC JOR SWZ MDG TON BIHLAO CAF FJI BHS BDI WSM NIC KNA MDV SLE SRB KAZ BFA ZMB MDA KSV DJI CMR DMA MLI ATG VCT GEO GRD LBR LCA PLW NERGNQ AGO SGP UZB OMN SLB AZE SAU ARE COG -20-10 0 10 20 Government net lending in 2011 (Per cent of GDP) With demand falling on the back of austerity, to seek export competitiveness may backfire
since wage compression lowers consumption, discourages investment..and the deceleration of consumption and investment drives down imports 1 1 1 1 Australia 135 Canada Import Volume (2005=) France Private sector spending (2005=) [RHS] Import Volume (2005=) Germany Private sector spending (2005=) [RHS] 112 Import Volume (2005=) Private sector spending (2005=) [RHS] Import Volume (2005=) Private sector spending (2005=) [RHS]
with detrimental impact on global demand and stability 75 Import Volume (2005=) Import Volume (2005=) Italy United Kingdom Private sector spending (2005=) [RHS] Private sector spending (2005=) [RHS] 92 88 86 Import Volume (2005=) Import Volume (2005=) Japan United States Private sector spending (2005=) [RHS] Private sector spending (2005=) [RHS] As austerity and export strategies fail, liquidity expansion is seen (again) as an option 210 1 1 1 01 01 2009 01 04 2009 01 07 2009 01 10 2009 MSCI ACWI (2009M1=) 01 01 2010 01 04 2010 01 07 2010 01 10 2010 01 01 2011 01 04 2011 01 07 2011 01 10 2011 01 01 2012 01 04 2012 01 07 2012 01 10 2012 01 01 2013 01 04 2013 01 07 2013 01 10 2013 G4 Central Banks Total Assets (2009M1=) The increase of G4 CB assets (from ~ 5 to usd 13 Tr.) has mostly served to fuel stock market bubbles
In some cases excess liquidity props up asset bubbles and may lead to debt-driven spending 165 155 145 135 United States 135 United Kingdom.5 99.5 99.5 97.5 1.3.10 1.9.10 1.3.11 1.9.11 1.3.12 1.9.12 1.3.13 1.9.13 1.1.10 1.7.10 1.1.11 1.7.11 1.1.12 1.7.12 1.1.13 1.7.13 Australia 99 97 Canada Stock Exchange House Prices Private debt outstanding (RHS) But excess global liquidity has caused erratic co-movements of bond spreads in EM 0 0 0 0 Turkey South Africa China Indonesia Russia Brazil 0 300 200 0 07 08 08 08 09 09 09 10 10 10 11 11 11 12 12 12 13 13 13
Liquidity expansions have triggered greater instability and exacerbated vulnerabilities Brazil 200 1 1 1 Argentina 4 0 3 300 2 200 1 20 1.12.07 1.6.08 1.12.08 1.6.09 1.12.09 1.6.10 1.12.10 1.6.11 1.12.11 1.6.12 1.12.12 1.6.13 1.12.13 1.12.07 1.6.08 1.12.08 1.6.09 1.12.09 1.6.10 1.12.10 1.6.11 1.12.11 1.6.12 1.12.12 1.6.13 1.12.13 India Turkey 225 175 75 Stock market (MSCI) Exchange rate ($/nat.curr.) EMBI+ Sovereign Spread [RHS] in so far as countries depend on foreign financial markets and foreign currencies 175 1 South Africa 325 275 225 China 2 200 1 175 75 75 1.12.07 1.6.08 1.12.08 1.6.09 1.12.09 1.6.10 1.12.10 1.6.11 1.12.11 1.6.12 1.12.12 1.6.13 1.12.13 1.12.07 1.6.08 1.12.08 1.6.09 1.12.09 1.6.10 1.12.10 1.6.11 1.12.11 1.6.12 1.12.12 1.6.13 1.12.13 1 Indonesia 300 Russian Federation 0 4 75 2 200 1 30 0 3 300 2 200 1 20 Stock market (MSCI) Exchange rate ($/nat.curr.) EMBI+ Sovereign Spread [RHS]
In sum, a sustained recovery is held back by: Over-reliance on monetary policy: In so far as the pressure towards downsizing of the state prevails, macroeconomic policies will be inconsistent and back-fire Financialization: In a global economy centred on productive activities, a profit-investment nexus may generate centrifugal forces through expansion of aggregate demand. But in a financialized global economy profit-seeking is mostly centripetal through asset price movements US-centric international payments system: In so far as global finance depends on the US dollar there can mostly be two kinds of response: mercantilism (to gain $ by exports), or stagnation (demand contraction)