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Economic Slowdown in Rich Countries

Economic Slowdown in Rich Countries Could Hurt Poorer States, UN Reports

While developing countries’ economies are forecasted to expand by 6 per cent this year, that growth could potentially be checked by the slowdown in wealthier nations, according to a new report by the United Nations Conference on Trade and Development (UNCTAD).

Financial turmoil, soaring oil prices and likely tighter monetary policy in several nations augur poorly for the global economy both in 2008 and 2009, with the reach of the sub-prime mortgage crisis extending well beyond the United States which has contracted liquidity and credit worldwide.

UNCTAD’s Trade and Development report for 2008 noted that output around the world is expected to grow by 3 per cent this year, down nearly one percentage point from last year. In developed countries, gross domestic product growth could shrink to half this rate.

“By contrast, growth in developing countries as a group can be expected to remain quite robust, at more than 6 per cent, as a result of the relatively stable dynamics of domestic demand in a number of large developing economies,” the publication said.

“However, possible restrictive monetary policy responses to increasing pressure on the overall price index from higher commodity prices could well lead to a further deceleration of growth in developed and developing countries alike.”

To allow poorer nations to sustain their economic expansion, greater investment in “productive capacity” – the ability to diversify manufacturing – is needed to augment their reliance on primary commodities, UNCTAD said.

Challenging theories that call for investment in developing countries to be drawn from mainly household savings and foreign capital, the report urges changes in domestic monetary policy and local financial systems to allow private companies to access cheaper financing.

It also criticized the current system of global financial governance, noting that market discipline alone cannot curtail periodic episodes of “irrational exuberance,” where firms try to reap double-digit gains out of economies growing at a much slower pace, leading to situations requiring government bailouts.

“The current international framework for monetary and exchange-rate policies offers opportunities for speculative activities that are highly profitable for a limited period of time, but ultimately destabilize the entire system,” the study said, calling for a review of divergent policies of central banks with a view to end global economic turbulence.

ENDS

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