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Global Stimulus Vital To Counter Economic Meltdown

Global Stimulus Vital To Counter Economic Meltdown – UN Report

New York, Dec 1 2008 4:10PM

United Nations economists today called for massive coordinated global economic stimulus packages, linked with sustainable development measures, beyond liquidity and recapitalization steps already taken, to counter the worldwide economic meltdown.

World per capita income is expected to decline next year, export growth and capital inflows will fall, borrowing costs for developing countries will rise as contagion spreads from the major economies, and the United States dollar is set to resume its decline, with a possible hard landing in 2009, according to the UN annual economic report, issued at the international Financing for Development review currently under way in Doha, Qatar.

The report, World Economic Situation and Prospects 2009, calls for deep reforms of the global financial system to prevent a recurrence of the crisis, including stronger regulation of financial institutions, adequate international liquidity provisioning, an overhaul of the international reserve system and a more inclusive global economic governance.

According to the baseline scenario, world output will reach a meagre 1 per cent in 2009, compared to 2.5 per cent in 2008 and global growth rates of between 3.5 and 4 per cent in the preceding four years. The 2009 projection includes a decline in output of 0.5 per cent in developed countries, along with growth of 5.3 per cent in the transition economies and 4.6 per cent in the developing world.

Under a more optimistic scenario, factoring in fiscal stimulus of between 1.5 and 2 per cent of gross domestic product (GDP) of the major economies and further interest-rate cuts, developed economies could post a 0.2 per cent rate of growth, and the developing world would surpass 5 per cent growth, the economists calculate.

But given the great uncertainty prevailing today, a more pessimistic scenario is possible. If the present credit squeeze prolongs and confidence in the financial sector is not restored in the coming months, developed countries could enter into a deep recession, causing world output to fall and GDP growth in the developing world to drop to 2.7 per cent, dangerously low for the ability of countries to sustain poverty reduction efforts and social and political stability.

The report noted that crisis management moved slowly in 2008 with aggressively expansive monetary policy in the United States during the first half of the year in an attempt to stave off a recession while European central banks maintained a tightening stance in the face of inflation.

This mismatch typifies a lack of coordination during the boom years, when growth was strong and the over-extension of credit in the US and over-accumulation of savings in surplus countries could have been addressed with less pain and more room for manoeuvre.

To shore up weaknesses which led to the extraordinary damage brought on by the downturn and prevent this from happening again, UN economists recommend a broad range of steps including:

  • Fundamental revision of the governance structure and functions of the International Monetary Fund (IMF) and World Bank for enhanced international policy coordination and more inclusive participation of major developing countries;
  • Fundamental reforms of existing systems of financial regulation and supervision to stem past excesses;
  • Reform of the present international reserve system, away from the almost exclusive reliance on the US dollar and towards a multilaterally backed multi-currency system;
  • Reforms of liquidity provisioning and compensatory financing mechanisms backed, among other things, by better multilateral and regional pooling of national foreign exchange reserves, and avoiding onerous policy conditionality.

    In another report, the World Bank said protecting the poor and vulnerable while at the same time removing constraints to economic growth and productivity would be a priority to overcome the financial crisis and resume sustained growth.

    “The costs of investing both in social programs and economic activities can seem daunting for many governments now short on cash,” World Bank Vice-President for Poverty Reduction and Economic Management Danny Leipziger said in Doha in releasing the report, called Weathering the Storm: Economic Policy Responses to the Financial Crisis. “But the future cost of not taking action can be much higher than the savings from inaction.”

    Interventions such as the conditional cash-transfer programmes in Mexico and Brazil are cost-effective and can cost less than 1 per cent of GDP. For many developing countries, spending on targeted safety nets is a smart investment since the effects of malnutrition in children is life-long. “Governments will be facing a significant global downturn, which in turn will raise demands for public expenditure, some of which will need to be accommodated,” Mr. Leipziger added.

    ENDS

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