Four scenarios on world economy

Dr. Richard Kozul-Wright, director of UNCTAD’s division on Globalization and Development Strategies (GDSD), commenced his presentation by underlining the likelihood of a much more difficult macroeconomic environment that could face the economies of the South in the medium-term. He was worried that policy makers in the South have been slow to register the kind of changes in the global economy and systemic weaknesses that have been documented by Dr. Yilmaz Akyuz. UNCTAD over the last few years has been critical of the ‘de-coupling mythology’, as he called it, which developing country policy makers themselves have bought into. UNCTAD has been warning that there are hard choices to be made in macroeconomic policies and strategies in the coming years.

Kozul-Wright explained that GDSD’s work identified four broad scenarios facing the world economy:

• The first scenario is a ‘muddling-through’ scenario, which is a continuation of slow growth, driven by efforts to rebalance private sector balance sheets and continuance of fiscal austerity in advanced economies. This is likely to be a world of sluggish investment and persistently high inequalities, continuing to hold back economic potential. This would come with a vague hope that somehow the ‘confidence fairy’ will return to the private sector and reinvigorate private demand in a way that could keep the recovery on track;
• The second scenario is of unsustainable economic growth, essentially faster growth driven by the build-up of debt in the private sector, in which housing booms would be a most likely source of expansion. Injection from those asset booms of demand into the global economy would allow some economies to contemplate export-led recoveries based on which they would be able to revive their growth possibilities. This would be a world in which global imbalances are likely to grow and financial fragilities are likely to re-emerge;
• The third scenario is an instability scenario in which the recovery would be derailed by unruly unwinding of the monetary stimulus, which would likely lead to recurrence of financial shocks and to a combination of currency and banking crises. This would present serious policy challenges in emerging economies, with highly contagious possibilities. The role of the Federal Reserve of the United States and the way it proceeds is pivotal in this kind of scenario;
• The fourth scenario would be a coordinated recovery scenario, in which a combination of monetary and fiscal measures would be used to stimulate demand and to generate more expansionary response to economic adjustments. This would be a scenario in which strong financial regulations are used to reorient the nature of the financial system from asset speculation towards boosting productive capacities in the real economy. Redistributive measures would be used to deal with inequalities that could hold potential destructive implications for the world economy. Such kinds of policies are viable and would have win-win consequences for all parts of the global economy. This was the scenario that the G20 promised to deliver when it was re-established in 2009/2010.

Kozul-Wright underlined that such a scenario of coordinated recovery has been far from what has been seen in practice. It is possible to attribute some success to the G20 in regard to preventing a spiral down of the crisis, and bringing stability to the financial system. But there has been no sign that the G20 operated effectively to bring about a broader effective recovery, he stressed.

This situation begs the question on why this kind of coordinated response has failed to materialize. UNCTAD attributes that to four reasons, Kozul-Wright explained. First factor is the persisting dominance of unregulated finance in shaping the larger policy environment.  Most reforms to the financial system have been cosmetic and in many instances non-existent. Second factor is the heavy reliance on monetary policy of unconventional nature, which restricted the policy options necessary for a balanced and coordinated response. Third factor is the continued dominance of the US dollar at the same time that the US has essentially forfeited its leadership role in the global economy. Fourth factor is that South-South cooperation, which has been flagged as a new hope for development in terms of coordinating efforts in the global economy, has yet to provide a meaningful alternative, both in terms of policy coordination in the South and in terms of a wider model for global policy coordination. Despite the optimism that many have in regard to South-South cooperation, it would be naïve to consider that as currently practiced it offers a serious alternative, Kozul-Wright noted.

Dr. Kozul-Wright stressed that the onus is much more on developing country policy makers to rethink their policies and pursue more selective and strategic policies, including better mobilization of domestic resources. He added that in the case of Latin American and African economies that have been heavily dependent on external flows, there is clearly a need to re-orient policies to focus on internal markets as drivers of demand.

Dr. Kozul-Wright stressed the importance of limiting dependence on external markets, while increasing wages as engines for growth. In this regard, Kozul-Wright made reference to interventions such as minimum wage legislation and income policies. He also stressed the importance of raising public spending and public investment, and the ongoing need for industrial restructuring, along the need to revisit technology policies, and the role of development banks as an important source of credit expansion for longer-term affordable credit.

Dr. Kozul-Wright underlined that the Post-2015 agenda does open up real possibilities to articulate such kind of strategies in the multilateral context. Yet, he argued that at this stage developing countries have a lot of homework to do in order to ensure that these issues galvanize their positions in New York, since many of these issues are still not on the radar of developing countries’ negotiating positions in that forum.