Current Economic Trends and Major Policy Issues Alfredo Calcagno UNCTAD

1. Current Economic Trends and Major Policy IssuesAlfredo CalcagnoUNCTAD UNCTAD Virtual Institute Study Tour for the University of the West Indies, Geneva, 16 - 27 May 2011

2. A Systemic Crisis This is a global crisis: It started in developed countries, but all regions are affected • Transmission through financial markets, • Trade volume, • Commodity prices, • Remittances. This is the crisis of an economic system in which the financial sphere predominated over production • Extreme openness to foreign capital increased volatility and accentuated cycles • Huge financial profits were required (high risks and leverage) • Growing income distribution inequalities • It was impossible to keep growing on the basis of permanent imbalances, external and domestic, and indebtedness

3. Financial deregulation in several developed and Eastern European countries led to unsustainable levels of leverage and indebtedness(households’ debt, % of GDP) 3

4. Global GDP contracted for the first time since the Second World War

5. Developed economies were strongly affected by the shock in the financial sector, which impacted on the demand for durable and capital goods and exports.

6. Developing regions could not totally “decouple”.

7. The channels of transmission of the crisis and Government’s ability to follow compensatory policies largely depend on structural factors and previous macroeconomic standings

8. World exports fell significantly in all regions, and recovered mainly in developing countries

10. Commodity Prices Evolution, January 2007-February 2011(Monthly averages, price indices 2000=100)

11. Remittances to developing countries diminished with the crisis

12. Worker remittances as a percentage of GDP, 2008

13. Yield spreads on emerging market bonds, Jan. 2006-July 2009 (EMBI +)

14. The crisis found developing countries much better prepared than in the past Developing regions had already endured several financial crises. • Domestic debt and leverage were relatively low • Many countries abandoned rigid exchange rates (corner solutions) • No serious banking or balance of payment crisis Several years of rapid growth which did not rely on foreign capital enlarged the “policy space” • Improvement in fiscal and external balances • International reserves accumulation (self insurance) and lower debt • No IMF programmes But this is not true for several countries, especially in Emerging Europe and CIS

15. Current accounts by region, 1990-2010(in current $) 15

16. Exchange rates, January 2006-October 2009(domestic currency per dollar, January 2006= 100) 16

17. Exchange rates, January 2006-October 2009(domestic currency per dollar, January 2006= 100) 17

18. Fiscal stimulus and support to the financial system announced for 2008-2010 (% of GDP)

19. Selected Latin American countries: Fiscal stimulus and specialfinancingprogrammed for 2009 (% of GDP)

20. Fiscal indicators

21. Fiscal indicators

22. Stimulus should not be withdrawn yet: Inflation is not a serious danger, particularly in developed countries (CPI changes in %)

23. Not all the governments have the same room for manoeuvre, but they all can take active policies Monetary and credit policies: • Reduction in reserve requirements and increase Central Bank support to banks • Lower policy interest rate • Subsidized credits for consumption or investment • Expanded credit supply by public banks Fiscal and social policies: • Increasing public investment or accelerating on-going projects • Transfers to households, subsidies for some goods and services • Increases in minimum wages and pensions, subsidies or credit to preserve employment • Tax reductions, including some import duties

24. International and multilateral sources of financing must support fiscal stimulus, without the traditional (pro-cyclical) conditionality.Countries (and lenders) should accept higher temporary fiscal imbalances, keeping in mind that some level of deficit may be unavoidable: inaction (or worst, recessive adjustment) also have a fiscal cost, without any benefit

25. Conclusions The present crisis shows that the way the economic system has functioned is no longer sustainable Public policies are back, but they cannot be limited to national spheres or to the short run • The crisis cannot be solved through market mechanisms • Intervention in financial markets is indispensable, not only for preventing their collapse, but also to re-regulate them • Pro-cyclical adjustments (IMF-type) must be avoided • Policy responses must be framed into a new growth paradigm, with a larger role for domestic and regional markets

26. Conclusions • Policy measures must be effective in the short run, but also in the long run: “urgent” measures should not be taken without considering their long-term consequences • A comprehensive approach is more likely to improve expectations, but some measures will normally be more effective than others: fiscal policy more than monetary policy, higher public expenditure more than lower public revenues, transfers to the poor more than tax reductions to the rich • Policy answer must be multilateral to be more effective. Regionalism may help in this process.