A Post-Lehman World of stability remains elusive as governments, financial institutions and markets are still grappling with soaring public debt, credit tightness and stock losses in developed economies while peak levels of joblessness in USA necessitate additional economic measures to stimulate growth and hiring in private sector, as the largest economy heads into a midterm election on November 2. A few emerging economies like China, India and Brazil are leading the global recovery in 2010.

The Trade and Development Report 2010 of UNCTAD, finding the global upturn “fragile and uneven”, warns that a premature exit in developed economies from demand stimulating macro-economic policies in order to cut budget deficits and regain ”market confidence” carries the risk of a “deflationary spiral”. The stimulus is petering out this year in most major economies, both USA and EU.

All the signs, according to Dr. Supachai Panitchpakdi, UNCTAD Secretary General, point to a weakening of the G-20 process which through coordinated actions earlier helped to lift the global economy out of the worst slump. The threat of “deflationary rebalancing” among developed nations signaled a breakdown of G-20 mechanism which should be strengthened,, he said. (The next G-20 Summit is in Seoul in November).

Developing countries which have relatively fared better could, according to UNCTAD, no longer rely on export-led growth strategy in the post-crisis world in which USA, with an inevitable downward adjustment of consumption, ceases to be principal driver of global growth. Neither China nor Europe nor Japan could assume that lead role, the Report said. For the foreseeable future, it suggests, policies for sustainable economic growth. Job creation and reductions in poverty should be based on establishing “a balanced mix of domestic and overseas demand”.

Developing countries should try harder than in the past to create “a virtuous circle of high investment in fixed capital that leads to faster productivity growth and corresponding wage increases”. This would enable a steady expansion of domestic demand with attendant rises in employment, which has suffered the most from the global crisis with loss of over 30 million jobs.

Unctad does not see China becoming the principal engine for world economy after the ending of the US debt-financed consumption boom. China's policy objective is to shift sources of growth from fixed investment and exports to consumption. Its household consumption favours more domestically produced goods and thus China is “far from having the potential to become sole new driver of global growth”. This may also impact on exports to China by some Asian and other developing countries.

US consumer spending had so far absorbed about 16% of worldwide output in the pre-crisis period. Now, the world's largest economy faces years of tough adjustment to grow and export and balance its trade and payments. Its most pressing problem is job creation with 8 million rendered unemployed in the longest recession since December 2007, and the rate of unemployment still at 9.6 per cent. Economic growth though recovering in 2010 is still marginal to make any significant impact on job hiring in the private sector. Additionally, the Obama Administration has to contend with hostile Republicans, in the midst of electoral politics, in putting through new tax incentives while plugging some loopholes to promote stronger recovery.

The net effect of adjustments in USA for growth and China (toward domestic consumption), taken together would be deflationary for the world economy while they would not be sufficient to unwind large global imbalances. Although China (along with India) is among the first countries to achieve a rebound from the crisis, with its massive stimulus, its leaders say that the world economy is still unstable with systemic and structural risks while China itself faces problems of uneven urban-rural and regional development. The Chinese economy is not slowing down, however, and is set to record 10 per cent in 2010,

For India, UNCTAD forecasts a lower growth at 7.9 per cent in 2010 than New Delhi's confident 8.5 per cent projection. However, it notes, if India's growth remains high, it could have positive effect on global demand, like that of China, to be one of the future engines of growth and employment creation in other countries. But given India's trade and current deficits, growth of domestic demand alone would not contribute to global rebalancing in the short term.

The report is not complimentary for India in so far as its high growth over a period not having led to greater employment and overall productivity. Growth of modern services like IT which have fuelled India's economic expansion has not been accompanied by proportionate growth in employment though positive in terms of productivity. Similarly, rapid output growth in organized manufacturing sector has not resulted in expansion of decent work opportunities for India's labour force.

Manufacturing employment is not only small relative to the total, but even has declined slightly, suggesting real wages in India have not followed productivity gains. A large proportion of labour force in China and India, despite their rapid GDP growth, exports and manufacturing and modern services. is still employed in low productivity and informal activities (where there is no social protection).

The report also calls for incomes policy in developing countries for containing inflation as tightening monetary policy would be ineffective in stabiling prices where cost-push factors operate. Inflation risks are growing in some developing countries (India), it notes like OECD, with rising energy and food prices. Using interest rates would provide greater attraction for capital flows with destabilizing effect on economies. For anchoring core inflation at a low level, therefore, it says, incomes policy might be considered as alternative.

UNCTAD Secretary-General Dr. Supachai Panitchpakdi points out that a refocus on strengthening domestic demand as an engine of employment creation with less reliance on exports for growth than many countries did in the past should not be viewed as a retreat from integration into the global economy. Developing countries need to earn foreign exchange to finance their required imports, especially of capital goods. Moreover, international competition among firms can spur innovation and investment by producers in their tradable goods industries, he adds. (IPA Service)