The report says that the crisis, which originated from the subprime mortgage segment of the United States in 2008, has engulfed the world and is now having an adverse and dramatic effect on developing and poor countries and therefore the 2015 deadline for achieving the UN Millennium Development Goals is at risk.

The report calls for an overhaul of the entire monetary and financial system for ensuring greater global stability. Financial instruments with no social returns should be weeded out to prevent any similar crisis in the future. It suggests improving regulation of commodity futures exchanges so that it can provide reliable price signals to producers and consumers of primary commodities. A new monetary system and a stable pattern of currency exchange rates based on multilaterally agreed principles and rules are needed for macroeconomic stability in the globalised economy and for a level playing field for international trade.

On emerging “green shoots” in some economies like improvement of certain financial indicators from their lows reached in the first quarter of 2009, falling interest rate spreads on emerging-market debt and corporate bonds, combined with rebound of securities, commodity prices and the exchange rates of several emerging-market currencies by mid-2009, the UNCTAD report says “the economic winter is far from over.”

As the crisis is global, reliance on exports offers no easy way out, since trade is expected to decline by about 11% in real terms and any new trade expansion requires a recovery in consumption and investment somewhere in the world, the report says

Economic growth in developed countries is strongly hit by shocks from the financial sector which impacted on the demand for durable and capital goods and exports., while that in developing countries is affected by falling international trade volumes, falling commodity prices, lower remittances or higher borrowing costs, the report says.

It notes that the crisis has caused slowdown in growth in almost all economies. Some developing and emerging markets economies that had managed to avoid large current account deficits or even posted surpluses for several years before the current crisis erupted have proved less vulnerable than in previous crisis. This is particularly true for several Asian and Latin American developing countries that were hit by financial and currency crisis between 1997 and 2001. The leading economies of East and South Asia - in particular China, Indonesia and India - have resisted recessionary forces better than others because their domestic markets play a more important and increasingly growing role in total demand. Moreover, the rebound in China in the second quarter of 2009 proves the efficacy of government deficit spending if it is applied quickly and forcefully.

The UNCTAD's Trade and Development Report 2009, however failed to detail as to why India and China could insulate itself from the adverse effects of global financial crisis. The main reason for these countries being insulated from the adverse effect is that their banks and financial sectors are largely under government control and well regulated. These two countries have not yet fully opened up their economies.

The report says that the global financial crisis was predictable. It broke out following years of huge disequilibria within and among major national economies. The most visible evidence of imbalances were the large current account deficits in the United States, United Kingdom, Spain and several East European economies, on the one hand and large and growing surpluses in China, Japan, Germany and the oil-exporting countries on the other. In the United States and the other booming economies, growth was driven to a large extent by debt-financed household consumption, made possible by reckless lending and growing bubbles in housing and stock markets

In the build-up to the present crisis, a large proportion of the credit expansion in the United States and other developed economies financed real estate acquisition, fuelled asset price inflation and spurred debt-financed private consumption rather than investment in productive capacity that could have generated higher real income and employment in a sustainable manner.

After 2000, household debt increased rapidly in many countries, particularly in those economies where current account deficits had widened, leading to an accumulation of external liabilities. What makes this crisis exceptionally widespread and deep is the fact that financial deregulation, innovation of many opaque products and total ineptitude of credit rating agencies raised credit leverage to unprecedented levels. Blind faith in the “efficiency” of deregulated financial markets led authorities to allow the emergence of a shadow financial system and several global “casinos” with little or no supervision and inadequate capital requirements, the report says.

According to the UNCTAD report the financial shockwave submerged equity and bond markets in many countries, exchange rates of some emerging market currencies and primary commodity markets all at the same time. Financial distress spread from one market to another, regardless of long-term “fundamentals”

The behaviour of financial investors on commodity markets is motivated by considerations that are largely unrelated to commodity market fundamentals. They regard commodities as an investment alternative to asset classes such as equities, bonds or real estate, based on the belief that diversifying their portfolio by adding commodity futures contracts improves their portfolios' overall risk-return characteristics. They take position in commodities as a group. The impact of index traders on commodity prices seems to have been concentrated in agricultural markets. Close correlation between commodities and other asset classes during the second half of 2008 shows that financial investors may have a strong influence on commodity prices.

The IMF lending has surged since the outbreak of the current crisis, extending to nearly 50 countries by the end of may 2009. But the policy conditions attached to these IMF loans are fairly similar to those of the past. This is at odds with many declarations in which coordinated countercyclical policies and large fiscal stimulus packages have been recognized as the most effective means to compensate for the fall in aggregate demand.

Indeed, deflation - not inflation - is the real danger, the UNCTAD report says. Wage deflation is the imminent and most dangerous threat in many countries today, because governments will find it much more difficult to stabilize a tumbling economy when there is a largescale fall in wages and consumption. However, deflation will not cure itself. Therefore the most important task is to break the spiral of falling wages, prices and demand as early as possible and to revive the financial sector's ability to provide credit for productive investment to stimulate real economic growth.#