Most of the economies, both developed and emerging, barring China, are in disarray with continued volatility in financial markets impinging on forces of growth not only in advanced nations but also through spillovers in the emerging economies. The latter, deprived of demand and requisite capital inflows, have run into external vulnerabilities, with India singled out as the hardest hit among larger economies.

World growth in 2013 is slated to remain at a lacklustre 2.2 per cent as in 2012. Fiscal austerity and wage depression in the two major advanced nations, USA and EU, and inadequate reforms to ensure financial stability have held down growth and jobs. It could have been worse but for the monetary stimulus by Fed which has, to some extent, helped revival of economic activity and the housing market. While the US economy shows signs of reviving, the unemployment rate is still high at 7.3 per cent.

Lately, EU is also reportedly emerging out of recession mainly on the strength of German economy and OECD expects the momentum in these developed economies to pick up while growth is set to slow in Brazil, India and some other developing economies. These developing economies had driven global economic growth since the 2008 financial crisis but now, according to OECD indicators, “the baton is being passed to developed economies”, which are beginning to overcome the effects of that crisis”.

But the high levels of unemployment in advanced economies have huge social costs both in terms of reducing incomes and consumer spending which is a major contributor to growth. A protracted downturn in industrial countries in the post-crisis years, coupled with market and demand uncertainties, slowed global trade expansion. After the collapse in 2008-09, trade in goods picked up to 5 per cent in 2011 but dropped to below 2 per cent in 2012.

Sluggish economic activity in developed economies has been the major factor in the slowdown in international trade. Though developing countries in all regions were able to weather the storms in the aftermath of the global crisis, growth slowdown was also significant for export-dependent Asian countries including some of the dynamically-growing economies in South and South-East Asia.

Strangely, despite all the damage from the prolonged global slowdown, there has been no fresh thinking in evidence on the part of major developing nations, especially BRICs, on evolving more sustainable growth models. Instead, India and other emerging economies continue to pin their faith in free markets, notwithstanding the dominance of financial system by developed nations, and export-led growth.

Even the G-20, the principal global economic forum for developed and developing nations, has not collectively mapped out any new strategy drawing lessons from the worst post-war by which the developing countries could be freed from becoming victims of the boom and bust cycles resulting from financial deregulation. BRICs are no doubt trying to devise some financing mechanisms for emergencies but without lowering their expectations from globalisation from which India has benefitted, as attested by Prime Minister Manmohan Singh recently.

At the G-20 Summit at St. Petersburg on September 6, the leaders’ main focus was on better coordination of policies to achieve strong, sustained and balanced growth of the world economy. Their declaration for growth and jobs did not seriously address the current imbalances and the fundamental structural shifts in the world economy. Dr Manmohan Singh and other BRIC leaders voiced concern over the destabilising impact on developing economies from the easy monetary policies in developed countries, especially US Fed’s QE.

But the Summit could do little to assuage them, monetary policy being in the domain of central banks which are mandated with domestic objectives of each country. However, in a carefully-worded formulation on an issue of global importance, the G-20 Summit Declaration said:

“Monetary policy will continue to be directed towards domestic price stability and supporting the economic recovery according to the respective mandates of central banks”. It acknowledged that accommodative (including unconventional) monetary policies had provided support to global economy.

The G-20 leaders took note of “the risks and unintended negative side effects of extended periods of monetary easing. We recognize that strengthened and sustained growth will be accompanied by an eventual transition toward the normalization of monetary policies”. Central Banks have “committed that future changes to monetary policy settings will continue to be carefully calibrated and clearly communicated.”

Prime Minister Manmohan Singh said afterwards that while emerging economies had sought a commitment on reducing turbulence from central bank policies (like QE), the final Declaration made it clear that winding down of easy monetary policies in developed countries would be calibrated strictly to those economies’ internal goals, whether of price stability or growth.

A restructuring of global growth strategies is forcefully argued for in the UN Trade and Development Report 2013 published on September 12. It is against developing countries reverting to the pre-crisis growth strategies, which were built on unsustainable global demand and financing patterns. Instead, they should accelerate domestic demand which would be highly beneficial for output growth and industrialisation. This is often overlooked.

Among other factors, external demand is expected to remain weak for a protracted period of time heightening the limitations of export-led growth, the Report points out, and thus rebalancing of the drivers of growth is indispensable, with greater weight given to domestic demand. It would be a formidable challenge for all developing countries. In any case, it will require a new perspective on the role of wages and the public sector in the development process.

Development strategies that give a greater role than in the past to domestic demand for growth can be pursued by all countries simultaneously without counterproductive wage and tax competition. Further, if many trade partners in the developing world manage to expand domestic demand simultaneously, they can spur South-South trade.

In the pre-crisis global strategy which is now being re-embraced, UNCTAD points out, the strong expansionary monetary policies in the major developed economies had not succeeded in fostering credit creation and strengthening aggregate demand. Fiscal austerity and wage compression are further darkening the outlook for the medium term. The burden of adjustment of the global imbalances that contributed to the outbreak of the financial crisis remains with the deficit countries, thus strengthening deflationary forces in the world economy.

Also, the momentum for pushing reform of the international monetary and financial system has virtually disappeared from the international agenda and this makes the outlook for the world economy and global environment for development highly uncertain. UNCTAD has also emphasised the need to address the fundamental causes of the crisis— rising income inequality, diminishing economic role of the State, a poorly regulated financial sector and an international system prone to global imbalances. (IPA Service)