Anxious Time
Ahead For
World Economy
By Nick Beams
World
Socialist Web
13 October 2003
A
leading United Nations economic agency has warned that the world economy
faces a series of major problems and has called for a program of global
economic stimulation, particularly in the major industrial countries.
The annual report
of the United Nations Conference on Trade and Development (UNCTAD) issued
in Geneva earlier this month pointed to an anxious time for the
global economy.
The long anticipated
rebound in the United States continues to be delayed, and there are
concerns that the imbalances and excesses created during the high-tech
boom of the 1990s could result in a long period of erratic and sluggish
growth, with occasional surges and dips, accompanied by price deflation.
With Europe undecided on, and Japan unable to find, the appropriate
policy mix for sustained recovery, the world economy looks set to repeat
the weak performance of the past two years and could still falter badly.
According to the
UNCTAD report, economic problems have developed on a number of fronts.
The current downturn, it noted, had been preceded by the rapid expansion
of the US economy at the end of the 1990s amid claims that it had overcome
the operation of the business cyclethe so-called Goldilocks scenario
in which the US economy was neither too hot nor too cold. But as it
had noted in its report of 2000, Goldilocks is a fairy tale.
US growth at the
end of the 1990s was fuelled by a massive inflow of capital from the
rest of the world, attracted by the prospects of seemingly endless high
capital gains from the booming stock market and the prospects of high
profits from the hi-tech boom. But with the ending of the boom in March
2000, the unwinding of the legacy of the 1990s is proving a good
deal more difficult than many had expected.
In spite of aggressive
interest cuts by the US Federal Reserve investment has failed to recover
and capacity utilisation remains low despite the scrapping of excess
equipment. The US economy has only been prevented from falling into
a more prolonged period of recession because of the growth in consumer
demand which now appears to be losing momentum. At the same time, European
authorities have failed to respond to the current downturn because of
the restrictions imposed on government deficit spending by the Stability
and Growth Pact and the relatively tight money policy of the European
Central Bank.
Due to what it called
weak policy responses to sluggish growth there is now increased
reliance on currency adjustments to reduce trade imbalances and revive
growth. So far these adjustments have centred on the downward
movement of the US dollar against the euro, while the East Asian currencies
have maintained their parity with the US dollar by massive interventions
in the international currency markets by their central banks, leading
to the accumulation of large foreign reserves.
This has given rise
to a campaign in the US for a revaluation of the yuan. But, according
to the UNCTAD report, it is by no means clear whether currency movements
would reduce trade imbalances between Asia and the rest of the world.
Indeed,
it continued, the events of recent months evoke memories of the
competitive devaluations of the inter-war period. Certainly, it would
be unrealistic to expect the international trading system to evolve
in the right direction or international monetary stability to be maintained
in the face of slow growth and mounting unemployment. A reversion to
the pattern of unruly competition and conflict characteristic of the
1930s could derail the process completely.
What then is to
be done to stimulate world growth? The UNCTAD report pours cold water
on the idea that further liberalisationincreased privatisation
and the imposition of free market principleswill lead
to economic stimulation. It pointed out that for the poorer countries
the strategy based on imposing sound economic fundamentals
through the replacement of state-backed national economic development
with a market driven export strategy had failed to deliver. Policies
based on downsizing the public sector and the imposition of tight monetary
policies had often undermined growth and hampered technological progress.
This meant that the current economic landscape in the developing
world has an uncanny resemblance to the conditions prevailing in the
early 1980s when many poorer countries experienced a deep crisis.
The report noted
that industrial progress had halted in much of the so-called developing
world with only eight of 26 selected countries experiencing an
increase in the share of value added by manufacturing to the gross domestic
product between 1980 and 2002. In much of Latin America big-bang
liberalisation had led to inconsistencies in trade, macroeconomic development,
foreign investment and financial policies. It was therefore doubtful
whether a second generation of neoliberal reforms would
rectify the problems of the past.
The further development
of trade would not stimulate economic growth, rather trade expansion
depended on an increase in demand and production in world economy as
a whole.
The world
economy, the report noted, is now facing a widening deflationary
gap created by deficient global demand. There is a global glut in both
labour and product markets, with too many goods chasing too few buyers
and too many workers chasing too few jobs. Intense price and exchange-rate
competition among major exporters have been adding to instability and
deflationary pressures, while many developing countries facing tight
payments positions are being forced to curtail imports.
If decisive action
were not taken to restore stability in international financial and currency
markets, start a global recovery and reverse the rise in unemployment
then there is a real threat that trade imbalances and the coexistence
of continued rapid growth in some parts of the world with stagnation,
decline and job losses elsewhere could deepen the existing discontent
with globalisation among a wide section of the worlds population,
triggering a political backlash and a loss of faith in markets and openness.
According to the
UNCTAD report, the way to begin to resolve the worlds economic
problems and prevent the eruption of major political struggles is to
apply the soothing balm of Keynesian measures based on increased government
spending. Warning of the real danger of a liquidity
trapa situation where monetary policy becomes incapable
of reversing the downturn in output and employmentit called for
Keynesian policies to expand liquidity and effective demand, both
at the national and global level.
Such policies should
include a fiscal stimulus over and above that provided by the so-called
automatic stabilisers, such as social welfare spending which increases
as unemployment rises, and should be coordinated on an international
scale.
Such calls for international
Keynesian policies are frequently made by critics of the free
market program who fear that if it remains unchecked it will only
result in deepening opposition to the global capitalist order.
But none of these
would-be-reformers of global capitalism, UNCTAD included, ever explain
why the previous Keynesian agenda collapsed in the mid-1970s, why economic
problems continue to deepen in the face of vast advances in productivity,
why a decade of Keynesian-type stimulus over the past decade has singularly
failed to revive the Japanese economy, and how international economic
co-operation can be introduced when there is deepening economic and
political conflict among the major capitalist powers.