In its 2020 outlook on trade and development, UNCTAD, the UN agency for Trade and Development, warns of the consequences of the economic downturn due to the corona crisis. The fear is that the recession will have a decided effect on the decade to come.
“Ideologically, the policy designers never really broke with the neoliberal policies that had dominated over the last 30 years”, Richard Kozul-Wright, Director for Globalization and Development Strategies, says, referring to the 2009 financial crisis. It is a matter of regret, he says, that there was no major ideological shift back then, an attitude he attributes to the large vested interests that resisted change at the time.
“We still had this hyper, unequal world. Within countries and across countries, inequality had not been reduced significantly and productive investment was weak.”
Ten years later the outlook is not much better, he says. “We are now in the deepest recession we have seen since the 1930s. The immediate short-term impact is to make this inherited situation worse.”
Debt levels, and not just in developing countries, rose significantly in the last decade. Credit is important for investment but exposes the creditor to risks.“Capital moved out of developing countries in March of this year at a scale that was far greater than after the 2009 crisis. At the same times, exports collapsed.”
Public expenditure is key
“We cannot make the mistake of going into austerity as we did in 2009 — the private sector won’t take us out of this crisis”, Kozul-Wright states. Given the uncertainties, there is unlikely to be a surge in investment. Consumers are not spending due to the loss in income. Instead, targeted government spending in advanced economies is a condition for sustained recovery, as well as higher income. The recovery will therefore have to be led by public-sector spending.
“There are particular difficulties facing developing countries”, he points out. “They have highly informal labour forces which are difficult to deal with from an economic policy point of view. And they have large debts.”
The multilateral economic system should support developing countries and set them on a path towards sustained recovery. Kozul-Wright refutes the idea of a V-shaped recovery that has been floated as proof of economic optimism.
“Assuming that advanced economies maintain their positions, we would expect to see growth above 4%. But that is not a rebound! It still leaves a huge shortfall in the economy. The global economy would be six trillion dollars short from where we expected it to be three years ago.”
Employment figures are unlikely to fully recover next year, even if the economy was to bounce back faster. The real concern is that governments at this stage resort to cuts in public expenditure.
“Austerity would be a disaster for advanced economies and for developing countries, as exports would not he warns pick up,” he warns.
If so, there is a risk of a double-dip recession at the end of next year hence fears of an entire lost decade due to savings on public expenditure. In equal measure it would be a blow to the UN’s 2030 agenda, with the Sustainable Development Goals not being attained.
“You cannot deliver on the 2030 Agenda in a period of sluggish growth and government cuts”, Kozul-Wright says matter-of-factly.
Still, once again there is greater awareness and recognition of the role the public sector plays in the economy. The question that arises is how long it will last.
“The big challenge is whether the momentum for doing things differently will persist.”
This year’s UNCTAD report gives mixed signals. On the one hand, no hikes in interest rates are foreseen in the next few years. However, government spending packages may not be nearly enough, and this includes the EU’s additional support programmes, where the grant component amounts to about €310 billion over three years, a relatively small share of total GDP.
“We clearly see a two-speed Europe in that regard, but the EU’s expenditure does not attempt to solve that”, Kozul-Wright concludes.