[Dateline: New York | Author: DESA]
The world economy is mired in the most severe financial crisis since the Great Depression and bold, internationally coordinated fiscal stimulus is needed to avoid the present crisis from turning into another prolonged depression and human disaster, says the World Economic Situation and Prospects 2009 (WESP 2009).
Regional launches will take place today in Geneva, Bangkok, Beijing, Beirut, Addis Ababa, Mexico City and Moscow, and an advance edition of the global outlook was presented late last year at the Financing for Development review conference in Doha, Qatar.
The WESP, a joint publication of DESA, UNCTAD and the five United Nations regional commissions, provides the UN’s perspective of the global economy. Previous issues of the WESP had already forewarned that a financial crisis was mounting, and, while originated in the United States, would spill over to the rest of the world. All related factors have now played out and have pushed the world economy into recession.
World income per capita will decline in 2009
According to the baseline scenario of World Economic Situation and Prospects 2009, world output growth will reach a meagre 1 per cent in 2009, compared to 2.5 per cent in 2008 and global growth rates of between 3.5 and 4 per cent in the preceding four years. The 2009 projection includes a 0.5 per cent decline in output in developed countries, along with average growth of 5.3 per cent in the transition economies and 4.6 per cent in the developing world. This works out to an overall drop in 2009 world per capita income, for the first time since the days of the Great Depression.
But given the great uncertainty prevailing today, a more pessimistic scenario is quite possible. If the present credit squeeze prolongs and confidence in the financial sector is not restored in the coming months, the report warns, the developed countries could enter into a deep recession in 2009. This would bring economic growth in developing countries down to 2.7 per cent, dangerously low for their ability to sustain poverty reduction efforts and social and political stability.
The report analyzes in detail the evolution of the global financial crisis during 2008 and the more fundamental factors that led to its build up. It further assesses the impact on global economic activity, especially in developing countries, spelling out the channels through which the woes in the United States and Europe are being transmitted to the rest of the world. The report also reviews the policy actions so far taken worldwide in response to the global financial crisis.
To be effective fiscal stimulus measures must be internationally coordinated
UN economists argue for fiscal stimulus to be provided in an internationally coordinated fashion. In a globalized economy, fiscal stimulus in a single country is undercut by import leakage and other such effects; when internationally coordinated, a reinforcing multiplier effect can take hold.
The UN further sees an opportunity to align fiscal stimulus packages with long-term sustainable development goals. The massive resources required for fiscal stimulus can be applied in part to public investments in infrastructure, food production, education and health and renewable energy sources, helping developing countries to diversify their economies and meet their Millennium Development Goals.
Bold reforms are also needed to prevent future crises
At present, however, there is no credible, institutionalized mechanism for international coordination of stimulus packages or monetary policies. Such a mechanism will need to be created alongside other fundamental reforms.
Such reforms should also address the weakness of a global financial system with the dollar at the centre as reserve currency. With net indebtedness of the United States still growing -- to about $2.7 trillion at the end of 2008, up from $2.5 trillion in 2007 – a disorderly adjustment of global imbalances and a hard landing of the dollar remain major downside risks. In that case, investors might again embark on a “flight to safety”, but this time away from dollar-denominated assets instead of to them, pulling the US economy down further, and the global economy with it.