Developed inations slow world growth

Global economic expansion is expected to slow this year and next as fiscal austerity and wage compression further weaken growth in developed countries without achieving the expected results of reduced fiscal deficits, job creation and renewed confidence in financial markets, according to a report by Unctad.
The UN Conference on Trade and Development report also states that rising inequality is not inevitable. The agency concludes that global economies will perform better with more even income distribution and that reducing inequality through fiscal and income policies is crucial to growth and development.
Watcharas Leelawath, deputy executive director of the International Institute for Trade and Development, yesterday said this year’s global economy is expected to experience slower growth of just 2.3 per cent, against last year’s 2.7-per-cent expansion.
Growth in developed countries will slow from an average of 1.4 per cent last year to 1.2 per cent this year, while expansion in developing nations will decline from 5.9 per cent to 4.8 per cent, Watcharas said.
Southeast European countries and the Commonwealth of Independent States, meanwhile, are expected to see economic growth fall from 4.5 per cent last year to 4.2 per cent this year.
Unctad’s “Trade and Development Report 2012” states that the general slowdown is the result of continuing austerity programmes, and that it has warned developed nations since 2010 that the challenge to recovery is not mounting government debt, but a lack of domestic demand. There is a high risk that the withdrawal of fiscal stimulus before the return of strong domestic consumption and investment will jeopardise recovery.
The report says those fears have been borne out, and that the main problem hindering recovery from the global downturn is recessionary pressures in developed countries.
These include balance-sheet adjustments in the private sector, high unemployment, which depresses household revenues and hinders consumption, and governments scrambling prematurely to reduce their debts.
Such policies not only misdiagnose the causes of the crisis, but also underestimate the negative macroeconomic impacts of policies that restrain demand in the midst of a recession, according to the UN agency.
Climbing government debt must be addressed, but in the long run this will be achieved through restoring growth and fiscal revenues, the report says.
Moreover, as they further weaken growth dynamics, wage-compression policies in developed countries tend to increase unemployment instead of stimulating investment and job creation.
Developed nations are also advised to use a managed-float approach on exchange rates and to prevent speculation in commodities, as such speculative activity would result in high inflation and slower growth.
On policies for inclusive and balanced growth, the report shows income inequality is increasing both within countries and between them.
The share of wages in total income has fallen in most developed and in many developing countries. For example, it fell 5 percentage points or more in Australia, the UK and the US. In several countries, the richest 1 per cent of the population now accounts for 10 to 20 per cent of national wealth.
There has been a similar broad shift between countries. While in 1980, the per capita income of the 15 richest nations was 44 times that of the 15 poorest, by 2000, that multiple had increased to 62.
The report notes, however, that in 2009, reflecting better economic performance in several developing and transition countries, the ratio had fallen to 56.
Chanin Mephokee, an economics professor at Thammasart University, said the inequality in incomes not only comes from the difference in wages and salaries, but also from differences in the control of capital, property and resources.
He said every country should urgently reduce its income gap by increasing the efficiency of resource management.
“The developing countries have political and social structures that create inequality in opportunities to get access to public services such as education, IT and financial facilities. This limits the chances for people living in rural areas or working in agricultural sectors to improve their quality of life and earn more,” Chanin said.
Mia Mikic, from the Trade and Investment Division of the UN’s Economic and Social Commission for Asia and the Pacific, said the number of trade barriers had increased significantly, although free-trade agreements have proliferated, especially in the Asia-Pacific. Such a rise in non-tariff barriers is an obstacle to global growth in the long run, she said.