The world economy remains tepid and unstable a decade after the 2008 financial crisis, while growing trade conflicts are symptoms of deeper economic malaise, according to a new United Nations publication.
While the global economy has picked up since early 2017, growth remains hesitant, with many countries operating below potential. The year ahead is unlikely to see much improvement as the world economy is under stress again, with rising tariffs and volatile financial flows.
Underlying such threats to global economic stability is the failure to address fundamental weaknesses in global economic governance which have been fostering global economic inequities and imbalances.
Addressing New Challenges
UNCTAD’s Trade and Development Report 2018: Power, Platforms and the Free Trade Delusion (TDR 2018) makes proposals to address recent economic trends and challenges.
The report examines how economic power is increasingly concentrated in fewer big international firms, its impact on the ability of developing countries to benefit from the international trading system, and the distribution of gains from new digital technologies.
TDR 2018 notes that since 2008, many advanced countries have shifted from domestic to external sources of growth, with the eurozone becoming a trade surplus region.
While advanced economies have not done enough to rebalance the global economy, ‘normalizing’ unconventional monetary policies could rile capital and currency markets, with potentially vicious economic consequences in the more vulnerable emerging market economies.
Among countries relying on domestic demand, too many depend on higher debt and asset price bubbles, instead of raising wages. Meanwhile, growth is constrained by the omnipresent threat of financial instability, although the bigger emerging market economies are doing better this year, and commodity exporters can benefit while prices are high.
While Brazil, India, China and South Africa depend heavily on domestic demand, many other developing economies do not. With downside, including financial risks rising in several countries, TDR 2018 warns of gathering economic storm clouds.
The current $250 trillion debt stock – 50 per cent higher than a decade ago – is thrice the size of annual global output. Private, particularly corporate debt has been mainly behind this borrowing spree, but without financing corresponding real investments. Meanwhile, growing indebtedness has increased inequality through the financial markets.
Horns of Trade Dilemma
International trade remains dominated by large firms through their control of global value chains, with the top one per cent of each country’s exporting firms accounting for more than half its exports.
The spread of such chains accelerated trade growth from the end of the 20th century until the 2008 financial crisis, with some developing countries growing fastest. But the ratio of trade to growth has been rising, with much more trade associated with the same output increase. This has mainly benefited large firms by increasing market concentration and intellectual property.
Meanwhile, except for China, manufacturing’s share of value added has generally declined as the shares of pre- and post-production activities have risen. Such rents captured at both ends of the value chain have affected income distribution more generally.
Recent tariff increases are disrupting a trading system increasingly involving such value chains, although trade growth in 2018 is likely to reach 2017 levels. However, heightened uncertainty and reduced investment could have more damaging medium term consequences, particularly threatening for countries already facing financial distress.
By changing the profitability of firms in tradeable sectors, tariff hikes have distributional consequences affecting demand. After decades of disruptive trade liberalization, tariff war will not restore the status quo ante, but could cause massive disruptions.
Instead, UNCTAD argues that through global policy coordination, governments could avert continuing deterioration of income distribution and employment, at the root of recent economic crises. Hence, while globalization has rarely produced ‘win-win’ outcomes, neither trade nationalism nor further trade liberalization are appropriate.
After all, free trade has limited policy space for developing countries and reduced protections for working people and small businesses, while further enriching big firms.
TDR 2018 deems trade wars symptomatic of the deteriorating economic system and multilateral architecture, due to corporate political capture and rising inequality, with money used to gain political power and political power used to make money. As inward-looking options do not offer a way forward for most, the challenge is to make multilateralism work for all.
To avoid the errors of the 1930s, UNCTAD urges addressing new challenges while referring to the 1948 Havana Charter, the first multilateral effort to create a managed international trading system.
This must involve trade promotion contributing to both full employment and rising wages, restricting rentier corporate behaviour, while ensuring sufficient policy space to achieve the Sustainable Development Goals.
(This article was originally published in Inter Press service (IPS) news on October 2, 2018.)