The Global Outlook chapter of the UN’s ‘World Economic Situation and Prospects 2009’, released on December 1, 2008, paints a gloomy picture of the world economy in 2009 and calls for deep reforms in the global financial system.
Among the reforms it suggests are stronger regulation of financial institutions, an overhaul of the international reserve system, adequate international liquidity provisioning and more inclusive global economic governance to prevent a recurrence of the current economic crisis.
According to the annual report, ‘world per capita income is expected to decline next year, export growth and capital inflows will fall, borrowing costs for developing countries will rise as contagion spreads from the major economies, and the US dollar is set to resume its decline, with a possible hard landing in 2009’.
World output will grow at a meagre rate of 1% in 2009 as against the growth rate of 2.5% in 2008 and 3.5-4% in the last four years. Growth rates are likely to fall by 0.5% in developed countries and nearly 4.6% in developing countries.
‘The crisis should have taken no one by surprise,’ the report says. ‘That analysts and policymakers are now expressing bewilderment at the extent of the crisis suggests not only a gross underestimation of the fundamental causes underlying the crisis but also unfounded faith in the self-regulatory capacity of unfettered financial markets.’
The report adds that the outflow of capital from emerging to developed economies continued to be larger than the inflow, and that sovereign wealth funds of emerging markets grew to some $4.0 trillion at the end of 2008.
The cost of external borrowing has since risen sharply for developing countries. Stock markets have dropped, while currency and commodity markets have become extremely volatile, says the report. Along with rapidly decelerating export growth, current account balances of many countries have shifted into the red.
‘To ensure sufficient stimulus at the global level, it will be desirable to coordinate the fiscal stimulus packages internationally,’ the report says.
Several crucial changes must be made in economic policies. This includes a fundamental revision of the structure of government and the role of the International Monetary Fund (IMF) and World Bank for greater international policy coordination and enhanced participation of developing countries.
The report also calls for a fundamental reform of the current financial regulation and supervisory systems to stem past excesses. The reliance on the dollar as the sole reserve currency poses risks for developing countries, since a collapse in the value of the dollar could have severe effects on their earnings.
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