CAIRO: The overall recovery of the world economy is slowing down in 2011 with strong downside risks, according to the United Nations’ “Trade and Development Report 2011.”
“Global GDP is expected to grow by 3.1 percent following an increase of 3.9 percent in 2010,” the annual report released by UNCTAD said.
The volume of international trade, particularly in developed economies, is expected to return to a single-digit growth rate in 2011, from 14 percent in 2010.
With several factors hindering growth, recent developments across the Middle East have also contributed to and been affected by the global economic crisis.
While expansion remained relatively strong in all developing countries, North Africa and some West Asian countries were the exception, “where political unrest has adversely affected investment and tourism, and thus also growth.”
In countries like Egypt, the January 25 Revolution, which eventually toppled president Hosni Mubarak, came about to demand social justice, democracy and equal opportunities. For this reason, the state faces continued pressure to modify its economic and trade policies in order to keep up with the changes in society.
“There needs to be a complete reappraisal of wealth distribution and employment opportunities in the country,” Ibrahim El Issawy, professor of economics at the National Institute of Planning, said during the launch of the report in Cairo.
“After the January 25 Revolution, we need to increase production in the country, it is the state’s role to change current policies that will help encourage an increase in production,” said El Issawy.
The issue of taxes was also raised by El Issawy. “Taxes should be reviewed,” he said. “Those who make LE 40,000 a year should not be taxed the same as those who make LE 1 million, for example.”
“We need a strategy to rehabilitate Egypt’s economy, we need an intensive national plan to achieve this,” he added.
However, several other developing markets have been able to sustain relatively fast growth when compared to the US or Europe because of their reliance on domestic demand.
Emerging markets including Brazil, South Africa, Turkey and India have all had to cope with the challenge of short-term capital inflows, “attracted by higher interest rates that reflect higher inflation rates or tight monetary policies.”
According to the report, these inflows have been putting “enormous appreciation pressure on their domestic currencies, and tend to weaken their export sectors and widen their current-account deficits.”
In order for developed countries to stride past this ongoing global economic crisis, they have to work together.
“There needs to be collaboration between developed countries in order to come out of this next period to boost trade development on a national and international level,” he added.
Since the global economic crisis of 2008, recovery of the US has been stalling with the pace of growth below where it is needed to be thus hindering employment.
“Even the second round of quantitative easing has failed to translate into increased credit for domestic economic activities, as domestic demand has remained subdued due to stagnating wages and employment,” the report stated.
“With little scope to lower interest rates further — as they are already at historically low levels — and fiscal stimulus waning, a quick return to satisfactory growth trajectory is highly unlikely.”
America’s slow recovery has been affecting several of the world’s largest economies, which are more dependent on trade with the US market.
The report pointed out that the recovery of the Japanese economy has also slowed down due to the impact of the unprecedented earthquake and tsunami that hit the country in March.
The European Union, also facing a debt crisis and recessions in countries like Greece and Ireland, expects growth to remain below 2 percent in 2011.
Furthermore, due to negative indications across many of the global markets, the report found that “international trade in both goods and services rebounded sharply in 2010, after having registered its steepest fall since the Second World War.” The report expects trade to return to single-digit growth.
“Commodity prices recovered very early in the cycle and have been exhibiting high volatility, owing largely to the greater presence of financial investors in commodity markets.”
Moreover, another dangerous factor for world economies is slow wage growth, which hinders domestic demand in developed and emerging markets. Wage growth is “essential to recovery and sustainable growth.”
“However, in most developed countries, the chances of wage growth contributing significantly to, or leading, the recover are slim,” the report pointed out.
Slow wage growth also triggers discontent among populations and could significantly hinder production.
In order to combat these risks that global markets continue to face, the report suggested several points, among them is the change of policies, which may have not proven to be successful before.
For example, in the case the US debt crisis, debt restructuring would be necessary. “When defaults occur, debts need to be restructured, and the complexity of the restructuring process depends on the structure of the defaulted debt,” the report stated.
Moreover, “[t]he best strategy for reducing public debt is to promote growth-enhancing fiscal policies and low interest rates.”
The report underlined that "unless there is a reversal of the current trend of diminished income expectations of the average household and a return to policies that emphasize the importance of mass income growth as the basis for sustainable and balanced development in rich and poor countries alike, all other attempts to regain growth momentum will be in vain."
