CAIRO: Spillover from recession in developed nations in tandem with a set of overly restrictive monetary policies imposed by developing-world central banks grappling with roaring food and energy-related inflation could disrupt recent growth, a United Nations Conference on Trade and Development (UNCTAD) report issued yesterday warned.
The instability of commodity prices and the bursting of some speculative bubbles are making it difficult for policymakers to cope with the strong likelihood of a sharp and prolonged downturn of the world economy, UNCTAD economists said in a 13-page collection of analysis and policy recommendations.
Many developing economies have boomed alongside commodity prices in recent years. But this dependence is dangerous, particularly as the flight of funds from speculators – investors who put their money in risky ventures, expecting to profit from price shifts – could push commodity prices down in the coming year, the report said.
Speculation is of particular concern for nations that depend on commodities because it upends long-run stability, according to the report. Just as speculation has amplified the upward movement of prices, it may also amplify any downward movement, UNCTAD Secretary-General Supachai Panitchpakdi stated in the report s overview.
Earlier this year benchmark indices showed that commodity prices can veer quickly and unexpectedly. From January to the end of June, a commodities index compiled by Reuters posted its best performance in over three decades, jumping from 358.71 to 462.74 points; but by the end of August it had slid to 391.71, with July marking the biggest single-month drop in terms of percent lost in 28 years. The erosion is still underway, with the index closing at 377.23 yesterday.
Much of the recent drop stems from wilting demand in receding developed markets, analysts say, although steadily increasing demand in China and other large, growing markets has in many cases staunched larger losses. World economic growth should fall to about three percent in 2008, marking a full percent drop from last year, the UN report said. Of this growth, 1.5 percent will be in developed countries, and perhaps over six percent in developing states where strong demand at home is buoying expansion.
But record inflation in many of these countries is prodding central banks into monetary policies that could hinder further growth, the report said.
The UNCTAD economists said modern economic conditions have made the threats of inflation less severe in many cases. In particular, wage-price spirals, where prices and salaries spur one another on in an unpunctuated cycle, are less likely now then they were during the oil price spike of 70s, largely because unions are weaker and wages remain low in many countries, they wrote.
Divergent interest rates among a range of nations could also spur speculation in foreign-exchange markets, further unsettling global economic order, the report said.
Instead, the conference recommended, states should try to dampen commodity speculation and design tools to calm prices in the face of quick fluctuations.
Earlier this year, Egypt s Ministry of Trade and Industry began forcing steel companies to announce their prices at start of the month in an attempt to diminish price gouging among middlemen.
Still, more must be done on both a local and worldwide scale, UN economists said. In its current state, the global financial system does too much to reward and too little to limit harmful speculation, they said.
The current international framework for monetary and exchange-rate policies offers opportunities. that are highly profitable for a limited period of time, but ultimately destabilize the entire system, the report read.
