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Slowdown in advanced economies 'biggest drag' on global growth: UNCTAD

Bassem Aly , Wednesday 21 Sep 2016
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This picture is taken from the press briefing of the United Nations Conference On Trade and Development (UNCTAD) about its annual report in Cairo, 21 September 2016 (Photo: Bassem Aly)
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The UN Conference on Trade and Development (UNCTAD) said on Wednesday that the "biggest drag" on global growth is caused by the slowdown of advanced economies.

"In many developed countries, a stringent fiscal stance and at times outright austerity have led to one of the weakest recoveries from an economic crisis on record. This has come on top of a prolonged period of slow wage growth, leading to insufficient household demand and weak spending on productive investment," UNCTAD said in its press release on its newly-released, annually-issued 2016 report.

Announcing the conclusions of its report at a press conference in Cairo, the UN organisation pointed out that the US economy is expected to slow to 1.6 percent in 2016, describing it as "close to the Eurozone growth rate."

For Japan, growth will remain in stagnation, while Brexit will "cut short" the "revived growth" in Britain and Northern Ireland.

However, UNCTAD said that it is hard to predict the overall impact of British withdrawal from the European Union.

These numbers, according to UNCTAD, will affect the developing economies, for they will grow on average less than 4 percent in 2016, saying that while Asian economies will have a slow but steadier growth, Latin American is facing a recession crisis.

The Geneva-based institution stated that global trade has dropped to 1.5 percent, which is a "full percentage point lower than world output."

"The lack of global demand and stagnant real wages are the main problems behind the slowdown in international trade. But if policymakers fail to mitigate the negative impacts of unchecked global market forces, then a turn to protectionism could trigger a vicious downward cycle affecting everyone."

Meanwhile, the report showed that the net capital flows to developing states "turned negative" in the second quarter in 2014, as more than $650 billion were leaving in 2015 plus another $185 billion in the first quarter of 2016.

UNCTAD called for the "closure of corporate tax loopholes, plus fiscal and regulatory measures to encourage long-term investment" and "more diversified financial systems, including a bigger role for development banks."

The organisation also urged for the adoption of a series of measures through international cooperation, especially through some "systematically important economies" in the Group of 20.

Such measures include the combination of proactive fiscal policy such as spending on infrastructure, in addition to "supportive monetary policy and redistributive measures."

The redistributive measures comprise income policies, minimum wage legislation, progressive taxation and welfare-related social programmes that will differ from one state to another.

For developing economies, "catching up is not getting any easier," though the report said that Asia is an exception, as 90 percent of manufacturing exports from all developing states around the world and 94 percent of "South-South trade in manufacturing" come from Asia.

Developing technologies, as a recommendation by UNCTAD, or economies of scale can serve as a solution if "strategic policies to enhance their [developing state] production, design and marketing capabilities" is provided to "enter developed-country markets."

In a related context, UNCTAD said that "conventional policy advice on structural reforms, which often combine an overvalued currency and wage repression, will not contribute to delivering a sustainable outcome."

"The report calls for a less ideological discussion of targeting support while also recognising that standalone industrial policies are unlikely to deliver. Instead, the key to success lies in the effective integration of macroeconomic, financial, trade and industrial policies," the report emphasised. 

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