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UN Launches Trade and Development Report 2012

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Sharp Decrease in Global Growth Last Year and Further Decline Expected in 2012

Wednesday 12th September, United Nations Information Centre said in a press release that the global growth fell from 4.1 percent in 2010 to 2.7 percent in 2011, and is expected to decline to below 2.5 percent in 2012, according to the Trade and Development Report 2012, issued today by the UN Conference on Trade and Development (UNCTAD). The report, subtitled "Policies for Inclusive and Balanced Growth", focuses especially on income inequality, and says that reducing widening gaps in wealth and income will not only have social benefits, but will also lead to higher economic growth.

The Trade and Development Report 2012 notes that many developing countries are supporting domestic demand and growth with countercyclical economic policies. But it contends that they cannot avoid a slowdown and are vulnerable to a continuing deterioration in advanced economies.

Economic expansion in developing and transition economies is expected to be stronger over 2012 – 5 percent and 4 percent, respectively – but also down from previous years. The developing world, driven by progress in several large economies, is less dependent than it used to be on the mature developed economies, and has a more resilient domestic demand. The report notes that between 2006 and 2012, some 74 percent of global output growth was generated in developing countries, as compared with only 22 percent in developed countries. In the 1980s and 1990s, by contrast, developed countries accounted for 75 percent of global growth, a proportion that fell to slightly over 50 percent between 2000 and 2006.

However, developing countries are still vulnerable to weakened demand for their exports from the developed economies, the report says, and that is likely to be the case as austerity programmes continue, and especially as they bite more deeply in Europe. The trend is already reflected in stagnating export volumes to developed-country markets and in a declining trend in commodity prices since the second quarter of 2011. Moreover, financial instability in developed countries is affecting financial flows to emerging market economies and adding to the inherent volatility of commodity prices, the report contends.

Expanding gaps in income and wealth around the world are not an unavoidable by-product of globalization and technological change, the new UNCTAD report maintains. The increasing concentration of income in fewer hands limits nations' economic potential by dampening demand for goods and services and by reducing the educational prospects and social mobility of their broader populations. Such trends can and should be reversed by government intervention through fiscal and labor-market policies, the report says.

Trends over the last 30 years show income inequality increasing both within countries and between them. The share of wages in total income has fallen in most developed and in many developing countries.

The prevailing belief since the 1980s that governments, in pursuing greater economic efficiency, have to tolerate greater inequality is not true, the Trade and Development Report asserts – and it recommends steps that can be taken to reduce income disparities while boosting economic growth. It says policies that preserve the share of workers in national income and redistribute income through progressive taxation and public spending would improve equality as well as economic efficiency and growth.

The Trade and Development Report 2012 also argues that the paradigm of labour-market flexibility has not only failed to reduce unemployment, but tends to exacerbate it. By relying on wage compression as the main tool for expanding employment, such labour market reforms dismiss the important contribution of income distribution to demand growth and employment creation. If overall productivity grows without a commensurate increase in wages, demand will eventually fall short of the production potential, thereby reducing capacity utilization, profits and investment, the report says.

Commenting on the report, ESCWA Chief Economist and Director of the Economic Development and Globalization Division Abdallah Al Dardari stressed that contractionary and austerity policies adopted by developed countries did neither provide positive outcomes in terms of controlling budget deficit nor in terms of promoting growth in these countries and in the rest of the world. In fact, the recession in developed countries deepened the problem of unemployment and weakened the world demand of exports both in developed and developing countries, which contributed to worsening the global crisis and put at risk the economic recovery. Thus, structural reforms are not sufficient and should be accompanied by fiscal and monetary policies that promote growth and employment which in turn promotes global demand of exports.

Dardari also highlighted the need to restore the balance between income levels in each country alone and at the global level, which is also an important source of growth in the global economy. In fact, social justice does no longer focus on fairness but is also a prudent economic policy that offers a way out from the global crisis. To achieve this, countries need to reform their fiscal policies to be able to finance social spending and to increase productivity and income, in order to boost demand and therefore increase exports, employment and growth.

According to Dardari, these points conform with the main message of ESCWA which underlines the need to adopt a new economic and social approach in Arab countries based on inclusive growth, economic competencies, social justice and economic diversification under the overall umbrella of a government that adopts a developmental agenda that serves the needs of its citizens in light of sound democratic governance.

For his part, Senior Advisor for the Arab Sates at the International Labor Organization's Regional Office in Beirut Zafiris Tzannatos said the deterioration of economic prospects is likely to result in high unemployment, loss of incomes for most people – even for those at or below the poverty line, and increasing inequality especially in terms of wealth concentration. Analyses both by UNCTAD and ILO show that more inclusive and equitable societies have higher rates of economic growth that are also more sustainable. According to Tzannatos, equitable societies enable people to use their capabilities to full extent by improving their educational prospects, promoting talent, applying fair taxation, supporting social mobility and providing credit to the broader population.

"Climbing government debt must be contained, but to achieve this it better be done by restoring growth (and fiscal revenues) rather than trying to increase taxes in a declining economy. Reforms can contribute to a recovery when they are not based on the notion that 'A good State is a small State' but expand the supportive economic role of the State while they create or reinforce social services and address unjust inequalities," Tzannatos added.

Kinda Mohamadieh, Director of Programs at the Arab NGO Network for Development, said the report stresses the centrality of reducing income inequality as a key factor to achieve development and a sustainable economic growth, as well as the development of local markets. According to Mohamadieh, the report recommends the importance of reconsidering the basis of national economic policies and the role of productive capacities and policies of redistribution, including the role of fair income and progressive tax policies and existing policies to boost local demand.

"Such recommendations are of great importance to the Arab countries that are witnessing political leadership changes and that require a wide democratization process and re-establishment of political policies," Mohamadieh affirmed. This development in the Arab world contributed to the deepening of disparities and inequalities and; therefore, must be addressed as part of re-establishment of their economic policies. She concluded by saying "it is surprising how we are still seeing recommendations by financial institutions calling on Arab countries to strengthen their flexibility in wages and jobs protection as a means to rejuvenate the economies."