Helen Clark: Statement to the 29th Meeting of the International Monetary and Financial CommitteeApr 12, 2014
Helen Clark, Administrator of the United Nations Development Programme
and Chair of the United Nations Development Group
Statement to the
International Monetary and Financial Committee
Positive but fragile recovery: global growth prospects for 2014
At the beginning of 2014, the world economy experienced further financial turbulence, as a number of emerging market economies suffered significant sell-offs in their equity markets and depreciation of their currencies. Projections for the global economy in the United Nations’ World Economic Situation and Prospects 2014, however, have remained broadly positive. World gross economic output was forecast to grow by three per cent in 2014, an improvement on 2.1 per cent for 2013.
Improved global prospects were seen to be supported primarily by two factors: a strengthened recovery in major developed economies and stabilization of growth in large emerging economies. With the euro area extricating itself from protracted recession, all major developed economies were aligned on the same upward trajectory for the first time since 2011. If that continues, it would not only reinforce recovery among developed economies, but would also be beneficial to developing and emerging economies. Meanwhile, some large emerging economies, including China and India, have managed to reverse the downward trend in growth they were experiencing.
Despite this positive forecast however, projected global growth is still not sufficient to narrow the output gap in the world economy which opened up in the aftermath of the global financial crisis. Further risks remain, including in the unwinding of unconventional monetary policies of major developed countries. Geopolitical developments also pose challenges which could cloud the global economic outlook.
Growth in international trade and volatility in finance
The prospects for world trade are forecast to improve, driven by a modest increase in demand in Europe, further recovery in the United States, and a return to more dynamic trade in East Asia. Growth of world exports is projected to be 4.6 per cent in 2014. Trade in services is recovering faster than merchandise trade, and is expected to continue growing over the forecast period. Meanwhile, commodity prices, which displayed divergent trends over the course of 2013, are expected to remain relatively flat for 2014.
Private capital inflows to some developing countries and economies in transition declined in 2013 and early 2014. This, along with increased volatility in the financial markets of emerging economies, resulted in equity market sell-offs and sharp depreciations of local currencies in some developing and emerging economies. This was partly triggered by the United States Federal Reserve decision to taper the amount of its monthly purchases of long-term assets. The risk of weak growth prospects for emerging economies has also played a role in triggering the decline of capital inflows.
At the same time, developing countries reached a new record level of Foreign Direct Investment in 2013 – which is expected to reach an unprecedented US$ 800 billion in 2014. While this is positive, it is important to note that FDI flows remain heavily concentrated in middle-income countries and resource rich low-income countries. FDI is concentrated in specific sectors such as natural resource extraction and the exploitation of comparative advantage in labour-intensive manufacturing industries. It is important to ensure that countries which are not currently able to leverage international private capital are supported to attract such flows and can attract international public finance, including through development aid.
Current account imbalances across major economies continued to narrow in 2013, and at their current levels are not considered to pose an imminent threat to the stability of the world economy. Efforts to strengthen international policy co-ordination, however, should continue, to prevent the imbalances from widening to excessive levels again.
Employment and inflation outlook
Global unemployment levels remain a cause for concern, as long-lasting effects from the financial crisis continue to weigh on labour markets in many countries and regions. Among developed economies, the euro area is faced with considerable challenges, as structural impediments and comparatively weaker recovery are negatively impacting on job creation. The unemployment rate has declined slightly in the United States, but long-term unemployment remains a significant issue in many developed countries.
Across developing countries, unemployment levels are variable. There are high levels of structural unemployment in North Africa and Western Asia, particularly among youth. In contrast, unemployment rates in Latin America and the Caribbean are at record lows. High rates of informal employment, as well as pronounced gender gaps in employment, continue to characterize labour markets in numerous developing countries.
Youth unemployment is a serious problem in developed and developing countries alike. Youth are also more likely to be in low-quality jobs and experience job insecurity and underemployment. Large numbers of young people in developing regions still remain in poverty despite being in regular employment. These challenges demand urgent attention from national and international policymakers.
Inflation remains low worldwide, partly reflecting excess production capacity, high unemployment, fiscal austerity, and continued financial deleveraging in major developed economies. Among developed economies, deflationary concerns are rising in the euro area, while Japan has managed to end its decade-long deflation. Among developing and emerging countries, only around a dozen economies are experiencing inflation rates above ten per cent.
Uncertainties and downside risks
There are uncertainties and risks for global economic growth and financial stability associated with the unwinding of unconventional monetary policies adopted in major developed countries.
The vulnerability of many emerging economies to the tapering of quantitative easing and the subsequent decline in capital inflows is also associated with a number of country-specific risk factors, such as the expanding ratio of bank credit to GDP in emerging economies - this has surpassed that of advanced economies, indicating heightened risks of excessive and unsustainable credit expansion. Other country-specific factors include large current-account deficits, policy uncertainties, political risks, and risks related to shadow banking, the housing sector, and overcapacity.
The importance of balanced and sustainable recovery
It is important that over the next few years policymakers in major developed countries work to ensure a smooth process for the changes in quantitative easing policies. A premature unwinding may risk stalling economic recovery, but a delayed unwinding could risk creating financial bubbles. Efforts are needed to enhance the supervision, regulation, and surveillance of financial markets in order to identify and mitigate financial risks and vulnerabilities. Clear communication strategies by Central Banks to articulate the timing and the targets of the policy action are important. In addition, greater consultation and co-ordination are needed between developed and developing countries to address spill-over effects.
For developing countries and emerging economies, the challenge is to manage the ramifications of the unwinding of quantitative easing. These economies should monitor external and internal imbalances, build policy space, and potentially use macro-prudential measures as well as other capital account management mechanisms.
Macroeconomic policies worldwide should continue to focus on supporting a strong, balanced, and sustainable recovery, focusing in particular on job creation. A number of countries are making concerted efforts to address both cyclical and structural unemployment challenges, and taking steps to promote productivity growth and innovation. Further public investment in skills training and upgrading will be necessary to integrate the hitherto excluded working age population – including women - into the labour market.
Looking ahead: the need to promote inclusive and sustainable growth
Despite overall strong growth and important development progress in recent decades, current development indicators reveal that this growth has neither been inclusive nor sustainable enough.
A new report by UNDP shows that even as economies have grown and global poverty levels have fallen, income inequality at the global level, on average, and in several regions, has been rising in the last two decades.
Inequalities have a negative impact on the well-being of people and the prospects of society as a whole. Income inequality, for example, impedes long-term growth prospects, and weakens the poverty-reducing impact of growth. It is associated with a host of poorer social outcomes, ranging from low health status and educational achievement to higher crime rates. Inequalities can also generate political instability; erode social cohesion and government legitimacy; and undermine capacity for the decision-making necessary for reform.
There is also widespread awareness of the high costs which traditional growth and development pathways pose to the earth’s ecosystems, including to our climate. Underlying incentives – including certain subsidies and over-reliance on GDP and GNP as headline measures of progress – have often led to a focus on shorter-term economic and political gains at the expense of the environment. Measures of GNP alone do not reflect the impact of national production on air quality, for example, or the depletion of a country’s natural capital over the long-term.
Neither the widening of gaps in income, wealth, and other dimensions of well-being, nor environmental degradation, are an unavoidable price which must be paid to advance development. Many countries have managed to reduce income and non-income inequality significantly and to advance sustainably through a combination of progressive fiscal and social policies.
In order to tackle inequalities and promote inclusive and sustainable growth, policies must be strengthened in a number of areas:
• While roughly three-quarters of the world’s poor live in rural areas, growth in many countries has been concentrated in urban and/or coastal areas. There is therefore a need for measures aimed at securing greater balance between rural and urban areas, and across provinces, regions, and countries.
• Ensure job-rich growth. Employment growth relative to GDP growth has been low and declining in many countries. Growing capital intensity in economies can have a negative effect on employment, but the challenge is to move economies up the value chain and create more and better jobs.
• Address the underlying factors which cause large disparities in asset holdings, including land, as well as unequal access to quality goods and services, such as education, health, credit, and other financial services, infrastructure, and social protection, which have prevented the poor from fully participating in and benefiting from growth, thereby aggravating existing income inequalities.
• Safeguard public spending on education and health.
• Encourage more sustainable patterns of consumption and production. There is a need to prioritize and incentivize investments which support country-led transitions towards less polluting, resource-efficient, and climate-resilient forms of growth over the medium and long-term.
• As part of these efforts there is a need for better measures of multidimensional poverty and inclusive sustainable growth which go beyond GDP, including disaggregated data which help reveal inequalities across wealth, gender, age, ethnicity, and other sub-groups, so that they can be better targeted.
Global recovery requires economic growth. The UN commends G20 efforts to adopt new measures to lift G20 GDP by at least two per cent over the coming five years. This goal is a step in the right direction, but a stronger focus on the quality of growth to make it more inclusive and sustainable needs to accompany it.
Financing for development
A coherent strategy on financing for development will be needed to progress the post 2015 sustainable development agenda. Public and private finance and domestic and international resources will all need to be mobilised, better targeted, and made more effective in pursuit of new goals and targets.
OECD figures on Official Development Assistance showed a real ODA decrease of four per cent in 2012 (0.29 per cent of their combined Growth National Income compared to 0.31 per cent in 2011), marking the first time since 1996-97 that aid had fallen in two successive years. Latest OCED figures, however, suggest that ODA rose again by six per cent in 2013.
Long-term financing will be essential to fund the transition to inclusive and sustainable growth. Yet, to date, insufficient resources have been allocated to meet long-term sustainable development needs in infrastructure; health, education and sanitation services for the world’s poor; small- and medium-sized enterprises; and financial services for all; as well as the in green technologies necessary to address climate change in both developed and developing countries. Global public goods, such as sustainable management of the world’s forests and oceans, are also underfunded.
In parallel, the international community must assist countries in their efforts to strengthen domestic resource mobilization, including through financial support and capacity building initiatives targeted at tax administration. Concerted global efforts to curtail illicit financial flows are also essential, and the G20’s commitment in that regard is to be commended and pursued. It is particularly important that developing countries are able to benefit from progress in areas such as automatic exchange of tax information.
At the United Nations, the Intergovernmental Committee of Experts on Sustainable Development Financing, which was established in the follow-up to Rio+20, is preparing a report on options for an effective sustainable development financing strategy. The report will be a key input into the intergovernmental negotiations on a post-2015 development agenda which will commence in September.
All sources of finance – public and private, domestic and international – will have an important role to play in financing a post-2015 sustainable development vision. It will be essential to adopt policies which support the private sector to invest more resources in long-term sustainable development. These measures will need to be complemented by more stable and predictable international public finance. Governments will also need to strive to mobilise more domestic resources for development, and to ensure their most effective use. It is important to recognize, however, that there are countries which cannot currently mobilise high levels of domestic resources or leverage international capital markets. The international community must ensure sustained support for these countries in the post-2015 period.
The need for effective and representative global governance
The coming months will be dedicated to defining the post-2015 development agenda and working towards a single framework and set of goals which are universal in nature as agreed by UN Member States. This will be critical for strengthening the international community’s ability to tackle global challenges, which are increasingly interconnected and call for stronger commitment to collective action and policy coherence.
Effective global economic governance remains vital for achieving the MDGs, and will be equally important in supporting the implementation of the new universal development framework. Many of the current institutions and principles for global economic governance were designed in an age which is not reflected in today’s geopolitics and geoeconomics. The increasing weight of emerging economies and developing countries, which are now responsible for half of global economic growth and almost half of global savings, should be reflected in the decision making processes of International Financial Institutions.
Implementation of the 2010 IMF governance and quota reform is important to support the credibility, legitimacy, and effectiveness of the institution, and, in turn, the coherence and stability of the global financial system.
The UN remains committed to working closely with the Bretton Woods Institutions to find common solutions to urgent global challenges. We welcome the engagement of the Bretton Woods Institutions with the post-2015 process.