Rethinking Bretton Woods | Fri, Feb 18, 2011
Limited change in the patterns and structures of global trade seem to be the weakest link in efforts to promote global economic recovery, a reading of both UN and IMF recent reports suggest.
After the dramatic decline in world trade of 2008-09, 2010 had been announced as the year of the recovery. Such assumption dominated good part of the year, especially as trade had began to recover in the later part of 2009.
But recent IMF and UN reports concur in estimating that trade will remain depressed in the medium term.
The United Nations World Economic Situation and Prospects report claims the recovery seen in late 2009 had started to “peter out” in the second half of 2010.[i] It puts the cumulative losses in trade volume in 2008 and 2009 at 26 percent compared with the levels reached in 2004-07. In contrast, the expected recovery rates in 2011 and 2012 will not make up for the losses suffered during the crisis, and such losses could be said to be permanent.
In its last IMF World Economic Outlook the IMF found that the 13 countries that recently had a systemic banking crisis account for about 40 percent of global demand. If 10 more countries that were close to a banking crisis are added, the proportion rises to over half of world demand and output.[ii]
“These countries’ imports are likely to remain depressed for a number of years, even more than their tempered output projections would suggest,” the IMF says. “ If, in addition, some economies fall into a sovereign debt crisis—which this analysis finds to be associated with more acute import losses—prospects for global import demand will dim even further.” [iii]
These findings carry important consequences for developing countries. Indeed, these countries were mostly affected by the financial crisis through trade-related channels.[iv] The 5-year period preceding the crisis saw their trade booming, and developing countries as a group are much more dependent on trade than developed countries. So the news that demand for exports will remain depressed represents an important factor to consider in assessing the viability of their development paths.
But the findings also call into question the apparent resilience of recovery in developing countries, and the sustainability of the “two-speed” recovery process that some analysts forecast.
This not to deny that in the present and immediate future developing countries are leading the recovery. According to the UN report the volume of developing countries’ trade had reached pre-crisis peaks of April 2008 already in 2010. It is equally clear that the contribution of China’s net imports to growth of GDP in the rest of the world was positive. As traditional Northern markets such as the European countries cut their demand, South-South trade has increased as a proportion of developing countries’ trade.
Nevertheless, the momentum for resumption of trade began to diminish in the second half of 2010. The UN report expresses doubt that emerging economies can continue to act as the engines of world trade growth. “Without a stronger recovery in import demand from developed economies, export growth of developing countries is also bound to slow, given their continued high dependence on advanced country markets,” it says.[v]
The IMF Board is expected to discuss in March a paper on “The Changing Patterns of Global Trade” but it is unclear to what extent that will deal with the issues and challenges posed in its own World Economic Outlook. The reform of the international monetary system, featured as top item on the G20 agenda this year, offers opportunities to improve the situation by addressing aggregate demand issues and the volatility of exchange rates. But, to judge by the pace of these reforms, in the minds of policy-makers the link with the urgent needs of the trade recovery has not been drawn (Finance Ministers meeting in Paris last weekend have agreed to look at, yet, another IMF paper on this issue).
There is no doubt that one of the main lessons developing countries should draw from the crisis is the need to emphasize diversity of export products and markets. More important, the need to incentivize domestic market orientation is key, as the IMF itself now cautions about the importance of rebalancing toward domestic sources of growth or what it calls “twin engines” of growth. [vi]
But this is more easily said than done, and its implications for productive and consumption structures have received little attention in the forums dealing with the post-crisis response. The macro figures and assessments do not even begin to convey the depth of the challenges that both, export –oriented companies trying to increase markets at home, and domestic market–oriented companies trying to find consumers abroad, face.
The shift, if it happens, will not take place overnight and can only be expected to be a gradual process requiring pragmatic reengagement with policy tools that may have been long disregarded for reasons of ideology –e.g. wage-led growth or targeted government procurement to reinvigorate national markets. This is especially so for poor countries that have, in some cases, more than four decades of systematically redirecting their economies towards export orientation.
[i] UN 2011. World Economic Situation and Prospects 2011.
[ii] IMF 2010. World Economic Outlook. Recovery, Risks and Rebalancing.
[iv] A more in-depth substantiation of the predominant role trade played in several channels by which the crisis affected developing countries’ sources of finance is provided in Caliari, Aldo 2009. Trade Issues Critical for Effectively Dealing with the Global Financial Crisis. (available at http://www.coc.org/node/6271)
[v] UN 2011. World Economic Situation and Prospects 2011.
[vi] IMF 2010. World Economic Outlook. Recovery, Risks and Rebalancing.