UN: Massive stimulus needed

The Straits Times
Dec 1, 2008 | 6:07 PM
UN: Massive stimulus needed

DOHA - A MASSIVE and coherent economic stimulus must take place soon to counter the global economic downturn, UN experts said in a report published on Monday.

The UN called for 'massive economic stimulus packages that are coherent and mutually reinforcing on a global basis, and linked with sustainable development imperatives' in a Report on World Economic Situation and Prospects 2009 presented at an international conference on development financing in Doha.

The packages 'should come on top of the liquidity and recapitalisation measures already undertaken by countries in response to the economic crisis,' the report added.

UN economists also proposed 'stronger regulation of financial markets and institutions, adequate international liquidity provisioning, an overhaul of the international reserve system and a more inclusive and effective global economic governance, to prevent against any future repetition'.

The report made dire projections for economic growth across the globe in 2009, with an overall drop in per capita income and developed nations most affected by the global financial crisis. Developed countries will see a 0.5 per cent decline in output, compared with an average growth of 5.3 per cent in transition economies and 4.6 per cent in developing countries.

World growth will most likely not exceed one percent in 2009, compared to 2.5 per cent in 2008 and rates varying between 3.5 and 4 per cent in the four previous years.

US growth will decline by one percent, with the euro zone declining by 0.7 per cent and Japan by 0.3 per cent. Growth in India, Brazil and Mexico is slated at 7 per cent, 2.9 per cent and 0.7 per cent, respectively.

'But given the great uncertainty prevailing today, a more pessimistic scenario is quite possible,' the report warned.

'If the credit crisis continues and confidence is not restored in the financial sector in the coming months,' UN experts explain. 'This would bring economic growth in developing countries down to 2.7 per cent, dangerously low for their ability to sustain poverty reduction efforts and social and political stability.'

The United States has already launched an economic recovery plan worth US$700 billion (S$1.06 trillion) and China, the world's fourth-largest economy, has initiated an unprecedented four-trillion-yuan (S$900 billion) stimulus package.

Despite these and other measures around the world to inject money in the banking system and lower interest rates, confidence has not been restored.

'With limited space for monetary stimulus, fiscal policy options are needed to reactivate the global economy,' the report proposes.

The UN report says that the total cost of US government action in the face of the financial meltdown has reached US$7 trillion, and that the figure may well be in the order of US$11 trillion globally.

Rob Vos, director of the UN's Development Policy and Analysis Division and lead author of the UN study, said a fiscal stimulus of the 'same order of magnitude' may be needed to keep the world economy from shrinking next year.

But the figures may not be as high as US$7 or US$11 trillion because 'those are commitments rather than money actually spent,' he said, noting 'a stimulus of around one to two per cent of GDP across the world should be enough to stave off negative growth'.

'Maybe not for 2009 but in 2010 there could be a recovery (if the stimulus package goes ahead) unless markets fall further in the meantime.'

Lauding a 'fiscal stimulus to be provided in an internationally coordinated fashion,' the UN economists in the report perceive the crisis as 'an opportunity to align fiscal stimulus packages with long-term sustainable development goals,' calling for public investment in infrastructure, food production, health, education and renewable energy sources.

They suggest further scrutiny of reasons behind the weakness of the global financial system, which uses the dollar as its reserve currency.

'With net indebtedness of the United States still growing - to about US$2.7 trillion at the end of 2008, up from US$2.5 trillion in 2007 - a disorderly adjustment of global imbalances and a hard landing of the dollar remain major downside risks,' the experts argue.

'In that case, investors might again embark on a 'flight to safety,' but this time away from dollar-denominated assets instead of to them, pulling the US economy down further, and the global economy with it.' -- AFP