Bridges Weekly Trade News Digest • Volume 12 • Number 29 • 10th September 2008

UNCTAD Offers ‘Gloomy Outlook’ on World Economy

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The United Nations Conference on Trade and Development (UNCTAD) released its annual Trade and Development Report at the International Institute of Trade and Development in Bangkok last Thursday. Titled ‘Commodity prices, capital flows and the financing of investment’, the report analyses developments in the world economy and presents economic prospects for developing countries with regards to international financial, currency and commodity markets.

“Overall, the financial turmoil, the commodity price hikes and the huge exchange-rate swings are having an enormous impact on the global economy and are casting a shadow on the outlook for 2009,” UNCTAD warned.

According to the report, the world economy is expected to grow by around 3 percent in 2008, almost 1 percentage point less than in 2007. In developed countries GDP growth is likely to be around 1.5 percent. In contrast, due to the stable dynamics of domestic demands in large developing countries, growth in developing countries is expected to remain robust at around 6 percent.

Nonetheless, the report cautions that restrictive monetary policies caused by high commodity prices could slow the growth of developed and developing countries alike. Additionally, while some analysts say that commodity prices may remain high due to structural factors like growing demand from China and India, UNCTAD advises that the end of speculation on high prices and delayed supply responses may cause some commodity prices to drop. To reduce vulnerability to commodity price shocks - especially for developing countries that depend on primary commodity prices - the report suggests the best strategy is greater diversification and industrial development.

The report also argued that speculators have significantly contributed to the high volatility of commodity prices. The report suggested that stricter regulation of financial markets will be needed to curb speculative activity.

One of the more surprising trends featured in the report is that a significant amount of capital has been flowing from developing nations to developed ones. Forty-two of 113 developing and transition economies were net exporters of capital during the period 2002-2006. This tendency contrasts with mainstream economic expectations that capital, attracted by higher rates of return, transfers from rich to poor nations in the open capital markets.

Moreover, on average investment and growth are higher in developing countries that are net exporters of capital than those that receive net capital inflows. As such, higher rates of investment for diversification and structural change do not always require current account deficits.

While the report suggested avoiding dependence on foreign capital inflow, it stated that a strong increase in official development assistance is nonetheless required to help poor commodity-dependent countries meet the UN’s Millennium Development Goals by 2015. Further, the report suggested strategies to increase the productive capacity of development assistance, such as aid directed into local investments.

Please refer to the UNCTAD website for further information and to access the report: http://www.unctad.org/Templates/webflyer.asp?docid=10466&intItemID=3492&lang=1.

ICTSD reporting; “Financial uncertainties dog the ‘real economy’,” GLOBAL TRENDS, 8 September, 2008; “United Nations points fingers at speculators,” FUND STRATEGY, 8 September, 2008; “UNCTAD Report warns of gloomy outlook for world economy,” XINHUA, 4 September, 2008; “Experts say economic downturn could spread to developing countries,” VOA NEWS, 4 September, 2008.