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DESA/UNCTAD: World Economic Situation and Prospects 2010

arton1813The World Economic Situation and Prospects 2010 (WESP), produced at the beginning of each year jointly by the UN Department of Economic and Social Affairs (UN DESA), the United Nations Conference for Trade and Development (UNCTAD) and the five United Nations regional commissions, finds that the world economy is recovering from the global financial and economic crisis. A mild global growth of 2.4% is forecast for 2010, after a slump of 2.2% in 2009.

However, the report cautions that the recovery is uneven, conditions for sustained growth remain fragile, and the global imbalances may widen again. Looking ahead, global economic recovery is expected to remain sluggish, unemployment rates will stay up and inflation will remain low. The immediate challenge for policy makers will be to determine how much longer the fiscal stimulus should continue. The report recommends that the stimulus should continue at least until there are clearer signals of a more robust recovery of employment growth and private sector demand.

Along with continued fiscal stimulus measures in the short run, the report recommends a focus on the rebalancing of economic growth in the medium run, to be supported by better international policy coordination, strengthened global governance and more decisive reforms of the global financial system.

Developing countries, especially in Asia, are expected to show the strongest growth in 2010. The UN report predicts output growth in developing countries will reach 5.3% in 2010, up from 1.9% in 2009. Yet, economic growth in the developing world will remain well below the pre-crisis pace of more than 7% per annum. China’s and India’s economies are expected to grow at 8.8 and 6.5% respectively in 2010, but also below potential. The Russian Federation is leading the turnaround among economies in transition as its economy is expected to grow at 1.5% in 2010 after a severe decline by 7% in 2009.

WESP 2010 projects a visible turnaround in the industrialized world as well, but with economic growth in 2010 remaining well below potential. The economy of the United States is expected to grow by 2.1% in 2010, following an estimated downturn of 2.5% in 2009. Recovery in both the European Union and Japan is projected to be much weaker, reaching GDP growth of no more than 0.6 and 0.9%, respectively, in 2010. At this pace of recovery, the major developed economies are not expected to provide a strong impulse to global growth in the near-term outlook.

Many of the least developed countries (LDCs) are expected to see a much slower economic performance in the years ahead as compared with the robust growth they witnessed in the years before the crisis. In 2009, about 60 developing countries suffered declining per capita incomes. Thanks to the recovery, this number is expected to drop to 10 countries in 2010, but at the same time only 21 developing countries are expected to achieve growth rates of 3% or more, which is taken as the minimum rate needed to ensure substantial poverty reduction. Hence, over 2009-2010 significant setbacks in the progress towards poverty reduction are expected.

The report therefore calls for three “rebalancing acts” to avoid a return to the unsustainable pattern of growth that led to the global crisis. First, while continued fiscal stimulus is needed in the short run, over time private sector demand growth will have to replace government spending to uphold global aggregate demand. Second, the first rebalancing act should be achieved by ensuring much more of stimulus measures are oriented at long-term investments to support future productivity growth, but especially to initiate the transformative investments needed to meet the challenge of climate change and “crowd-in” private investments for this purpose as well. Third, demand across countries will need to be rebalanced, involving a shift towards external demand (net exports) in major deficit countries, such as the United States, and towards domestic demand in the major surplus countries, especially in Asia. Again part of this rebalancing act could build on the suggested sustainable growth path with major developed countries exporting capital goods and finance to developing countries to facilitate large scale investments in clean energy and sustainable development in poor nations.

These three rebalancing acts will require close policy coordination as they are strongly interdependent. WESP 2010 indicates that the framework for “strong, sustainable and balanced growth” launched by the G20 leaders at the Pittsburgh summit in September 2009 could prove an important step in the right direction. The success of this framework, however, will require strengthened mechanisms for international policy coordination which are more inclusive and legitimate than the present ad-hoc process. It will also depend on further reforms of the international financial architecture, including reforms of the global reserve system to a system less reliant on the US dollar as is presently the case. The report offers concrete suggestions on each of these counts.

Click here for the Executive Summary.

The full report is available at: http://www.un.org/esa/policy/wess/wesp.html.

Click here for the pdf version.

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