MANAMA: The current international framework for monetary and exchange-rate policies, which offers opportunities for speculative activities, is largely to blame for the ongoing global economic turmoil, the Geneva-based United Nations Conference on Trade and Development (UNCTAD) said in a report.
If commodity prices plunge, the report cautioned that gloomy outlook for rich nations could spread while halting the recent boom in developing countries.
UNCTAD released its annual Trade and Development Report 2008 yesterday. The report said: “The recent crisis has shown once again that market discipline is ineffective in preventing recurrent episodes of “irrational exuberance” because the current international framework for monetary and exchange-rate policies offers opportunities for speculative activities that are highly profitable for a limited period of time, but ultimately destabilize the entire system.”
“Just as speculation has amplified the upward movement of prices, it may also amplify any downward movement,” UNCTAD Secretary-General Supachai Panitchpakdi in the overview to the report said. The report called for tighter prudential regulation to reduce volatility and the resulting negative income effects, as well as costly public bailouts.
However, recent steps by major central banks to provide liquidity to financial institutions affected by the current turmoil are considered appropriate because of the systemic risks for the global financial system without such action.
UNCTAD feared that despite some adjustment of current-account imbalances around the world due to the fall in the US dollar, divergences in monetary policies may invite renewed destabilizing speculation in foreign-exchange markets.
The report also notes that a nonrecessionary correction of global imbalances would require stronger stimulation of domestic spending and imports in the major surplus economies, especially in Germany and Japan, as well as a measured appreciation of the Chinese currency.
“There is a strong likelihood of a sharp and prolonged downturn of the world economy,” the report said and deplored policymakers for failing to tackle this challenge. “The risk of galloping inflation as a result of higher primary commodity prices has been considerably overestimated. The probability of a wage-price spiral occurring is much smaller today than when oil prices rose in the 1970s. That is because unit labor costs, which are a key determinant of inflation, have increased very little in most countries. Measures to tighten monetary policy would exacerbate the global slowdown,” the report warned.
“Uncertainty and instability in international financial, currency, and commodity markets, coupled with doubts about the direction of monetary policy in some major developed countries, are contributing to a gloomy outlook for the world economy and present considerable risks for the developing world.
“The ongoing global financial crisis and the possibility of tighter monetary policies in a number of countries presage major difficulties for the world economy for the remainder of 2008 and in 2009. The bursting of some speculative bubbles and the volatility of commodity prices pose formidable challenges for policymakers, in particular for monetary policy. “A global depression has to be avoided while headline inflation - inflation that takes into account rises in food and energy prices - is still very high. The world output is to grow by around 3 percent in 2008, almost one percentage point less than in 2007. In the developed countries GDP growth is likely to be around 1.5 percent.
