The Hindu Business Line : Unctad: Imbalances pose risk to global growth

Trade report
East and South Asia continue to experience high growth, owing to the strong performances of China and India
India’s export growth (by volume) was higher than the world average

Our Bureau

New Delhi, Sept. 5 Even as the world economy is expanding vigorously for the fifth year in a row, the main risks for continued global economic expansion come from the failure to address the global imbalances, warns a United Nation (UN) report today.

In its 2007 Trade & Development Report (TDR), released worldwide today, the UN Conference on Trade and Development (UNCTAD) has cautioned that if the present slowdown in the US economy deepens and it slips into a recession and if the main surplus countries do not initiate much greater expansionary policies based on domestic demand, the “outlook will be rather bleak”. It discerns some signs of a slight shift in the sources of world economic growth, with the US economy slowing down and domestic demand in Europe and Japan recovering.

It said East and South Asia continue to experience high growth, owing to the strong performances of China and India. Their high investment ratios (exceeding 40 per cent of GDP in China and close to 30 per cent in India) can only persist if large external shocks could be avoided and if economic policy is not forced to limit expansion to a greater extent than currently envisaged. It said India’s output growth (GDP) touched 9.2 per cent in both 2005 and 2006 and is likely to be 8.5 per cent in 2007.

India’s current account deficit which was $6.9 billion in 2005 worsened to $19.3 billion in 2006 and this was 2.1 per cent of its GDP in 2006. India’s export growth (by volume) was higher than the world average, at 14 per cent, with a surge in manufactured exports.

The UNCTAD report said the performance of East and South Asia was almost exclusively responsible for the overall reduction in global inequality, given that their gap with developed countries was reduced from 48 times in 1980 to 19 times in 2007.

Merchandise exports

In parallel with the robust performance of the world economy, world trade expanded in 2006 as total merchandise exports grew by almost 15 per cent in current dollar prices, with an increase in volume terms of 8 per cent and in unit value terms of almost 6.5 per cent. Exporters of manufactures from East, South and South-East Asia increased the purchasing power of exports through the expansion of the volume of goods exported with China and India, particularly contributing to regional trade expansion.

It said exports of developing countries in value terms have consistently been growing faster than those of developed countries in the 2000s. As a result, the share of developing countries in global exports increased from 32 per cent in 2000 to 37 per cent in 2006. As a corollary to this, the overall current account of developing countries has swung into a surplus for the first time since the early 1970s. Whereas in 1996-97, South America, South East Asia and the transition economies posted significant deficits, and East Asia and West Asia were close to balance; all of them now have solid current account surpluses.

As a result, UNCTAD said, a number of developing countries have become net exporters of capital on such a scale that there has been a net aggregate capitol outflow from developing countries.

“The sustained net capital exports from the poorer developing countries to the capital-rich developed countries raises doubts about the validity of orthodox development theory in the new global context and points to the need for a rethinking of the most crucial assumptions about the functional relationships between savings, investment, capital flows and alternative policies and catch-up paths,” UNCTAD said.

While suggesting developing countries to be cautious over going ahead with free trade agreements with developed countries that involves loss of policy space and no guarantee for improved market access, UNCTAD emphasises the need for co-operation within developing countries themselves for energy and water supply and distribution to give greater coherence to development content.