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Global Cooperation Crucial for Sustainable Growth

What really threatens the strength and durability of the global recovery are the myopic nationalist, rather than internationalist, policies pursued by developed countries that backlash against globalization
To tackle key areas of global importance such as the large movements of refugees and migrants, it is crucial that the international community reaffirms its commitments, including expanding international public finance and official development assistance.
To tackle key areas of global importance such as the large movements of refugees and migrants, it is crucial that the international community reaffirms its commitments, including expanding international public finance and official development assistance.

On July 24, the International Monetary Fund released the World Economic Outlook Update, July 2017: A Firming Recovery. The report has confirmed a sustained pickup in global growth with diverging performance across countries, where growth has been revised down a bit for the US while being revised up for Japan, the eurozone as well as emerging economies such as China, India, Russia and Brazil. Yet it is too soon to give the global economic system as a whole a clean bill of health, ATimes reported.

It also concludes that risks to global growth are broadly balanced in the near term, but still remain tilted to the downside over the medium term. Four types of downside risks for the recovery are summarized, including policy uncertainty such as difficult-to-predict US regulatory and fiscal policies, and post-Brexit negotiations; financial tensions stemming from China’s financial reform and the US’s monetary tightening; inward-looking policies such as trade protectionism; noneconomic factors such as rising geopolitical tensions, and domestic political shocks arising from weak governance and corruption.

While these risks could derail global growth, at its core, what really threatens the strength and durability of the global recovery, especially the sustainable development efforts of developing countries, are the myopic nationalist or inward-looking, rather than internationalist, policies pursued by developed countries that backlash against globalization.

Some of those pitfalls are discussed below:

 Monetary Policy Normalization in the US

After pursuing almost a decade of extremely loose monetary policy, the US Federal Reserve is embarking on monetary policy normalization with an accelerated pace of interest rate rises. It has contributed to a significant US dollar appreciation, further intensified by fiscal stimulus measures. Coordinating the normalization of policy rates with the normalization of the Fed balance sheet poses a number of challenges, which leads to fragile global economy and rattled global financial markets with significant potential for maturity or liquidity mismatches.

The ongoing monetary tightening in the US to some extent reflects a stronger external demand from which US trading partners would benefit. In most cases, it encompasses significant financial and economic risks for emerging economies, with elevated vulnerabilities to external and domestic shocks, amid relatively low commodity prices, structural weaknesses and political uncertainty.

It would adversely trigger a sudden surge in capital outflows from emerging economies that would disrupt equity prices and currencies and significantly raise external borrowing costs. Broad-based US dollar appreciation could contribute to tighter balance sheet pressures and rising debt levels for countries with large US dollar debt exposure, and rollover and currency risks for companies with unhedged foreign exchange exposures.

The emerging economies with sizable external financing needs, limited levels of foreign reserves, high borrowing needs, large dollar-denominated debt and fragile macroeconomic conditions will be the most susceptible to the winding down of the unconventional monetary policy in the US.

 Rising Trade Protectionism

International trade, supported by a universal, rules-based, open, non-discriminatory and equitable multilateral trading system, has the potential to drive economic growth in both developed and developing economies, speed up technological diffusion among countries and improve the efficiency of resource allocation.

Despite the recent improvement in world trade, an upward spiral in beggar-thy-neighbor protectionist measures has emerged in some developed countries, which could be met with retaliatory measures and eventually lead to substantial increases in tariffs worldwide.

The widespread imposition of trade barriers could result in cascading trade costs, disrupt global supply chains, put downward pressure on trade prospects, cause a protracted slowdown in productivity and investment growth, and harm low-income households disproportionately with widespread welfare losses.

 Declining Foreign Aid

To tackle key areas of global importance such as climate change, poverty, inequality and large movements of refugees and migrants, it is crucial that the international community reaffirms these commitments, including expanding international public finance and official development assistance.

ODA has declined as a share of GDP since the global financial crisis, which has become a major source of concern in light of the urgent investment needs of developing countries to achieve the SDGs. In 2015 ODA flows from the OECD Development Assistance Committee members amounted to 0.3% of their total gross national income, falling short of the commitment reaffirmed by developed countries in the 2030 Agenda, to provide ODA commensurate to 0.7% of GNI set by the United Nations.

Only six countries—Denmark (0.85%), Luxembourg (0.93%), the Netherlands (0.76%), Norway (1.05%), Sweden (1.4%) and the United Kingdom (0.71%)—met or exceeded the United Nations target in 2015.

Waning global commitments of developed countries are reflected by the tapering level of net ODA flows to the least developed countries by more than 10% since 2011. In 2014, total ODA from OECD DAC members to LDCs was $41 billion or 0.09% of GNI, a way off from the United Nations targets of 0.15-0.20%.

Although 2015 observed a rebound of ODA to LDCs, significant gaps remain that could dent spending and confidence more generally, further exacerbate macroeconomic strains, complicate resilience needs and weigh directly on sustainable development efforts in those countries.

 

 

 

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