World trade becalmed – no circuit breaker in sight

THOSE TRADE WINDS have died, and Asian economies modelled on export-led growth are in a ‘very challenging’ position, says Joakim Reiter, Deputy Secretary-General of UNCTAD. Trading economies are now competing for the same markets, not selling to an expanding pie. Reiter worries about private debt in Asia, and fears for the future of poorer countries that squandered development opportunities during the resources boom – a boom he does not expect to be repeated . . .

IF GLOBAl TRADE does not pick up between now and 2020, the world will have experienced its worst decade, in terms of the lowest trade growth, since World War 2. The current prognosis is not promising. The global economic landscape appears a dismal patch of grey, rolling out as far as the eye can see.

To someone like Joakim Reiter, the implications are deeply worrying for the developing world, and, indeed, for workers in the developed world as well.  
Weak global demand is translating into low-growth, persistent high unemployment and downward pressure on salaries.
“This is a real concern, because a number of developing countries, not least in Asia, have had economic models built on export-led growth. We’re in a very challenging position,” says Reiter, who is Deputy Secretary-General of the United Nations Conference on Trade and Development (UNCTAD).
Global demand has not picked up since the financial crisis. The world has been living with depressed global demand.
“In the absence of global demand it is very difficult to have export led-growth,” Reiter told ATI. “Historically, trade has outperformed growth by a serious margin. Today, trade growth is on par or marginally ahead of output.”
Trade and trade issues are subjects that Reiter warms to. They have been the focal interest of his diplomatic career, including a four-year stint as Sweden’s Permanent Representative to the World Trade Organisation (WTO) before his appointment to the second-highest position in UNCTAD.
He explains that depressed global demand has reduced the role of trade and exports as growth engines for many countries.
 “Basically, countries are not selling to an expanding pie and they are competing for the same markets. So the only way countries can be successful in exporting is by taking market share from someone else,” he says.
This means an endless treadmill of cutting production costs to keep up with competitors in other exporting countries.
“Of course, many parts of Asia already have efficient production and transaction costs, but to maintain its market share, downward pressure on salaries, as part of its production cost over the last 30 years, will continue.
“This trend,” he says, “will in turn have a huge impact on household incomes.  And this, of course, from a development point of view, is not positive.”
Post-crisis, China’s demand for commodities partly made up for reduced demand for manufactured goods.
Reiter says historical highs in commodity prices in recent years have been “abnormal”. UNCTAD has no view on where prices should be, but it does want to see less volatility so that commodity exporting nations have predictability of their national incomes.
His regret is that many commodity-exporting countries did not seize the opportunity offered by the commodity super cycle to diversify growth. “Commodities are very important and it is important to make full use of these resources. But it is equally important to use the resource rent to try to diversify so that you can level out the large variations that you see in commodity prices over the years.
“I am not going to pass judgment on any country in Asia. Overall, commodities exporting countries have not adequately used their resource rent to diversify. That is why you see that a number of commodity dependent countries, for example, in Africa, have failed to build productive capacity in connected or separate sectors.
“Further, despite the export revenue boom, these countries still have a lot of poverty.” Reiter does not believe that the unique situation created by China’s commodity buying spree, which pushed up prices to historically high levels, will be repeated.
Now the problem for poorer countries ­—which have squandered the resources opportunity — is that they have much less money to solve poverty and other problems.
“The paradox is that the pressure to use your resources efficiently reduces when you have a lot of money,” he says.
“It seems to be a perpetual issue with some resource-rich countries.  The availability of cash in good times reduces the incentives to improve your conditions for bad days ahead.”
Over the past four decades, exports and investment have combined to drive an economy and improve salaries for workers in the successful exporting sectors. Better salaries mean better living standards.
Reiter says UNCTAD is urging countries to look at developing more balanced growth patterns  — stimulating domestic demand and improving household incomes through domestic consumption.
He says a number of countries, including China, are now seriously looking at rebalancing their growth. “In the end, unless they can figure a way to stimulate demand and global trade, they don’t have an option.”
UNCTAD has suggestions for countries on how to lessen economic pain.
“First, we tell countries not to rely too heavily on export-led growth; secondly, we encourage them to get their house in order by, for example, promoting a better business climate, reducing trade costs; and enhancing integration with neighbours and, thirdly, we tell them to monitor private indebtedness.
“We are quite concerned about growing private indebtedness because cash is so cheap now. Private indebtedness has increased a lot, and we worry about it in the Asian context. When the US lifts interest rates, will we see a situation where the fragilities of the Asian countries will be exposed because private indebtedness is too high?”
UNCTAD has a long-standing tradition of charting global investment and capital movements. Reiter says the biggest tectonic shift in the flow of foreign direct investment (FDI) is that developed Asia has become both the biggest receiver and supplier of FDI.
He applauds this shift, saying that developing Asia is filling a void left by developed nations, which are having to deal with their own economic problems. “To some extent, this is a confirmation of the shift in balance of
economic power,” he says. “In our assessment, the world has crossed an important line and Asia is a real power house when Asian corporates are lifting their offshore investment.”
Asia has long relied on European or American FDI for investment and generation of jobs. So, he says, it is good for developing Asia to have diversity of capital and economic strength in these countries.
However, the least developed countries are falling through the cracks. They face a large capital gap of US$2.5 trillion annually.
“Where is the money going to come from?,” he asks. “If it is not coming from public money, how do we leverage public money to work with private investment?”
The key, he says, is to try to unlock the huge war chests held by private corporations around the world and to encourage them to invest in developing countries to fill the funding gap.
But corporate investment continues to stall because of a lack of confidence in the economic outlook. Companies are cautious because they don’t have a sense that things are turning around. And this explains why there is still a dearth of new corporate investment. Companies are sitting on a mountain of cash — money which could be put to productive use.
“A general concern that we have had for quite a long time is that, even where we are seeing a lot of capital inflow, these flows are fuelling consumption rather than productive
investments. This is leading to asset bubbles as opposed to building productive capacity.”
Reiter explains that this global investment malaise is partly due to low returns from
Government bonds. “Investors are getting regular dividends from their equity holdings in private companies. So they are not keen for these private companies to invest in new projects. “
What will it take to change the corporate mindset? Reiter is not confident that there is a circuit breaker today.
Seven years after the financial crisis shook the world, Reiter says there are no indicators on the horizon that an end to the global economic tedium is about to appear.
“In previous cycles, there comes a time when you see a number of variables picking up — when the picture starts looking better. And you can reasonably say, in that assessment, things will start to pick up in the next two to three years. Of course there are a few indicators now, but none is solid enough for us to be able to say things are going to be fine.
“There is not enough proof out there to indicate to us that the global economy is about to turn the page. Quite the contrary.”
From UNCTAD’s perspective, among the biggest concerns is lack of a global enabling environment for rapid economic growth and poverty reduction. In times of rising and high unemployment, he fears that the risk of more people falling back into poverty increases.
“Employment is so important for income and for raising people out of poverty.
“So, the world’s jobless growth scenarios raise serious concerns for all countries, and especially poorer developing countries,” he says (see ILO report, page 15).
The United Nations has implemented its ambitious Sustainability Development Goals (SDGs), which are far more ambitious than SDG’s predecessor, the Millennium Development Goals (MDGs), launched last decade.
The thrust of the SDGs covers three dimensions of sustainable development — environmental, social, and economic.
Reiter says MDG was implemented at a time of unprecedented economic growth. The global community managed to achieve some of these goals because conditions in the first part of millennium were favourable.
In contrast, SDGs launched in September in New York will be implemented under much more arduous economic conditions.
 “I’m just not sure if countries have figured this one out. I am concerned that they will lack answers on how to get there in a low growth environment where trade is not picking up,” says Reiter. “How are countries going to manage poverty eradication in a low growth environment?”