Austerity could trigger double-dip recession, UNCTAD warns

The coronavirus pandemic has exacted a devastating human toll. But the disruptions caused by COVID-19 also give the global community an opportunity to redress long-standing economic disparities, including those triggered by last decade’s global financial crisis, the United Nations Conference on Trade and Development (UNCTAD) stresses in a new report.

In its report titled From Global Pandemic to Prosperity for All: Avoiding Another Lost Decade, UNCTAD argues that expansionary austerity – the idea that cuts in government spending can lead to economic growth – was an ineffective and ultimately destructive policy response to the 2008 global financial crisis, fostering weak demand, sluggish investment and tepid growth.

It is a lesson policymakers ignore at their peril, warns Richard Kozul-Wright, director of the unit on Economic Cooperation and Integration among Developing Countries (ECIDC) at UNCTAD.

“It will be worse if this (austerity) is repeated after COVID-19 given that the world is more fragile today and inequalities are greater,” Kozul-Wright told Al Jazeera.

Significant cuts in government spending by leading economies could trigger a double-dip recession in 2021 or early 2022 followed by a lost decade of lower wages, higher unemployment and slower growth, Kozul-Wright emphasised.

“This would be particularly damaging for developing countries that are already facing a huge debt mountain and would put an end to the 2030 Agenda,” he added.

The 2030 Agenda for Sustainable Development, the UN’s hallmark plan for responsible global growth in the 21st century, had 17 targets that countries signed up to reach from reducing maternal mortality to eradicating extreme poverty.

Now, the global economy is expected to contract by more than 4 percent this year, with an estimated swing of 6.8 percentage points leaving a shortfall in global output by year’s end of more than $6 trillion, UNCTAD said.

Fading policy taboos

Domestic activity is expected to contract sharply in every part of the world. This will have a knock-on effect on trade, which UNCTAD estimates will shrink by around one-fifth this year, and foreign direct investment, which is expected to drop by as much as 40 percent.

While the biggest falls in output are taking place in the developed world, the greatest economic damage will be suffered by the developing world, where hundreds of millions of people work in informal markets and the nearly-decimated tourism industry is a major source of employment.

The UN earlier this year warned the coronavirus pandemic may push another 132 million people into chronic hunger by the end of the year. It also said remittances, the vital lifeline workers send back to their families in developing countries, dried up significantly when the pandemic hit and are forecast to fall by more than $100bn this year.

Latin America will be hit particularly hard with an estimated drop in output this year of 7.6 percent. Double-digit declines are forecast for the continent’s largest economies, notably Argentina and Mexico.

People wearing protective masks during the coronavirus outbreak in Bogota, Colombia, where the wider Latin American region is likely to be particularly hard hit with a drop in output this year of 7.6 percent [File: Luisa Gonzalez/Reuters]

But where there is crisis, there is also opportunity, said Kozul-Wright, who noted that a number of economic policy taboos are fading amid the pandemic.

“Government spending is no longer a bad thing, a universal basic income might be a good idea, industrial policy might be required to build a more diverse and resilient manufacturing base, central banks can’t just focus on inflation, some are even talking about strategic planning,” he said.

UNCTAD is urging developed countries to take the lead on addressing global inequality, unsustainable debt and environment destruction. The agency stresses the need for macro expansion, rising wages in line with productivity, policies that support innovation and public investment particularly in environmentally-friendly sectors.

Least developed countries and middle-income countries, burdened with mountains of debt, volatile financial markets, corporate tax evasion, and inept healthcare systems, lack the fiscal space needed to address the myriad challenges presented by the pandemic, it warns.

They need debt relief, concessional lending and Special Drawing Rights, says UNCTAD.

To date though, support to the least developed and middle-income countries from developed economies has been extremely limited.