The UNTCAD just published its annual report on Trade and Development, titled Post-crisis Policy Challenges in the World Economy.
The report describes a two-speed global recovery, showing how developing economies have come out of the crisis stronger then their developed European and American counterparts. There the author invokes the contradictory forces at work in a "wageless" recovery, where wage repression combined with austere fiscal policies will keep developed economies in a state of prolonged stagnation, even with all the monetary stimulus imaginable. Misguided policies combined with unfettered financial markets are largely to blame according to the author. Here in a nutshell is the gist of the argument:
Challenging the widespread re-orientation of macroeconomic policy, especially fiscal policy, towards austerity, the Report notes that fiscal imbalances were not a driving factor but a result of the crisis. Thus, fiscal retrenchment is not an appropriate response. Fiscal austerity seeking to cut fiscal deficits, curb public debt and thus "regain the confidence of the financial markets" is likely to be self defeating, as it affects GDP growth and reduces fiscal revenues.
The report discusses various options that could re-stabilize the global economy, but imply deep and politically difficult reforms such as:
In general, the financial sector needs to be restructured in order to reduce the risk of mis-pricing and the resulting systemic crises. Reforms should mainly aim a clear separation between the activities of investment and commercial banking.
And the construction of a new state-centered international monetary system that would succeed and suppress the actual dominance of the monetary system by the private financial oligopoly:
Greater stability of the real exchange rate could be achieved by a system of rules-based managed floating. Such a system could be built on the adjustment of nominal exchange rates to inflation differentials or to interest rates differentials. This can be practiced as a unilateral, bilateral or strategy, but the greatest benefit for international financial stability would result if the rules for managed floating were applied at the multilateral level.
All in all a good read !
This article was first posted on The Progressive Economics Forum.