NEW YORK – The United Nations’ recently released World Economic Situation and Prospects mid-year report warns that the global economy is at risk of a severe downturn, unless world leaders’ short-term mindset gives way to a focus on medium- and long-term policies. Furthermore, greater international cooperation and coordination are crucial to achieving a strong, sustained, and inclusive recovery.
Such a recovery requires efforts to create jobs and enhance countries’ productive capacity – for example, through infrastructure development – thereby encouraging complementary private investments and generating the conditions necessary to sustain long-term growth. This, in turn, implies the need to balance coherent macroeconomic policies with structural transformation goals.
At the onset of the Great Recession, rapid and coordinated responses by leaders of the major economies, including bold stimulus packages, gave the impression that the crisis would be short-lived. Indeed, in 2009-2010, stimulus packages created or saved an estimated 21 million jobs in the G-20 countries alone.
But global leaders’ collective resolve has since waned, as they have found themselves increasingly captive to – and battered by – financial markets. As a result, stimulus was rapidly withdrawn in an effort to consolidate weakened fiscal positions, bringing the nascent recovery to an abrupt end. Economic stagnation in many European countries accompanies the prospect of double-dip recessions in others (leaving aside the unfolding disaster on the periphery).
The economic, social, and political costs of prolonged economic meltdowns are massive and growing. Globally, a staggering 200 million people – almost half of them young – are unemployed. Of those, at least 27 million became jobless since the start of the crisis.
Indeed, unemployment rates in Europe – except Austria and Germany – and the United States were higher at the end of 2011 than they were in 2007.
In the developing world, the share of the long-term unemployed continues to increase, reaching 40% in many countries, notably the US, the United Kingdom, and the debt-distressed eurozone members. Youth unemployment has also increased markedly, most astonishingly in Spain, where more than half of young adults seeking a job cannot find one.
To curb this trend, more than 400 million additional jobs will be needed worldwide over the next decade. And, given the current shortfall of 200 million jobs, the total rises to 600 million.
As the crisis deepens, even those developing countries that weathered the storm far better than most developed countries are showing signs of strain. After all, for three decades prior to the crisis, developing countries were told to liberalize, and to pursue export-oriented policies, leaving them structurally dependent on advanced-country demand, which remains weak. Reorienting production to domestic consumption would be difficult under any circumstances; a downturn in global trade, increasingly volatile commodity prices, and falling aid and investment flows don’t help.
But the approach du jour – more austerity and worsening conditions for workers in the guise of greater labor-market “flexibility” – has only made matters worse. Since fiscal room for maneuver is severely restricted in many economies, and expansionary monetary policies have reached their limits, addressing the global crisis effectively requires global cooperation – by governments, businesses, and employees. Indeed, without international coordination, national policies will be ineffective, and it will be impossible to tame commodity prices or stabilize exchange rates.
Moreover, the public sector must be more proactive in sustaining aggregate demand through investments in social and physical infrastructure. This must include incentives to stimulate private-sector investment – especially in new, environmentally-friendly technologies and labor-intensive economic activities – and collaborative industrial policy to strengthen economic diversification in developing countries.
Projections by the UN suggest that a coordinated economic-recovery agenda centered around such policies would boost annual global output growth to an average rate of 4%, and close the jobs deficit, by 2016 – a far better outlook than that implied by the current approach. Furthermore, over the medium term, higher output and employment growth would stabilize public debt/GDP ratios, which would start to fall after 2016.
To be sure, there is much to be done at the national level as well, both in the short and medium term. For example, sovereign-debt worries must be addressed, revenue systems enhanced, social-protection arrangements put in place, and financial regulation overhauled. But, even here, national action must be complemented by international coordination.
Inclusive multilateral organizations – led by the UN, together with the International Monetary Fund and the International Labor Organization – must lead by example, offering needed technical support and underscoring the benefits of global cooperation.
Prolonged economic pain is not a foregone conclusion. The international community must act together – urgently and resolutely – to face today’s challenges while laying the groundwork for a more sustainable and inclusive future for all.