Fiscal austerity not better, second global recession on the brink – UNCTAD

Due to sluggish private demand, several advanced economies are hovering on the brink of a second bout of recession, says a policy brief note prepared by the United Nations Conference on Trade and Development (UNCTAD) December 19, 2011.

Despite this threat UNCTAD indicated that yet many of these countries’ political attention has turned to ways to cut fiscal deficits and reduce the domestic public debt.

“This has created a dangerous accumulation of risks for the world economy,” said the policy brief e-mailed to

According to the UN trade agency, the private sector can only successfully deleverage (i.e., reduce its debt) if “someone else is willing to take on higher debt and support demand.  If the private and the public sectors try to deleverage simultaneously, they must either find debtors elsewhere, or the economy will tailspin into a depression.”

The brief highlighted that high unemployment is a more pressing problem now than fiscal imbalances, adding “fiscal austerity in the current environment will make matters worse and not better.”

As the developing world is both unable and unwilling to accept the role of debtor of last resort, the brief notes that “dangerous pressures are building up.”

Unless there is a rapid policy turnaround, the world is in danger of repeating the mistakes of the 1930s, it warned.

UNCTAD opined that in today’s highly integrated global economy, the contractionary contagion will affect all countries and that emerging and developing economies need to prepare contingency plans.

Recalling a mess during 2011, UNCTAD said most advanced economies either suspended or reversed the expansionary policies that had helped to avert the worst symptoms of the global economic crisis.

Several governments hoped to bring about an “expansionary contraction” where fiscal restraint would improve private sector confidence and foster a wave of private investment and consumption demand, it adds.

These hopes, UNCTAD argues are rapidly waning as new data points unambiguously to a fully-fledged recession in key advanced economies in 2012.

The pain has brought no gain, observed the brief.

UNCTAD and others had warned early on that “expansionary fiscal contraction” was wishful thinking at best.

By Ekow Quandzie

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