“The world stands on the brink of a double-dip recession and a ‘lost decade’ for many countries,” according to a year-end policy brief by the UN Conference on Trade and Development (UNCTAD). 

The report noted that developed nations attending the G-20 summit in Cannes (November 3-4) recognized this but have nevertheless continued with austerity policies that “point precisely in the wrong direction.”  If such measures continue, UNCTAD warned, Europe will plunge into full-fledged recession in 2012 while the best that the US and Japan can look forward to is a period of stagnation.

UNCTAD economist Heiner Flassbeck accused governments around the world of ignoring the lessons of the 1930s when it was widely accepted that the second downturn of 1937-38 “was induced in part by the decision to tighten up fiscal policy too early in the recovery.”  Flassbeck warned that the same scenario risks being repeated today if new policy approaches are not taken.

First and foremost, the UNCTAD brief recommends that “countries threatened by recession and deflation should avoid intensified austerity measures. Instead they should implement measures to increase domestic demand and employment."  This could be done, the UN organization says, by seeing fiscal policy as a tool for growth and development much as the corporate sector does. Instead of asking whether deficits are too big, countries should consider how they could be used to stimulate the economy.

In other words, an expansionary fiscal policy could boost consumer demand and employment by directly stimulating public investment, which would in turn lead to increased private investment. “Social spending in such areas as unemployment benefits, health and housing can also be seen as promoting recovery as they sustain consumption,” the report recommends. Similarly it notes that “tax cuts that benefit lower income households can have a stronger impact on aggregate demand than cuts aimed at high-income households.”

The problem with using deficit cutting measures to regain market confidence, according to Flassbeck, is that governments are simply too big. “They are just too big to cut their expenditure and expect that their revenues will remain as they were before. They will not… Revenues will fall and with falling revenues you will see that you cannot reduce a deficit. And if you cannot reduce a deficit, you cannot regain confidence. So, the whole idea is flawed from the very beginning.”

Finally, the report noted that developed countries cannot expect emerging nations such as Brazil and China to save the day, because if the US, Europe and Japan (which represent 70% of the world economy) all slow their growth at the same time, emerging nations will follow suit.

(Photo © Heiner Flassbeck, UNCTAD Director of Globalization and Development Strategies)