The United Nations Conference on Trade and Development (UNCTAD) advised developed nations like the United States to refrain from implementing aggressive monetary policies like interest rate hikes in a new report that warns of an impending global recession.
A global recession is imminent if the central banks of developed countries — like the Federal Reserve in the United States — continue policies of “monetary and fiscal tightening,” according to the annual report from the United Nations agency. Instead, the agency suggests that central governments engage in “a pragmatic strategy, including price controls” and to implement tighter commodity market regulation.
Founded in 1964, UNCTAD prioritizes the needs and interests of developing countries as part of its central mission. “This year’s interest rate hikes in the United States,” according to the report, “could cut $360 billion of future income for developing countries (excluding China).”
UNCTAD, which issued it’s annual trade and development report on Monday, stated its findings indicated that the current course set by the central banks in advanced economies threatens to push “the world towards global recession and prolonged stagnation, inflicting worse damage than the financial crisis in 2008 and the COVID-19 shock in 2020.”
A press release that accompanied the report cautioned that using aggressive interest rate hikes as a means to anchor inflation comes with significant risks. The report argues that “any belief that they will be able to bring down prices by relying on higher interest rates without generating a recession is, the report suggests, an imprudent gamble.”
Prospects are worsening, with growth in 2023 expected to decelerate further to 2.2%, leaving real GDP below its pre-pandemic trend by the end of next year and a cumulative shortfall of more than $17 trillion — close to 20% of the world’s income.
The synchronized slowdown is hitting all regions but is ringing alarm bells for developing countries, where the average growth rate is projected to drop below 3%, a pace insufficient for sustainable development, further squeezing public and private finances and damaging employment prospects.
“The real problem facing policy makers is not an inflation crisis caused by too much money chasing too few goods, but a distributional crisis with too many firms paying too high dividends, too many people struggling from paycheck to paycheck and too many governments surviving from bond payment to bond payment,” said Richard Kozul-Wright, Director of the Globalisation and Development Strategies Division in UNCTAD, the division that authored the report.
The number of countries reporting double-digit inflation increased dramatically between 2021 and 2022, according to the report which highlighted how the rising cost of borrowing upturned capital flows, sending the developing world further into debt and some into default.
UNCTAD criticizes the response from central banks, comparing their strategy to the “disastrous” methods used in the early 1980s, which the agency accuses of slowing economic growth in the developing world and of increasing inequality and poverty as a result.
“But this also serves as a reminder that the most critical problems faced by the global economy today predate the war in Ukraine,” the report says — a position largely at odds with the Biden Administration which blames the economic crisis on Russian President Vladimir Putin.
“The burning question concerns the political will. The experience of the last four decades does not give much room for hope. Worse still, the accumulation of policy failures during the period have eroded the initial conditions for a sustained and equitable recovery so much that even with the best of policy efforts, the results are not likely to be sufficient to avert systemic economic, social and environmental failure.”
