World Economic Situation and Prospects 2011

The World Economic Situation and Prospects report was released recently. This is a report jointly produced by the UN Department of Economic & Social Affairs (DESA), UN Conference on Trade & Development (UNCTAD) and five UN regional commissions including ESCAP.The report deals with the global economic outlook and states that growth in 2011 and 2012 will be weak, particularly because the developed economies will drag down global recovery and continue to pose a risk for global economic stability in the near future.

While the developing countries and the transition countries will drive the recovery, growth in their case too will be moderate. Long term unemployment is expected to rise and the crisis has set back progress towards the achievement of the Millennium Development Goals (MDG).

One chapter of the report deals with international trade, according to which world trade had declined by more than 11% in 2009. Although there was a slight rebound of global output in 2010, recovery was particularly strong between mid 2009 and mid 2010. Since then, the recovery has not been marked due to the slowdown in the recovery of the world economy.

World income between 2011 and 2012 is expected to average 3.3% and world trade growth will be about 6.7%. However, as this rate of recovery does not make up for the cumulative losses of income and trade during the global crisis, such losses are expected to be permanent and therefore recovery will be protracted and import demand is expected to be depressed for several years.

The report confirms what is now accepted globally, that the emerging economies of the developing world will be the global leaders in the world economy and in international trade.

During 2010, international demand for consumer durables and investment goods was back up to near pre-crisis levels while demand for intermediate and primary commodities is still below pre-crisis levels. Developing countries have been in the forefront in the global recovery in international trade, which is in line with their strong expansion of trade.

By September 2010, the trade volume of the developing countries as a group had already surpassed the pre-crisis peak of April 2005 while the developed countries’ trade fell behind. The developing country share in global trade increased from about one third to more than 30% between 2008 and 2010.

Primary commodity prices have fluctuated strongly as compared with prices of manufactures. While primary commodity exporting countries benefited the most from the turnaround in terms of trade, they also suffered from price falls during the crisis. Countries that are net food importers and don’t export oil or mining products suffered a slight deterioration in their terms of trade during 2010.

The countries in transition such as Western Asia saw a significant rebound in their terms of trade after suffering losses due to a fall in primary commodity prices. Predominantly, manufactured exports in East and South Asia saw a stagnation or slight decline in terms of trade in 2010 after a modest improvement during the recession, which was due to greater export diversification.

Broadly, terms of trade indices returned to 2007 levels and the present level seems to be in line with the upward trend in primary commodity prices. Manufacturing prices have been pushed down by the fast economic growth in the economies in developing Asia through the vast expansion of a range of low priced industrial products.

Future trends seem uncertain due to the high degree of financialisation of commodity markets and the influence on prices of speculative investments in commodity futures markets and the uncertainty about global economic recovery. Countries dependent on primary commodities experience greater shocks –both positive and negative – than those with diversified economies with reliance on manufactures.

Prices in the non oil commodity sector have seen a seesaw effect with declines and recoveries. The second half of 2010 saw a rise in prices due to rising demand in emerging Asian economies, replenishment of industrial inventories in developed countries, the depreciation of the US dollar amidst greater exchange rate volatility and increase in interest from financial investors in commodity markets. Influence of the last two factors signal greater uncertainty about future price dynamics for non oil commodities.

Due to the diversification of land for oil seed and vegetable oils for use in bio fuel production encouraged by government subsidies, future prices of food crops that could alternatively be useful for bio fuel production could remain linked to the evolution of prices. Brazil, China, EU and India have all set targets to increase the production crops for bio fuels.

Subtle and not so subtle Non Tariff Measures (NTMs) are being erected under various permissible pretext such as protecting health and environment. The majority of NTMs are in technical barriers to trade such as technical regulations and standards and sanitary and phytosanitary measures.

The need for developing countries to diversify exports in order to cushion themselves from major shocks, soaring food prices in the future due to diversification of land for crops to be grown for the use of bio fuel and increasing use of protectionist measures which are NTMs which would reduce exports, particularly to the developed countries, are some salient points in the report’s section on international trade which would be of importance to countries such as Sri Lanka.

(Manel de Silva holds an Honours Degree in Political Science from the University of Ceylon, Peradeniya and has engaged in professional training in Commercial Diplomacy at ITC and GATT. She has served as a trade diplomat in several Sri Lankan Missions overseas and was the first female Head of the Department of Commerce as Director General of Commerce.)