PROMINENT Harvard economist Robert Lawrence has painted a gloomy picture of prospects for the global economy, predicting a much longer and deeper slump than is generally expected.
SA’s position was particularly vulnerable, Lawrence said. With a gaping current account deficit, SA was already in deep trouble before the financial crisis. That position would be compounded by the severe slump in commodity prices, which are set to fall even more.
The government’s infrastructure development programme and the sharp decline in the value of the rand would help offset some of the pain, but this could be cold comfort in a global environment where exports markets have frozen up, Lawrence believed.
“A decrease of 30% in the value of the currency is equal to a tax of 30% on imports and a subsidy to all exports of 30%. But that is not a solution if the world out there isn’t buying,” he said.
Lawrence, who was part of the Harvard group which advised the government on the economy, was speaking at a conference organised by trade and industrial policy think tank TIPS.
He said the boom period since the start of the millennium had been driven by unprecedented rises in commodity prices on the back of an insatiable appetite for commodities in China and India; huge export-led growth driven by consumption in the west; and a systemic discounting of risk which led to increased investment in the developing world. But the financial crisis has ushered in the dusk of that period and developing countries in particular are vulnerable in the new world order.
With commodities nowhere near levels seen as recently as 2005, Lawrence believed prices would slump some more.
Investors have taken flight from developing countries and there has also been a rapid and sharp decline in export markets — regressions which all threaten the stability of emerging economies in particular. Compounding the effect on Africa, the continent would also see a drop-off in remittances and development aid flows.
Lawrence said emerging economies were also vulnerable to some of the elements in fiscal stimulus packages being implemented by developed countries.
While countries have committed themselves to playing within the rules, he noted that there were loopholes in World Trade Organisation regulations. Developing countries, for instance, are not signatories to an agreement on procurement, which meant the US — with its planned “buy local” campaign — could discriminate against them.
Moreover, there was wriggle room to increase subsidies and push up tariffs, and for tit-for-tat protectionism.
“There is a lot of room for concern,” said Lawrence.
Source : businessday.co.za
He said the conclusion of the Doha round on a new multilateral trade pact was imperative.