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Developed countries should take on their responsibility amid fragile global recovery

06-24-2010 08:44 BJT

NEW YORK, June 23 (Xinhua) -- World economy has crawled back from the worst economic downturn since the Great Recession, however the pace of recovery remains subdued. Developed countries should take on their responsibility and coordinate with developing countries amid the fragile global recovery.

As a result of continued high unemployment, soaring public debt, and recurrent financial uncertainty, the United Nations economists foresee lackluster growth prospects for most developed economies in the latest global economic outlook.

There is increasing concern that the substantial widening of fiscal deficits and mounting public debt could become a drag on future growth. Such concerns are present particularly in developed countries, where the average public debt-to-GDP ratio is expected to exceed 100 percent in 2010 and to move even higher thereafter.

In Europe, public finances of many developed countries, such as in Greece, Portugal, Spain and Ireland, have deteriorated rapidly due to the crisis and the policy responses.

The Greek fiscal crisis has morphed from a solvency crisis in a single country to a crisis threatening the euro zone itself. Contagion to other countries with perceived fiscal problems in the region led to a sharp widening in sovereign bond spreads, repeated downgrading of the investor ratings for these countries, and pressure for increasingly drastic fiscal consolidation program.

There is also a risk of a return to widening global imbalances if developed countries could not take coordinate efforts with developing economies

The global financial crisis and the worldwide recession have led to a recessionary adjustment of imbalances in current accounts across countries, with imports falling steeply in deficit countries (led by the United States) and export earnings collapsing in most surplus countries.

However, as the financial crisis is abating and global growth tentatively recovers, the imbalances could widen again substantially. In the major deficit countries, particularly the United States, private savings have increased as consumers have become more cautious, but not by a sufficient margin to cover widening fiscal deficits and prevent mounting public indebtedness. The external deficit is therefore expected to widen again.

The immediate challenge for policymakers will be to determine how much longer the fiscal stimulus should continue. Given the risk of a double-dip recession resulting from a premature withdrawal, the stimulus should continue at least until there are clearer signals of a more robust recovery. Substantial improvements in employment conditions and a reduction of output gaps will likely be meaningful indicators for establishing the turning point.

Urgent progress is also needed in reforming the global financial system, especially in the developed world.

The global financial crisis has further exposed major deficiencies in the international financial architecture, as well as failures of regulation and supervision at national levels. As the global economy recovers, more, rather than less, urgent efforts will be needed to spearhead reforms of international and national financial systems so as to prevent a similar crisis from recurring.

The risk of exchange-rate instability and a hard landing of the dollar could be reduced by having a global payments and reserve system which is less dependent on one single national currency.

To put the world economy on a more sustainable, more stable and more equitable growth path, developed countries need take more responsibility and coordinate with developing economies.

Editor:Xiong Qu |Source: Xinhua

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