V. Jayanth

Survey recommends counter-cyclical fiscal measures

CHENNAI: A United Nations (UN) report has advocated a shift in policies by governments to ensure greater economic stability and security, given the increased threats and vulnerabilities from rising food and fuel prices facing the world today.

The UN has recommended that government respond with “counter-cyclical fiscal measures”, setting aside resources in boom times, stimulating economic activity during busts. “Such measures require effective institutional supports and additional rules for fiscal discipline and debt management,” says the World Economic and Social Survey 2008, published by the UN Department of Economic and Social Affairs.

“Pro-cyclical finance flows tend to stimulate volatility in commodity prices. The recent increase in commodity prices associated with the strong demand from China has helped exporting countries, especially in Africa and Latin America, to improve growth. But volatility in commodity prices has been and is a source of instability,” says the survey. It notes that managing commodity booms is particularly difficult, and downturns can inflict lasting damage. The recent surge in fuel and food prices is placing pressure on inflation, leading to a squeeze of household incomes.

“One step that many countries have taken to protect themselves from the volatility of financial flows and commodity markets is to set aside massive foreign reserves as a form of self-insurance. However, the fact that these savings are largely kept idle costs these countries roughly $100 billion a year,” the survey estimates. The UN has therefore recommended continuing the trend by which foreign reserves are placed in more productive sovereign wealth funds, and using them to invest directly in development projects even in other developing countries.

On the volatility in the markets, the UN economists say: “Left to their own devices, markets are not delivering the desired levels of economic security.” They advocate steps to narrow the pendulum swings of economic cycles, reduce dependence on debt and finance instruments for economic growth, tailor macroeconomic policies to development priorities, and inject new life into multilateralism.

The growing economic anxiety has been attributed to a large extent to the deregulation of trade and financial markets, which leads to a lot of economic activity but also comes with a lot of risks and strains on individuals and households, the survey explains.