Fiscal policies important for growth, says UNCTAD

Fiscal policies important for growth, says UNCTAD

On April 17, 2024, the UN Trade and Development (UNCTAD) warned of further growth deceleration in 2024, citing falling investments and subdued global trade dynamics. UNCTAD Secretary-General called for coordinated multilateral efforts to address the asymmetries of international trade and market concentration, while underlining that borrowing countries need more fiscal flexibility to reach the Sustainable Development Goals (SDGs). UNCTAD has also said that monetary policy alone cannot provide solutions to key global challenges, pointing to the ongoing crises linked to sovereign debt, ever-growing inequalities, and climate change. With the world becoming smaller and events in one part of the world hampering another, Bhutan is also affected by the dynamics of global economy. Thus, UNCTAD’s mention of the importance of fiscal policy has its bearings on Bhutan, too.

An economist based in Thimphu said that fiscal policies can foster growth and human development through a number of different channels. These avenues encompass both macroeconomic dynamics, such as the impact of budget deficits on growth, and microeconomic factors, affecting the efficacy of resource allocation, he said.

“Beyond the immediate repercussions of fiscal policy on macroeconomic equilibrium, the tax, expenditure, and financing strategies wield significant influence on long-term growth trajectories. At the microeconomic level, taxation introduces distortions into private actors’ choices regarding savings and investment, potentially reshaping the economy’s growth trajectory,” he added.

Explaining further, he mentioned that within expenditure frameworks, various categories and policies wield considerable sway over long-term growth trajectories. “Emerging insights from endogenous growth theory indicate that fiscal policy can either catalyze or hinder economic expansion by influencing investment decisions in both physical and human capital,” he said, adding that heightened allocations toward education, healthcare, infrastructure, and research and development hold the potential to ignite sustained growth over time. “This upward momentum generates enhanced fiscal resources, thereby reinforcing investments in human capital and fortifying economic vigor,” he said.

Explaining the intricate interplay between external debt and economic dynamics, he said that broadly, studies suggest that foreign borrowing exerts a positive influence on investment and growth, up to a certain threshold. “However, beyond this tipping point, its impact becomes detrimental. Additionally, discussions abound regarding the constraining effects of exorbitant interest obligations on debt, including domestically held debt, which often curtails productive expenditure by nations,” he said.

Furthermore, there exists significant discourse on whether public spending fueled by foreign assistance effectively fosters growth in developing nations. Evidence suggests that aid contributes to growth in environments characterized by sound policies, he said.

Meanwhile, UNCTAD has also warned of rising protectionism, trade tensions and geopolitical uncertainty, saying that these risks not only hamper economies, but also imperil concerted multilateral solutions at a time when international trade collaboration is needed more than ever.

It has further highlighted that many developing countries are grappling with significant debt and development challenges at a time of declining aid flows.

In 2022, nearly half of the surveyed developing nations for which data is available, experienced negative net transfers on public and publicly guaranteed debt. Outflows to external creditors, including bilateral, multilateral, and private lenders, surpassed incoming disbursements by almost $50 billion, an amount equivalent to the GDP of several countries combined.

UNCTAD says that even as some developing countries recorded strong bond issuance in the first months of 2024, uneven and costly market access persists.

“The current debt crisis is rooted in structural issues, arising from sluggish economic growth, widespread tax avoidance, commodity dependence, and the cost of climate change,” it has underlined, calling

for a stronger global financial safety net and the establishment of efficient multilateral frameworks for resolving sovereign debt issues.

The other issue highlighted is food prices, which UNCTAD has said continue to rise, in developing countries, hurting low-income households.

“In line with the global commodity cycle, food prices measured in dollars have partly declined, yet domestic prices continue to rise in many developing countries, aggravating the cost-of-living crisis faced by low-income households,” it says.

It has identified several factors contributing to the rise in global food prices and also harming many producers in developing countries. These factors include the significant concentration within global food value chains, stricter standards imposed by importing nations on food products, and the growing influence of finance on commodity markets.

Food insecurity persists as an acute concern across developing countries. If current market trends persist, some 600 million people would be chronically undernourished by 2030, according to projections by the UN Food and Agriculture Organization.

By Ugyen Tenzin, Thimphu