As the Special Joint Committee in the U.S. Congress discusses spending cuts to reduce the deficit, a new United Nations report warns such fiscal tightening measures “only addresses symptoms of the problem,” leaving the basic causes of fiscal deficits and high public debt ratios unchanged.
According to the Trade and Development Report 2011 of the U.N. Conference on Trade and Development, which focuses on postcrisis policy challenges in the world economy, the replacement of stimulus packages with fiscal austerity measures by developing countries and with weak domestic demand may actually halt economic recovery.
By contrast, developing countries have resumed their precrisis economic expansion trend and are sustaining their growth mainly because of a strong domestic demand.
In developed economies, the report notes that private demand alone has not been sufficiently strong to maintain the momentum of recovery from the economic crisis. Unemployment remains high and wages are stagnating.
The UNCTAD report warns a new recession in richer countries will have a negative impact on developing countries.
The report’s findings are based on economic growth trends in the United States, Europe, Asia, Central America and the Caribbean, and sub-Saharan Africa.
It concludes: “Higher public debt ratios are a consequence of the crisis, not its cause…fiscal policy that supports growth is more likely to reduce fiscal deficits and to curb public debt ratios than a restrictive one.”
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