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UN Says Austerity Won't Boost Global Economy

Heiner Flassbeck, UNCTAD Director of the Division on Globalization and Development Strategies, speaks during a press conference about the Report on the Global Economic Crisis at the United Nations in Geneva, Switzerland, March 18, 2009.
A new United Nations report warns fiscal austerity measures have not - and will not - lead to global economic growth.

Heiner Flassbeck is a director at the U.N. Conference on trade and Development (UNCTAD), which issued the report. For him, the debate over austerity versus stimulus is over.

“Stop austerity,” said Flassbeck, who runs UNCTAD's Division on Globalization and Development Strategies.

Flassbeck says austerity is clearly the wrong way to go to promote growth. He notes private companies in Europe, Japan and the United States are saving their money and not spending because they fear the future economic outlook will continue to be bad.

“They have no expectation that their income will rise," he said. "So, if everybody saves, and the government says we are doing austerity so we are going to be savers also. So, what is going to happen?

"The result is very simple, the economy will collapse," Flassbeck said. "The only way out of the slump and to avoid a recession is more stimulus. If we do not get incentives for investment, if we do not get stimulus for investment and if we do not get better conditions for consumption, and if governments are going on with austerity, the situation can only deteriorate.”

But not everyone agrees with the UNCTAD conclusion. Terry Miller, director of the Center for International Trade and Economics at the Heritage Foundation, a conservative research group in Washington, says the U.N. agency is considering a "false question" about austerity or stimulus.

Miller says the austerity measures adopted by some governments, particularly in Europe, are designed to reduce sovereign debt, not inhibit economic growth. He says that reduction of such debt in turn cuts the borrowing costs for governments to finance their operations, as well as for private interests in regional economies to grow their businesses.

He says that "sensible policies" of government austerity "let the private sector get back to the job of investment and job creation." He said countries "that have spent more have had lower rates of growth."

The UNCTAD report, however, warns that growth is slowing in all regions of the world. Global growth fell from more than four percent in 2010 to 2.7 percent last year. And UNCTAD expects a further decline to below 2.5 percent in 2012.

The report says economic expansion in developing and transition economies is expected to grow by five and four percent respectively in 2012. Although this is stronger than in the advanced economies, it notes those growth rates are also slower than previous years.

UNCTAD economists explain developing countries are doing better because they are less dependent on the large economies than they used to be, and they have more resilient domestic demand.

The report criticizes governments for following wage-compression policies. Flassbeck says the data show lowering people's wages has done nothing to bring down the rates of unemployment. He says governments must reverse these policies.

“Only the government can overcome this situation where the market gives the wrong signal. Markets give the wrong signal that wages should fall further," he said. "But, if wages should fall further, you can be sure that consumption will be falling. When consumption falls, investment falls and then growth falls.”

UNCTAD economists predict there will be no significant recovery from the recession until low-and middle-income groups earn enough money to spend on consumption. They argue that reducing the widening gap in wealth and income is not only fair, it also has social benefits and will lead to higher economic growth.

**The original version of this story was presented with only one side of debate, the updated version reflects another viewpoint.