Trade Hot Topics Issue#68 - Sustaining Recovery: The Role of Macroeconomic Policy and Trade

In 2009, the financial crisis in advanced economies turned into a global economic crisis affecting almost all developing countries. According to a World Bank (2010) estimate, the crisis caused a 2.2 per cent contraction in global output last year. The drying up of trade finance, the rise of protectionism and the collapse of global aggregate demand precipitated by the crisis contributed to a significant decline in trade flows. Thankfully, there is now evidence that the worst of the crisis has passed. Trade flows have started growing again and the International Monetary Fund (2009) estimates that global economic activity rose by 3 per cent during the 2nd quarter of 2009 and accelerated throughout the rest of the year. However, sustaining this turnaround, and preventing backsliding into recession, will require the continued use of concerted macroeconomic policy measures that have been collectively adopted in the face of the downturn. The global context for these national responses was the imperative felt around the world to avoid the mistakes which turned the financial shock of the late 1920s into the Great Depression of the 1930s. This has seen unprecedented global co-operation and co-ordination in macroeconomic policy as well as the use of novel policy instruments. Reliance on such measures will need to be gradually reduced once the recovery is solidified. In the mean time, however, policy-makers remain in uncharted territory.

This issue of Commonwealth Trade Hot Topics provides an overview of the policies adopted in response to the crisis and considers the policy options faced by different countries. For the largest Commonwealth countries which have contributed importantly to the global stimulus, managing rising debt levels, especially in the context of continuing medium term fiscal difficulties, will become an increasing challenge. For developing countries, policy options are typically more restricted – especially following the adverse impact of the food and fuel crises in 2008. The poorest countries need increased international support in the form of external financing to mitigate the impact of the crisis on the achievement of the Millennium Development Goals (MDGs). In all countries the timing of the withdrawal of macroeconomic support is of crucial importance to sustaining recovery. In small states, and other Commonwealth developing countries that are open to trade, accommodative trade policy will be necessary to secure recovery.