New Delhi: Projecting a slowdown in global economic growth in 2011 to around 3 per cent, compared to almost 4 per cent last year, a UN agency on Tuesday said developing economies could be affected by recession in developed nations.

"The pace of global economic recovery has been slowing down in 2011... This year, world Gross Domestic Product (GDP) is expected to grow by 3.1 per cent, compared to 3.9 per cent in 2010," the United Nations Conference on Trade and Development said in a report released on Tuesday.

It said the developing economies have sustained their strong growth path, despite the recent global downturn, mainly due to domestic demand.

"However, they must face financial instability and speculative capital flows generated in developed economies and would not be spared by a new recession in the North," UNCTAD's Trade and Development Report 2011 (TDR 2011) said.

Projecting a slowdown in global economic growth in 2011, UNCTAD said private demand alone is not sufficient to maintain momentum of recovery due to high unemployment and stagnant wages in many countries.

While developing economies are expected to regain the pre-crisis growth rate of 6 per cent this year, growth in developed economies is expected to be between only 1.5-2 per cent, it said.

Regarding South Asia, of which India is a part, UNCTAD said the region is likely to be among the best performers with a growth of 7 per cent in 2011.

"Although growth in developing countries has become more and more dependent on the expansion of domestic markets, these countries face significant external risks because of economic weakness in the developed economies and a lack of significant reforms in international financial markets," UNCTAD said.

It said that emerging economies remain vulnerable to trade and financial shocks that could strongly affect volume of their exports and the prices of primary commodities, as
happened in 2008.

The report said that growth in US is likely to remain low on account of low domestic demand, stagnating wages and employment and low interest rates. The debt crisis, along with spreading fiscal austerity, is also expected to act as a drag on the global growth.

According to the TDR 2011, trade remains an area of concern, especially for the richer nations.

"In 2011, the volume of international trade is expected to return to single-digit from 14 per cent in 2010, particularly in developed economies. Recovery of trade has been faster in developing than in developed economies," it said. Regarding international commodity prices, which have seen a decline since the second quarter of 2011, UNCTAD said the fall is on account of negative sentiments of financial investors.

"The implementation of measures to reduce domestic demand in response to high commodity prices has proven to be inappropriate, harming growth without significantly lowering inflation," UNCTAD said.

According to it, wages should go up in line with productivity and said such a recourse to "incomes policy" is a more rational way to control inflationary pressures and to
support domestic demand growth.

UNCTAD moots tough market norms

Terming the current financial turmoil as a "wake up call" for the international community,
an UN agency today suggested financial reforms, including a rules-based floating currency regime and stricter market regulations, to deal with the problem.

The rules-based floating currency regime was necessary to curb "excessive speculation", said the Trade and Development Report 2011 (TDR 2011) of the United Nations Conference on Trade and Development (UNCTAD) released globally today.

It also suggested measures for restructuring of national banking systems and a stricter regulation of financial markets, including for commodity derivatives.

"The new financial turmoil should be a wake up call for the international community and its institutions. It remains imperative to address the unfinished elements in the global financial reform agenda more vigorously than has been the case so far," said the TDR 2011.

UNCTAD said that after several decades of experience it has become clear that monetary shocks, particularly in a system of flexible exchange rates, are much more significant
and harmful.

According to the report, there are two approaches for the design of a rules-based floating currency regime – under which the central bank of a country maintains a broader range
in which it allows the currency to fluctuate and beyond which it intervenes to check any greater appreciation/depreciation of the currency.

"The first principle addresses more directly the need to avoid imbalance in trade flows, while the second one is more directly related to limiting financial speculation of the kind of carry trade which typically leads to currency misaligment," UNCTAD said.

Releasing the report, economist and professor in Jawaharlal Nehru University Jayati Ghosh said that a lot of liquidity is moving into developing countries, where interest rates are high, from developed economies like US and Japan.

"This pushes up the exchange rate and damage the economies of the developing nations, making imports cheaper and making exports expensive. This is happening in Brazil currently... We need a system to control this inflow and leaving currency entirely to market forces is not good," Ghosh said.

The TDR 2011 also pointed to the volatility in the global commodities market and called for increase in transparency in physical and derivatives markets.

The UN agency also suggested that market surveillance authorities could be mandated to intervene directly in exchange trading on an occasional basis by buying or selling derivatives contracts with a view to avert price collapses or price bubbles.

It also said that financial deregulation has been one of the main factors leading to the global financial and economic crisis of 2008.

According to UNCTAD, financial deregulation led to "emergence of a large, unregulated and under-capitalised shadow banking system, while traditional banking shifted from reliance on deposit to financing from capital markets, and from lending to trading".

It, however, warned that such measures may be hindered due to provisions of international agreements like the General Agreement on Trade and Services (GATS) and bilateral
agreements between countries and provisions related to payments, transfers and financial services.