Otaviano Canuto's blog

The volatility in commodity prices continues. Sure, they have come down in the last few days on Eurozone crisis fears but, all in all, they remain volatile, and in the case of food, very high. One of the reasons for this is that world commodity markets–particularly those for agricultural commodities—have become highly distorted.

“So what?” you may ask. Well, distorted price levels and excess price volatility are detrimental to producers and consumers alike. In particular, expensive food has a negative impact on the poor as they tend to spend more than half their income to feed themselves. As a result, price distortions can pose a serious threat to development.

Despite the wave of liberalization that has swept world trade since the 1980s, price distortions in agricultural commodities persist, according to “Reducing Distortions in International Commodity Markets,” the latest edition of the World Bank’s Economic Premise note series. These distortions are not only caused by trade policies, such as export and import rules, but also by imperfect competition, the existence of monopolies, and policies related to the private sector.

The issue is particularly relevant as the use of export restrictions is expected to increase amid high rates of economic growth in emerging markets, which generates greater demand for food products and raw materials.

Trade logistics, or the capacity of countries and companies to ship goods to international markets, is a key ingredient for economic competitiveness, growth, and poverty reduction. Poor logistics performance creates a deadweight loss for producers and consumers alike, and results in a net waste of resources. Improved trade logistics, on the other hand, would give a welcome boost to the economy at a time of fragile recovery from the global recession. Unfortunately, reality has not bared this out.

The World Bank’s latest survey on trade logistics released today, Connecting to Compete 2012: Trade Logistics in the Global Economy, shows that a gap between the performance of rich and poor countries continues. And not only that--the convergence trend experienced between 2007 and 2010 slowed down over the last two years as the global recession and the European debt crisis shifted attention away from logistics reform.

With Singapore as the top performer among the 155 economies included in the Logistics Performance Indicators (LPI), which are part of the report, high income economies dominate the top rankings. The worst logistics performers are the poorest ones. Nevertheless, there were many countries that increased their ability to ship goods, both developed and developing, like Chile, China, India, Morocco, South Africa, and Turkey. For its part as well, the U.S.

First, the good news: The world has become considerably less poor. Today, 43 percent of people are considered to be living in poverty—that is, living on less than $2 per day—compared to 30 years ago when almost three-fourths of the developing world was doing so. Even more heartening is that extreme poverty—that is, living on less than $1.25 per day to meet the most basic human needs—has declined even more. In fact, the share of those living in this state has fallen by more than half, from 52 percent in 1981 to 22 percent in 2008.

Now, the bad news: Despite the substantial declines in global poverty, 2.5 billion people are still living in poverty (below the $2/day line), and 1.3 billion still are living in extreme poverty (below the $1.25/day line). What’s more, despite a reduction in international income inequality between countries, significant income disparities among citizens seems to remain unchanged on a global level, due in part to increased income disparities within newly emerging economies. But as long as poverty is falling around the world, should we even worry about income inequality?

Indeed, we should. Even if incomes are growing for everyone, persistent inequality should concern policy makers when perceptions of “unfairness” lead to political instability, when income inequality limits the potential for future growth and poverty reduction, and when inequality harms people’s opportunities and welfare.

One of the most distressing aspects of the frail economic recovery from the global crisis has been lagging job creation. In developed and developing countries alike, millions of people remain unemployed (some 200 million by ILO estimates), and many who still have jobs live in fear of losing them or seeing their incomes and benefits stagnate. Fortunately, the worst may be over in several parts of the world. While the labor market in developed countries like the U.S. keeps improving, many developing countries are actually doing better despite the sluggish economic growth.

According to the new edition of Job Trends, released by the World Bank today, labor markets in developing countries have continued their gradual recovery despite slower growth in the fourth quarter of 2011 –the latest period for which we have data on GDP growth, unemployment, wage growth and employment growth for our sample of 24 countries.

Eastern Europe and Central Asia pretty much led the way, with unemployment falling to 6 percent from 6.7 percent in the fourth quarter of 2010, and wages increasing by 8.3 percent. Lithuania, for instance, continued its strong recovery from the financial crisis with a strong rise in employment, while increased economic growth in Turkey, and to a lesser extent, Russia and Armenia, led to sizable declines in unemployment and increased wage growth.

In Latin America and the Caribbean, unemployment fell and wages increased as well. In Mexico, one of the most affected countries by the global crisis, workers benefited from accelerating employment and wage growth, as well as reduced unemployment, which dropped to 4.8 from 5.3 percent a year earlier.

Perhaps it is not surprising that trade with emerging economies is often more complicated, time consuming, and costly than one would want. In addition to lacking some of the necessary physical infrastructure to transport goods, emerging economies frequently have complex and opaque regulatory requirements that create additional delays and increase transaction costs at their borders. According to data provided by Doing Business, it takes three times as many days, nearly twice as many documents, and six times as many signatures to import goods in poor countries than it does in rich ones.

For developing countries, such delays undermine their competitiveness as they increase the cost of exports and reduce the reliability of supply. To remedy this problem, governments and development professionals have supported trade facilitation reform to improve border management procedures. However, despite agreement that border management regimes need to be improved, there is little effective guidance available for those charged with implementing reforms. Key questions need to be more fully answered, such as how to identify the main reform priorities, how to secure genuine political commitment, and which institutional structures are the most appropriate.

In over 70 countries, from financial centers in Malaysia to the Middle East, Islamic finance has been growing rapidly around the world. In fact, Shariah-compliant financial assets have increased from about US$5 billion in the late 1980s to about US$1 trillion in 2010. Even more impressive is that this class of financial instruments appears to have avoided many of the worst effects of the recent crisis, making it an increasingly attractive investment vehicle.

Given its rapid growth and relative stability, are there lessons we can garner from Islamic finance? Three years after the onset of the global financial crisis—as regulators are still grappling with how to deal with predatory lending practices, opaque derivatives, and overly leveraged financial institutions—can Shariah-compliant finance challenge our notion of conventional banking?

Perhaps it can. By and large, Islamic finance relies on the core principles of Islam concerning property rights, social and economic justice, wealth distribution, and governance. Two of its main tenants are the prohibition of interest on debt in any form and the removal of ambiguous contracts to enhance disclosure and proscribe deception. Among its other key precepts is a commitment to back all financial contracts by assets and activities in the real economy, as well as an emphasis on the principles of morality and ethics in conducting business.

According to the most recent Economic Premise, authored by World Bank Managing Director Mahmoud Mohieldin, these underpinnings have generally helped Islamic banks escape some of the worst effects of the 2008 financial crisis.

The recent IMF recommendation for a second aid package to Greece—amounting to 28 billion Euros over the next four years—helped push through the biggest sovereign debt restructuring in history, after Greece got private investors to forgive more than 100 billion Euros in debt. The IMF decision, announced by Christine Lagarde late last week, also marks yet another chapter in the ongoing saga of the European sovereign debt crisis. From the seats of distressed national governments in Athens, Dublin, and Lisbon, to the European Central Bank in Frankfurt and the European Financial Stability Facility in Luxembourg, European leaders continue to grapple with getting sovereign debt levels under control, restructuring balance sheets, and cutting spending.

The IMF’s second aid package to Greece came three years into the Euro area sovereign debt crisis, as investors continue to shun periphery government bonds, European Banks remain under severe funding pressures, and as the Euro area faces an anemic growth outlook. According to the World Bank’s Global Economic Prospects report released in January of this year, the Bank has lowered its growth forecast for 2012 to -0.3 percent for the Euro Area, down from its June estimate of 1.8 percent growth.

On the face of it, prospects look bleak. But according to the most recent Economic Premise, there may be hope for Greece and other countries riddled with high levels of sovereign debt.

As we mark International Women’s Day this week, let’s not be complacent. Over the past century, we have come a long way in increasing women’s voice, participation, and agency in societies around the world. Unfortunately, as the effects of the financial crisis continue to be felt and other political developments take place, there is increasing concern that the progress we have made is in jeopardy of taking a back seat to “more urgent” problems.

If you don’t believe me, just take a look at the headlines. Or replay the World Bank’s special event we held on Monday on women’s rights and the Convention on the Elimination of All Forms of Discrimination against Women (CEDAW). As expressed by the panelists, Facebook posts, and countless live tweets, there is real worry that the progress being achieved, especially on women’s human rights, could be reversed.

Take the global economy, which is still fighting its way back from collapse. From the talks of strengthening the Eurozone to the struggles of creating more jobs, where are the high-level discussions or efforts to help women recover from the economic downturn? Although male workers were in many cases more affected by the crisis than women, there is evidence that female employment is growing at a lower rate than men’s. On the political side, some countries where elections are taking place are questioning the role of women in society--even in places where gender equality had been taken for granted.

In a world in economic turmoil, calls for greater fiscal austerity, leaner social entitlements, and smaller government expenditures are seemingly ubiquitous. From the United States to the Euro Zone, the size and role of government are being questioned. Yet, at the same time, the recent financial crisis has highlighted the importance of the state as a regulator of the financial system. Just think about who was needed to step in to protect “too big to fail” financial institutions, extend social protections to the most vulnerable, and preserve the stability of the financial system at a time when no one else could?

Beyond these fluctuations in public opinion about the role of government, there is more the state can do to help drive post-crisis growth. In addition to its role in regulating financial systems, the state can play a very vital role as an investor in the knowledge economy by supporting policies and making investments that catalyze both market and firm growth. For example, government intervention in higher education is a primary area for enhancing growth, as a laissez-faire economy will tend to generate too few of these investments. Another example is in climate-change policy, where government can have a role in redirecting technical change to support green growth.

Another key area in which the state can intervene in the post crisis world is to serve as a guarantor of the social contract at a time when coping with the social costs of the crisis and creating jobs must go in tandem with reducing indebtedness. In the context of weakening public finances, tightening credit, and surging global imbalances, this pact must allow the state to manage the public deficit, while ensuring social peace and avoiding strikes and protests.

The state of the global economy is now more troubled than what most pundits had predicted. The great recession of 2007-09 has left permanent scars and the global recovery has lost steam. In the industrialized world, the Eurozone is struggling to save its common currency and avert an even larger debt crisis. Across the Atlantic, although things are looking slightly better, the United States still faces damaged household balance sheets, depressed consumption, and persistent unemployment.  In the developing world, the remarkable role that emerging markets have played as alternate engines of global growth is no longer certain. And this is truly worrisome because in the years that followed the recession, developing countries came to the global economy’s partial rescue, helping advanced economies from slipping into an even deeper recession.

In 2010 and 2011, developing countries grew 7.3 and 6 percent respectively, compared to the 3 and 1.6 percent growth of high-income countries, according to the World Bank’s latest Global Economic Prospects. Nevertheless, growth in several major developing countries like Brazil, China and India is significantly slower than earlier in the recovery, mainly reflecting a tightening of monetary policy to combat rising inflationary pressures but also the low-growth path in advanced economies. As a result, developing countries are now expected to grow only 5.4 percent this year.