The Trade and Development Report 2011 focuses on the post-crisis policy challenges in the world economy. It concludes that the recovery is slowing down and that the "two-speed recovery" is mainly the result of wide differences in domestic demand. In developing countries strong wage growth and sustained public support have prolonged the recovery in investment and domestic demand whereas in most developed economies private demand is subdued due to stagnating wages and little improvement in employment. The recent shift towards fiscal and monetary tightening represents a major risk for the global economy.

The Report questions whether policymakers have drawn the lessons from the global financial and economic crisis. It shows that the widespread enthusiasm about system reform and supportive pro-growth macroeconomic policies when the crisis erupted has not lasted. Financial regulation reforms are progressing slowly and monetary system reform is limited.

Challenging the widespread re-orientation of macroeconomic policy, especially fiscal policy, towards austerity, the Report notes that fiscal imbalances were not a driving factor but a result of the crisis. Thus, fiscal retrenchment is not an appropriate response. Fiscal austerity seeking to cut fiscal deficits, curb public debt and thus "regain the confidence of the financial markets" is likely to be self defeating, as it affects GDP growth and reduces fiscal revenues.

The Report addresses the main regulatory reforms that should take place in relation to financial markets. So far, the process of re-regulation of the financial systems has been slow and inadequate to cover the shadow banking system and to cope with a highly concentrated financial sector that is dominated by a small number of gigantic institutions. In general, the financial sector needs to be restructured in order to reduce the risk of mis-pricing and the resulting systemic crises. Reforms should mainly aim a clear separation between the activities of investment and commercial banking.

Financialisation of commodity markets based on herd behaviour significantly affects the prices of such basic goods as food staples and energy. The Report proposes measures to increase transparency in physical and derivatives markets, putting in place an internationally coordinated tighter regulation of financial investors, and it suggests that market surveillance authorities could be mandated to intervene directly.

The Report finally underlines that the foreign exchange markets are disconnected from macroeconomic fundamentals. This disrupts the functioning of the real economy. Greater stability of the real exchange rate could be achieved by a system of rules-based managed floating. Such a system could be built on the adjustment of nominal exchange rates to inflation differentials or to interest rates differentials. This can be practiced as a unilateral, bilateral or strategy, but the greatest benefit for international financial stability would result if the rules for managed floating were applied at the multilateral level.

This report was published by the United Nations Conference on Trade and Development