Global economy needs policy overhaul to move beyond sixth straight year of sluggish growth
UNCTAD press release
Unlike the usual eulogistic approaches to globalization developed by the WTO1 or the OECD, the United Nations Conference on Trade and Development (UNCTAD) gives a severe analysis of the effects of globalization on developing countries in its 2016 report on trade and development.
In a lengthy press release on the findings of this report (extract here2), UN intuition calls for a genuine paradigm shift after three decades marked by uncontrolled trade liberalization and lack of hindsight when faced with the short-termism of markets when left to themselves.
Indeed, UNCTAD is asking the poorest countries to review their development strategies by adopting a clearer position with regards the benefits and limits of integration in international trade.
Three points are particularly highlighted: i) while financial flows would allow an influx of capital to invest in developing countries, on the contrary UNCTAD has found net capital flows to poor countries have become negative ; ii) while trade openness should allow each country to find its specialization, UNCTAD notes that with integration into global value chains “the power to negotiate and set prices belongs mostly to large enterprises”; iii) while market access to developed countries and their consumers should be the engine of growth for developing countries, UNCTAD notes that apart from China, other countries are not benefiting because of austerity policies and the erosion of the middle classes in the North.
To escape this trap, the UN recommends in particular “improved policy coordination at the international level, especially among systemically important G20 countries”. The UNCTAD report is ultimately a plea for developing countries to free themselves and to add value to their own resources as did Asia who “in 2014 [...] alone represented 90% of manufacturing exports of developing countries in the world and 94% of trade in goods manufactured in the countries of the south”.
In essence, UNCTAD is asking developing countries to build their own development strategy by investing in infrastructures, protecting emerging industries and increasing domestic demand. In short, more than ever it must be remembered that development is the result of choices and political will and that we should not be waiting for the invisible hand of the market for providential help.
Momagri Editorial Board
Getting the world economy back on track requires that global leaders use bolder macroeconomic policies, strengthened regulation of finance and active industrial policies, the United Nations Conference on Trade and Development (UNCTAD) said today.
In its annual Trade and Development Report, the United Nations body argues that economic slowdown in the advanced economies is the biggest drag on global growth, but developing countries are now caught in the downdraft.
“Policymakers all around the world face a difficult combination of sluggish investment, productivity slowdowns, stagnant trade, rising inequality and mounting levels of debt,” said UNCTAD Secretary-General Mukhisa Kituyi, adding that “solutions require an ambitious rethink, not a tepid business-as-usual reaction”.
Global trade has slowed even more dramatically following a brief bounce from the depths of the global financial crisis, dropping to just 1.5 per cent this year, a full percentage point lower than world output; the Geneva-based body argues that the lack of global demand and stagnant real wages are the main problems behind the slowdown in international trade. But if policymakers fail to mitigate the negative impacts of unchecked global market forces, then a turn to protectionism could trigger a vicious downward cycle affecting everyone.
Regulate finance: Money for nothing, but investment still stuck in low gear
“Enthusiasts for efficient markets once promised that financial deregulation would boost productive investment, but this promise has not been met,” said Richard Kozul-Wright, Head of the UNCTAD Division on Globalization and Development Strategies and lead author of the report.
“Instead, rising profits coincide with increased dividends, stock buybacks, and mergers and acquisitions, but not with new plant and equipment or even research and skill acquisition,” he said.
Corporations are not reinvesting their profits into production capacity, jobs, or self-sustaining growth. Indeed, even as profit shares have risen, private sector investment is over 3 percentage points lower than what it was 35 years ago, the report finds. It argues that a reliance on monetary policy and cheap credit to stimulate recovery has reinforced this pattern.
The UNCTAD report warns that developing countries have become increasingly vulnerable to volatile global financial markets, including speculative and sizeable capital flows, and that financial deregulation in emerging economies is beginning to see corporations reduce their profit-to-investment ratios, with negative consequences for long-term economic growth. In countries such as Brazil, Malaysia and Turkey, investment-to-profit ratios have fallen sharply since the mid-1990s, the report finds.
Net capital flows to developing countries turned negative in the second quarter of 2014, with over $650 billion leaving in 2015 and a further $185 billion in the first quarter of 2016.
The UNCTAD report warns that despite a respite in the second quarter of 2016, deflationary spirals remain a risk: capital flight, currency devaluations and collapsing asset prices could stymie growth and shrink government revenues. Several commodity exporters are already facing debt distress, and without more orderly workout procedures in place, worse could follow.
Alarm bells have been ringing, in particular, over the explosion of corporate debt levels in emerging economies, which now exceed $25 trillion.
The explosion of corporate debt has also coincided with the accumulation of financial assets and the skewing of investment towards highly cyclical and rent-based sectors of limited strategic importance for catching up, such as the oil and gas sector, mining, electricity, real estate and non-industrial services.
Advanced economies can help kick-start sustainable global growth by combining proactive fiscal policy, including on infrastructure spending, with supportive monetary policy and redistributive measures too, the UNCTAD report says. Redistributive policies include income policies, minimum wage legislation, progressive taxation and welfare-enhancing social programmes tailored to local circumstances. Such policies can also lead efforts to regulate against global and corporate financialization.
Developing countries should build domestic demand, use regulation to protect themselves from the risks of financialization in their domestic contexts and protect their policy and fiscal space to manage any unforeseen shocks, the report finds.
Many of these measures will require better policy coordination at the international level, particularly among systemically important economies in the Group of 20.
Manufacturing productivity growth in the South
According to the report, catching up is not getting any easier for developing countries (table 2). Some regions, notably East Asia, have successfully boosted productivity and incomes by developing strong manufacturing export sectors. But raising the share of manufacturing in gross domestic product above 30 per cent has not been replicated elsewhere, not even in their neighbours in the South-East, the report finds (table 3).
Hausse de la productivité du secteur manufacturier dans les pays du Sud
In 2014, Asia alone accounted for 90 per cent of manufacturing exports from developing countries to the world and for 94 per cent of South–South trade in manufactures. Countries from East and South-East Asia in particular have been able to generate significant value added from their export of manufactures.
Upgraded technology or economies of scale in selective industries can offer solutions. But the spread of global value chains, where a sector’s leading firms carry significant bargaining and pricing power, makes it challenging for developing country firms to enter markets in economically consequential ways, while any productivity increases drain abroad through lower prices.