Developing and transition economies need to move towards more balanced growth and give a greater role to domestic demand in their development strategies, a new UNCTAD report contends.
The Trade and Development Report 20131 (TDR13), subtitled “Adjusting to the changing dynamics of the world economy,” cautions that a prolonged period of slow growth in developed countries will mean continued sluggish growth in their imports. Developing and transition economies can compensate for resulting growth shortfalls through countercyclical macroeconomic policies for some time, the study says. But in the longer term, policy makers will need to reconsider development strategies that have been overly dependent on exports. Instead, the report says, development strategies should place a greater emphasis on the role of wages and the public sector in the development process. The TDR was released today.
Prior to the Great Recession, buoyant consumer demand in some developed countries enabled the rapid growth of manufactured exports from industrializing developing countries which, in turn, provided opportunities for primary commodity exports from other developing countries. The overall expansionary – though eventually unsustainable – nature of these developments boosted global growth. The boom also seemed to vindicate developing and transition economies in adopting an export-oriented growth model. However, such a model is no longer viable in the current context of slow growth in developed economies, the report warns. To address the prospect of a prolonged period of considerably slower export growth, policymakers need to give greater weight to domestic demand.
Moving towards a more balanced growth path could, on a sustained basis, compensate for the adverse effects of slower-growing exports to developed countries. Moreover, it could be pursued simultaneously by all developing and transition economies without the “beggar-thy-neighbour” effects and the contractionary wage and tax competition inherent in export-led strategies, the TDR notes. Indeed, if many developing and transition economies simultaneously give domestic demand a greater role in their growth strategies, their economies could become markets for each other, fostering regional and “South-South trade,” and thus further growth for all. Hence, shifting the focus of development strategies to domestic markets does not mean minimizing the importance of the role of exports. Exports could actually expand further if several trade partners were to achieve higher economic growth at the same time. In that context, natural-resource-rich countries may be able to continue to benefit from historically high commodity prices. But they should ensure that the resulting revenues are used for investing in new activities that enable production and export diversification, the report advises.
The study warns that there are challenges to such shifts in growth strategies. Developing countries’ insufficient market size is often cited as a reason why domestic-demand-oriented growth is not viable. But recent projections on the growth and composition of the “global middle class” suggest that some of the most populous developing and transition economies may now have the rising household consumption needed to compensate for a major part of any decline in export demand from developed countries. The study underlines, however, that to realize this sales potential, policymakers must boost domestic purchasing power and achieve an appropriate balance between increases in household consumption, private investment, and public expenditure. The specifics of this balance depend on the circumstances of individual countries. But in general, striking the balance will require a new perspective on the role of wages and the public sector.
The Trade and Development Report recalls that export-oriented strategies emphasize the cost aspect of wages. Indeed, wages have lagged behind productivity growth in most countries in recent decades. By contrast, a strategy giving a greater role to domestic demand would emphasize the income aspect of wages, as it would be based on household spending as the largest component of domestic demand. Employment creation combined with productivity-oriented wage growth should create sufficient domestic demand to fully take advantage of growing productive capacities, without having to rely on continued export growth. Some developing countries have recently tried to boost consumer spending by easing access to consumer credit, but the study warns that such an approach can lead to excessive debt and household insolvency, as amply demonstrated by recent experiences in a number of developed countries.
The report contends that the public sector can further boost domestic demand by increasing public employment and undertaking investment. Moreover, changes in the tax structure and the composition of public expenditure can shape the distribution of purchasing power towards those income groups that spend larger shares of their incomes on consumption. Increased aggregate demand from household consumption and the public sector would provide an incentive to entrepreneurs to invest in increasing real productive capacity.
Investment decisions could be further supported by industrial policy, the TDR notes. This would aim at making the sectoral allocation of investment better match the newly emerging patterns of domestic and regional demand. Local enterprises in developing countries may already have an advantage over foreign ones in catering to the new demand patterns emerging in their countries and regions. They have better knowledge of local markets and local preferences and can more easily develop appropriate new products and distribution networks. Thus, they could prevent the rise in domestic demand from causing excessive trade deficits.
In the case of countries heavily dependent on commodities exports, the study advises a careful evaluation of future developments in export earnings to determine if commodity prices are in a so-called “super-cycle”, and, if so, at what point in the cycle they are currently located. It argues that a collapse of commodity prices or a quick return to a long-running deteriorating trend is unlikely to occur in the next few years. As long as commodity prices remain at relatively elevated levels and commodity producers are able to appropriate a fair share of resource rents, policymakers should ensure that the revenues accruing from natural resource exploitation are used to reduce income inequality and to spur industrial production. The report says related measures should include public investment and the provision of social services targeting those segments of the population that do not directly benefit from resource revenues.
Full report: http://unctad.org/en/PublicationsLibrary/tdr2013_en.pdf
Overview: http://unctad.org/en/PublicationsLibrary/tdr2013overview_en.pdf
