Five years after the onset of the global financial crisis the world economy remains in a state of disarray, with global output growing at around 2 per cent and global trade growth virtually grounding to a halt, the Trade and Development Report (TDR) 2013 stresses. Growth remains subdued in developed countries, where labour market conditions, fiscal tightening and on-going deleveraging hinder domestic demand. With an external economic environment showing few signs of improvement, developing and transition economies could not avoid growth deceleration.
Prior to the Great Recession, buoyant consumer demand in the developed countries seemed to justify the adoption of an export-oriented growth model by many developing and transition economies. But that expansion was built on unsustainable global demand and financing patterns. Thus, reverting to pre-crisis growth strategies cannot be an option. The Report notes that to adjust to what now appears to be a structural shift of the world economy, fundamental changes in prevailing growth strategies are needed.
TDR 2013 notes that developed countries must address the fundamental causes of the crisis: rising income inequality, the diminishing economic role of the State, the predominant role of a poorly regulated financial sector and an international system prone to global imbalances; while developing and transition economies that have been overly dependent on exports need to adopt a more balanced growth strategy that gives a greater role to domestic and regional demand.
Distinct from export-led growth, demand-led strategies can be pursued by all countries simultaneously without beggar-thy-neighbour effects. The Report also affirms that, if many developing countries manage to co-ordinately expand their domestic demand, their economies could become markets for each other, spurring regional and South-South trade. Hence, shifting the focus of development strategies to domestic markets does not mean minimizing the importance of the role of exports.
In adopting a growth strategy with a larger role for domestic demand, countries should achieve an appropriate balance between increases in household consumption, private investment and public expenditure. Fostering the purchasing power of the population is a key element in this regard. It can be achieved through an incomes policy, targeted social transfers and public sector employments schemes. Income creation and redistribution favouring lower- and middle-income households is crucial to this development strategy, because those households tend to spend a larger share of their income on consumption, particularly of locally or regionally produced goods and services.
Increased aggregate demand would provide an incentive to entrepreneurs to invest in expanding productive capacities and in adapting them to new demand patterns. Doing so requires investment which, in turn, necessitates access to reliable and affordable long-term finance.
With that aim, foreign capital may be useful in financing imports of essential intermediate and capital goods. However, large cross-border financial flows to developing and transition economies have often led to lending booms and busts, currency mispricing and the build-up of foreign liabilities without contributing to an economy's capacity to grow and service such obligations. A cautious and selective approach towards cross-border capital flows is needed for reducing the vulnerability of receiving countries to external financial shocks and directing credit to productive investment.
The Report finally underlines that these countries should rely increasingly on domestic sources for investment finance. It affirms that central banks should enlarge their mandates beyond inflation control and, through a credit policy, play a much more engaged role financing the real economy. The implementation of such a credit policy can be facilitated through the involvement of specialised institutions, including national and regional development banks. Indeed, a network of specialized financial institutions may be more effective in channelling credit for development-enhancing purposes than big universal banks, which tend to become not only "too big to fail" but also "too big to regulate".