19th General Meeting of Shareholders of the African Export-Import Bank
11 July 2012
Excellencies, ladies and gentleman
Let me begin by thanking the African ExIM Bank, and in particular its President Jean Louis Ekra, for the invitation to address this important meeting. Mr Ekra has helped foster a strong relationship between our two institutions and it was a pleasure to host him in his capacity as honourary President of the Global Network of Eximbanks and Development Finance Institutions at its 7th annual meeting just before the opening of the UNCTAD XIII quadrennial conference in April. UNCTAD supported the creation of G-NEXID in 2006, and cooperation between the organization and G-NEXID was formalized with the signing of a memorandum of understanding in September 2011.The network is for me a clear example of the benefits to be achieved from closer south south cooperation.
Let me secondly commend the conference organizers for choosing to host this meeting in Beijing. The growing economic ties, including through trade and investment flows, between China and Africa are part of a changing global economic landscape which holds out real promise of a better future for us all. China is already Africa's leading trade partner and volumes are rising. The organisers have also taken an important step by linking South South cooperation to the opportunities and challenges of todays dynamic but unstable global economy. The discussion of south south cooperation often restricted to a debate about aid flows and effectiveness, and while that remains an important debate, I believe that the wider context is where we need to be directing our thinking about south south cooperation and it is where I will focus my remarks today.
My message on south south cooperation can best be summed up as one of cautious optimism. The developing worlds resilience to, and rebound from, the recent financial crisis certainly marks an important break with the past and holds out the hope, long held by UNCTAD, that an emerging South can bring about a more balanced and stable world economy. However, caution is warranted given that the shift in wealth has been uneven to date, with large differences among regions and countries, and because vulnerabilities remain. Even the much heralded BRICS are in reality a very diverse group of countries and experiences. Moreover, many emerging economies remain dependent on the advanced economies and vulnerable to changes in policy and conditions there, as we are now seeing with the damaging contagion from the Eurozone debt crisis. If this assessment is correct then it is crucial that policy makers across the South are not lulled in to a false sense of complacency by recent trends and that the South South agenda does not heed the siren calls of a return to "business as usual" coming from some of the leading multilateral economic institutions.
Colleagues, ladies and gentlemen
Global economic conditions in general, and those in the advanced economies in particular, have historically always had a significant influence on growth, trade and investment prospects in the developing world. The asymmetric nature of that relationship was demonstrated in the early 1980s when policy changes in the advanced countries triggered a sharp slowdown in much of the South, accompanied by a deeply damaging debt crisis and followed by a "lost decade" (or more) of development in many countries. Along with repeated financial shocks and crises which lasted through the late 1990s, the developing world, with the exception of East Asia, fell further behind the North during this period.
Since the new millennium, however, we have witnessed a very strong economic performance across all regions in the South. During 2003-08, the average growth of developing countries exceeded that of advanced economies by some 5 percentage points, compared to around one point in the 1980s and 1990s. One of the strongest growth surges occurred in Sub Saharan Africa, holding out hope that this region could finally begin to enjoy the benefits of a globalising world. Growth gaps widened during 2008-11 as most developing countries proved quite resilient to the financial crisis triggered by the collapse of Lehman Brothers in September 2008, while advanced countries experienced a deep recession and a very sluggish recovery.
This growth divergence has widely been interpreted as the South "decoupling" from the North and the start of a process of rapidly narrowing income gaps across the world economy. Projecting recent trends into the future suggests, on some estimates, that over the next fifty years the global economy will have 'converged'; that is, the relevant countries in the South will not only dominate the global economy in terms of absolute trade and production figures, but many will have closed the income gap with countries in the North.
This convergence narrative is often presented as a vindication of the market-friendly policy agenda promoted over the past 30 years by international financial institutions and through bilateral development agencies. The policy message is clear, the challenge for the BRICS and other developing countries is to continue with "business as usual" by adopting sound macroeconomic policies, rapidly opening up to global firms and market forces, pursuing good governance and investing in human capital. At the same time, with strong growth predicted for the emerging countries in to the future, there have been growing calls from development partners, which have become louder since the financial crisis, for these countries to assume much more responsibility for managing the world economy, easing the burden on the cash strapped North.
What I would like to suggest to you this morning is that this is not a persuasive narrative. In part that is because it myopically ignores the damage that was done to developing countries in the 1980s and 90s by the same policies which are now deemed the only sure-fired basis for their future success. In part, because the evidence does not show the desynchronisation of cycles between developing and advanced economies on which the decoupling hypothesis rests. But it is also because the success stories of the last decade have not actually followed the economic recipe that the adherents of "business as usual" are now looking to promote under the narrative of the rising South.
This last point raises what in my mind are the key questions from the recent period of accelerating Southern growth, namely whether there has been a durable shift in the trend growth of the South relative to the North, if so what has caused it and if not what can be done to put it on firmer foundations? To answer these questions we need to acknowledge a certain paradox in the recent globalisation experience.
The paradox of the last decade is that the victims of the debt crisis of the 1980s, which in many respects marked the start of what in UNCTAD we have called finance-driven globalization (FDG), have become the winners of the debt fuelled growth which has driven FDG since the millennium. This pattern of growth, which originated in the advanced economies, generated a highly favourable global economic environment for developing countries in terms of export opportunities, capital flows and commodity prices.
Developing country exports grew very quickly at something like twice the pace of those from advanced countries with a concomitant rise in their share of world trade. From the early years of the 2000s, low interest rates and rapid expansion of liquidity in the US, Europe and Japan also triggered a boom in capital flows to developing economies. There was at the same time a surge in FDI flows by TNCs looking to cut their costs by spreading production chains more widely including to many more host developing countries. Some countries also enjoyed a surge in workers' remittances during these years, which exceeded 3 per cent of GDP in India and reached double-digit figures in some smaller countries. Commodity prices rose strongly, in some cases thanks in part to rapid growth in some emerging economies, but also because of the financialization of commodity markets.
This confluence of favourable external trends was unprecedented in the post Second World War era and it would be surprising if it did not register in improving growth figures in the South. Indeed, on some estimates, at least one-third of pre-crisis growth in China, for example, was due to exports, mostly to advanced economies, and the ratio is even higher for some smaller Asian export-led economies; Latin America would not have seen much growth had terms-of-trade, dollar interest rates and capital flows remained at the levels of the late 1990s: and as UNCTAD research has shown much the same can be said for growth in Sub Saharan Africa.
But there is a further paradox of FDG that needs to be introduced here. Namely that the big winners in the developing world have been those countries that resisted financial and capital account liberalization - indeed the Washington policy consensus more generally - and deployed a range of creative and heterodox policy initiatives to help break the constraints on sustained growth and better manage their integration in to the global economy. These successful economies, of which China is the most prominent, have also built industrial capacity in the context of strong regional growth dynamics, including through managed trade and FDI. In all these cases industrial policy, rather than purely market forces, has been crucial to their being able to take advantage of the scale economies and other benefits that external integration can bring.
The big challenge is, of course, what happens next now that debt fuelled Northern growth has come to its predictable and unhappy end? Much will of course depend on how the advanced countries approach this challenge. In UNCTAD we are particularly worried about the resort in may countries to austerity measures; our own research on the damage from such an approach in developing countries tells us that this is unlikely to be a healthy economic solution for rich countries either.
The financial crisis in 2008 also led to a deterioration in all the areas that had previously supported expansion in developing economies. Markets for Southern exports contracted, capital flows were reversed and commodity prices declined sharply. Growth rates across the developing world dropped as a result, in some cases quite significantly. However, a number of these economies, including some of the largest, showed resilience to these shocks and were able to rebound quickly, particularly where a strong countercyclical response was made possible by favourable payments, reserves and fiscal positions built up during the preceding expansion. As a result, the growth impulse in some leading Southern economies shifted to domestic demand, including in countries which had previously been strongly export-led.
China has, of course, played a key role here, launching a massive stimulus package in infrastructure and property investment. Because of its high commodity intensity, this investment-led growth has given an even stronger boost to commodity prices than did pre-crisis export-led growth thereby supporting growth recovery in other developing regions. At the same time, short-term capital inflows surged back in to the South following sharp cuts in interest rates and quantitative easing in developed economies in response to the crisis. These flows helped to ease a growing payments constraint in several major emerging economies including India, Brazil, Turkey and South Africa. However, these flows also widened deficits by leading to currency appreciations, which in some cases have been very sharp.
Domestic demand-led recoveries in the South have now come to an end, and at the same time the economic situation in many advanced economies has become more challenging with growth slowing again in most and with some already back in recession. As a result the downside risks for developing countries are once again mounting.
While the failure of the advanced economies to manage their own imbalances represents the biggest immediate threat to growth in the South, the underlying challenges remain the systemic tensions arising from FDG. Despite the scale of the 2008 financial crisis and a good deal of subsequent talk about not letting it happen again, there has since been a quite shocking failure to reform the international financial system. There is still no effective multilateral surveillance to bring discipline and responsible behaviour on the part of reserve-issuing countries. Despite all the talk of a Keynesian revival the adjustment to shocks still falls on debtor economies with no pressure on surplus countries to make required changes. The IMF has abandoned parts of its economic orthodoxy and begun to discuss ways to better manage capital inflows, including capital controls as a last resort and temporary measure. However, the Fund has paid little attention to policies in source countries, including measures to stem speculative outflows, multilateral financial resources to support countercyclical measures remain woefully inadequate and a sovereign debt work out mechanism remains a distant possibility. Instead, muddling through and ad hoc arrangements, involving the IMF and selected countries and other agencies, remain the order of the day. The never again mantra has turned in to the when next prediction!
Developing countries, as much as advanced countries, have an interest in a stable financial system that is in the business of providing security for people's savings and mobilizing resources for productive activities, including international trade. Reforms are urgently needed to regulate institutions that have become too big to fail, to replace unruly and procyclical flows with predictable long-term financing, to regain stability in currency markets and to support expansionary macroeconomic adjustments.
Another downside risk for many developing countries is commodity price instability. This is not just about oil prices driven by geopolitical uncertainties and speculation. Even a moderate slowdown in China, towards 7% per cent, could bring an end to the boom in a broad range of commodities and if advanced countries enter recession the impact will be significant on some countries. This could be further amplified by a rapid exit of investors and traders in commodity derivatives. We may not know with certainty the extent of instability caused by commodity speculators and whether they create autonomous movements independent of real supply and demand shocks. But two pieces of evidence show the destabilizing impact of derivative trading. First, there is increased synchronization of price movements of commodities with different supply and demand characteristics. Second, there is evidence of cumulative movements, bandwagon behaviour among derivative trades, particularly during the commodity boom-bust cycle in the second half of 2008. Controlling these activities is also key to a more stable global economy.
Colleagues, ladies and gentlemen
Recent growth figures for developing countries have already begun to raise concerns that these risks are becoming a reality. Most international forecasting agencies are busy revising down their growth forecasts for different regions and for the global economy as a whole. At the same time hope of another coordinated international response, along the lines which followed the financial meltdown in 2008, are looking less and less likely, not only because national policy makers have less room for manoeuvre this time around but also because trust in the multilateral system appears to be dissipating, witness the state of the Doha negotiations and the Rio plus 20 process.
A pressing issue, therefore, is how to situate South South cooperation against this backdrop of an unstable and fragile world economy? From my remarks I think it is clear that developing countries face two interdependent challenges which call for a wide-ranging rethinking of their development policies and strategies including with respect to south south cooperation. First, in the immediate future, they face the risk of a significant drop in their GDP growth rates. The slowdown could be quite severe if Europe falls into a deep recession bringing down US growth rates which, in any event, are likely to be weak and unstable. Second, over the medium term, developing countries cannot return to the kind of rapid growth they enjoyed during the debt-fuelled global expansion of the last decade, even if the advanced economies could recover fully.
Talk of new growth poles in the South needs to be approached more cautiously than has been the case so far. Neither the structural changes nor the market conditions of the past decade or so have advanced to the point where the South is self sustaining let alone an independent engine of global growth. The growth of south south ties over the past decade has been impressive and can provide some resilience in the face of a slowdown in the North. Between 1996 and 2009 the developing country share of global trade rose from 18 to 29 per cent, with South-South trade growing at an average of 12 per cent per year, 50 per cent faster than North-South trade. It now accounts for around 20 per cent of global trade, and over half of all developing-country trade. Over this same period the share of developing countries in inward FDI flows has 38 to 43 per cent of the total and South-South foreign direct investment (FDI) has also been growing rapidly, at around 20 per cent per annum over this same period, and now accounts for 10 per cent of total FDI flows, with as much as one third of flows to developing countries coming from other developing countries. Finally, while high-income countries remain the main source of remittances for developing countries, migration between developing countries is now larger than from developing countries to OECD countries.
However, it is important to recognise that these growing south south ties have often been dependent on Northern markets and firms, in the context for example of global supply chains, so it is important not to exaggerate their independent nature. As a consequence, efforts to extend and strengthen these ties should not be divorced from the wider policy challenge to build productive capacity and expand domestic markets in the South. As such South-South integration and cooperation (SSIC) is still work in progress. One possible model in making further progress is the flying geese paradigm associated with successful East Asian development. The emergence of similar models elsewhere cannot, however, be taken for granted, nor that their development impact will simply replicate that of East Asia. Still, this experience does suggest that, with proper policies, South South cooperation can play an important role in fostering inclusive development through closer trade and investment ties.
Realistically, China is probably the only emerging economy which can offset the damage of stagnation in the North on its own economy and generate strong countervailing impulses for other developing economies. However, at present, the size of its consumer market barely reaches 20 per cent of that in the US, even though China's GDP is around 40 per cent of the US GDP. This is because of exceptionally low share of household income in GDP and a very high household savings rate. Moreover, because of their low import content, total (direct and indirect) imports for consumption in China do not reach 10 per cent of those in the US. Therefore, in order to provide a large market for other developing economies, China needs not only to raise the share of household income in GDP and reduce precautionary savings, but also to increase the import content of consumption. China is also the only major developing country capable of helping other countries to reduce their dependence on financial markets in advanced economies. The country is expected to continue to run a current account surplus in the foreseeable future although, as it sets about on its own rebalancing agenda, this will be lower than it was during the subprime expansion.
A longstanding challenge of south south integration and cooperation is whether or not there are sufficient financial resources available in stronger developing economies to support growth and development in the weaker ones. In recent years, growing surpluses in some dynamic developing economies certainly raise the possibility that these could be recycled to other parts of the South in support of their growth and development. The Bank of the South in Latin America and the recently discussed BRICs Bank are possible models in this respect. UNCTAD has also raised the possibility of using Sovereign Wealth Funds in the South to help finance long-term investment projects in the least developed countries. The design of such mechanisms is not an easy task -- witness their absence in the Eurozone area for example - however their further consideration is certainly merited and points to more constructive discussions of mutual needs and challenges in the South.
In the longer term, while the policy challenges facing growth poles in the South vary, for many they are linked, one way or another, to maintaining a virtuous circle between capital accumulation, structural change, productivity growth and rising domestic demand. One of the encouraging features of the recent growth surge in the South, has been the pick up of investment rates in Latin America and Africa after decades of decline and stagnation. However, levels remain well below what is needed to ensure inclusive and sustained growth and the situation with public investment remains particularly worrying. Moreover, the pace of industrial development, indeed of economic diversification in general, has so far remained sluggish in most of these economies.
Consequently, commodity exporters in Latin America, and also in Africa, still have little control over the key determinants of their economic performance (capital flows and commodity prices), and their main policy challenge continues to be how to break out of this limitation and gain greater growth autonomy. Accessing the right kind of development finance remains an issue but ultimately they will need to reduce their dependence on foreign capital, whether from China or from the advanced economies, by strengthening domestic resource mobilisation. In this respect, it should be noted that although the highest income earners in Latin America capture a much greater proportion of national income than those in Asia, they save and invest a much lower proportion of their incomes, and as mentioned earlier, this may have been somewhat aggravated by recent bubbles in commodity and capital markets.
Low investment and high dependence on foreign capital are challenges that need to be addressed, not only in commodity exporters, but also in some exporters of manufactures facing what has been called the "middle-income trap", because without adequate investment it remains difficult to shift the structure of production towards high-productivity and more supply- and demand-dynamic sectors. As has been seen in Southeast Asia in recent years, a high rate of savings does not always translate into an equally high level of investment and, as seen in India, a high level of aggregate investment does not necessarily translate into rapid manufacturing growth. Moreover, in these economies a heavy reliance on foreign direct investment has not generated the local entrepreneurial base needed to move further up the development ladder.
If developing countries are going to continue to grow rapidly, additional efforts have also to be made to avoid rising domestic and balance of payments deficits. In part that will come with the successful diversification of their production structures. But such developments will not happen spontaneously. It requires new infrastructure, and access to markets and technology, which will be costly, especially in the light of the imperative to raise real wages and domestic demand. In this respect, the examination of successful growth experiences in the South and sharing the policies which have sustained them can assist ongoing efforts to introduce domestic and international policy reforms and supportive institutional arrangements, overcome the threats from unregulated financial arrangements, address the disproportionate vulnerability to shocks in the South, and ensure inclusive growth within and between countries.
These reflections indicate that the way forward for the South depends on the internalisation of the drivers of growth in order to secure self-sustaining economic expansion, the achievement of greater autonomy for countries to determine their own development trajectory, and the implementation of sustainable, strategic and inclusive development policies. For practical reasons, SSIC is most likely to contribute to this by building on what in UNCTAD we have been calling developmental regionalism. After several disappointments and false starts, there are signs that regional integration is gaining renewed support across the developing world. The initiatives include attempts to forge greater consistency around trade and investment policies in Africa and Latin America, as well as the creation of regional production networks in Asia.
These developments point to more measured alternative to premature trade liberalisation, unregulated global capital flows and a race to the bottom of global value chains. Developmental regionalism should harness regional trade, investment and capital flows to building productive capacity and strengthening productive integration among neighbouring economies. Although these modalities of integration ultimately depend on the decisions of firms, rather than governments, national industrial policies can support this process, and coordination and harmonization of such policies can help make integration more effective. Indeed, industrial policy as I suggested earlier with reference to the flying geese model is likely to play a much more prominent role in charting the future course of more inclusive and sustainable development across the South.
Formal regional cooperation is not a precondition for de facto integration, but larger and more inclusive gains will likely require a dynamic interaction between the two. At first, such cooperation will tend to focus on technical issues (trade barriers, standards etc.), but as production and trade systems become more integrated among neighbouring countries, the need for coordination and collaboration will grow. The expansion of regional trade has added impetus to discussions on regional monetary and financial cooperation. Indeed, with the gaps referred to earlier in the multilateral system such cooperation has gained ground in recent years. Monetary and financial cooperation covers a wide spectrum from simple trade-related payment initiatives to more complicated liquidity provisioning development finance schemes and ultimately monetary union. However, there is no recipe, mandatory sequence or ideal timing when it comes to such arrangements, and distinct initiatives are likely to emerge according to the degree of integration and the political economy of each region.
The development scenario I have been trying to present to you is very different from the narrative of automatic convergence that I suggested at the beginning of my presentation has become part of conventional wisdom surrounding the recent Rise of the South. It includes targets for government expenditure and public and private investment to facilitate a more equitable distribution of income and improved employment prospects, reasonably stable real exchange rates and the promotion of regional trade areas in developing regions, selective incentives and support for exports of commodities, manufactures and services by countries that lack a sufficient export base, and global cooperation in the management of commodity markets, including energy resources and markets, to achieve price stability and reduce the dependence on fossil fuels.
Because the imbalances I have been describing operate both at a national and at a global level, their resolution depends on coordinated national as well as global policy initiatives. In my report to UNCTAD XIII I have talked about the need for a Global New Deal and while I do not have time to elaborate on that here I believe this provides the kind of framework around which a combination of reflationary, regulatory and redistribution measures can together help to "lift all boats" and to bring greater stability to the global economy.
By way of concluding let me reiterate that south south cooperation is still very much work in progress but that it provides a hopeful sign that the recent strong growth performance of the south can, this time around, persist and spread and that the global imbalances that have in the past held back development can be better addressed. As such I have tried to suggest in my remarks that SSC should not be narrowly defined in relation to the aid discourse but rather conceived as part of a wider discussion of building more inclusive and sustainable development paths that breaks with business as usual. In that respect it should be seen as part of a wider reform agenda encompassing the regional and global levels.
Thank you for your attention
