Play to the advantages of economic interdependence, experts urge

20 September 2013

The interconnected nature of the global economy contributed to the financial and economic crisis, UNCTAD's Secretary-General has said, however it also can help developing countries to recover from the crisis.

TDB 2013
From left: Mr. Alfredo Calcagno (UNCTAD), Mr. Mukhisa Kituyi (Secretary-General of UNCTAD) and Ambassador Triyono Wibowo (TDB President)

Secretary-General Mukhisa Kituyi's remarks came as the Trade and Development Board took up discussion of two themes, namely interdependence, and development strategies in a globalized world.

Trade and Development Board President Triyono Wibowo (Indonesia), introducing the morning's debate, said that UNCTAD's recent research indicates that astute, coordinated steps are needed to invigorate the global economy without reintroducing the global imbalances that led to the crises of 2008 and 2009. For developing countries, he said, there is a need for policies to strengthen domestic and regional markets. Countries should seek an appropriate balance between trade and domestic economic growth, should try to reduce income inequality, and should strive to strengthen regional links, which, especially among developing countries, can create valuable markets that reinforce growth for all participating nations.

The Secretary-General then told the meeting that the extreme interconnectedness of the world economy had been painfully illustrated by the recent financial crisis and global downturn, which had spread around the world after beginning in the housing and financial sectors of a few advanced economies.

It is also sobering to see, he said, that interdependence between developed economies and the developing world are deeply rooted enough that the hoped-for "decoupling" has not occurred. The decoupling theory suggested that emerging nations, which kept enjoying high growth rates in the wake of the recession, might escape the stagnation affecting mature economies. But it appears that slower demand in major developed markets is now reducing developing countries' exports, leading to a dampening of their economic progress.

"Indeed, a large part of trade among developing countries, for example as part of global value chains, is affected by the sluggish demand in the advanced economies," Mr. Kituyi said.

UNCTAD's findings are that interconnectedness can be a remedy as well as a problem, the Secretary-General told the meeting. Trade should still be an important component of developing countries' development strategies, but in order to give themselves greater stability and better long-term prospects, they should seek to balance export growth by stimulating domestic demand and domestic markets. In addition, developing countries should strive to benefit from and to improve South-South economic relations with the aim of creating more vibrant markets for each other's goods. Such a development would result in sufficiently large demand to support the creation and expansion of industry in developing countries, and would enable them to diversify the goods that they produce, leaving them less vulnerable to global turbulence.

In order to address the new challenges faced by a large number of countries, such as unemployment and marginalization of the poor, the Secretary-General indicated that countries need to fundamentally change their development strategies. The nature of the current development paradigm failed to deliver economic outcomes that would generate employment and reduce poverty. Today, there is a need for a new development paradigm that focus on inclusive growth and put more emphasis on the creation of productive employment, the improvement of living conditions of the poor and access to basic goods and services.

Alfredo Calcagno, Officer-in-Charge of UNCTAD's Division on Globalization and Development Strategies, reviewing the findings of UNCTAD's recently released Trade and Development Report 2013, said that interdependence and development strategies are closely related.

A return to the economic regime in force before the crisis is not possible, he said, as that would inevitably lead to bubbles and sharp reversals that make steady, long-term economic progress unachievable. Developing countries and countries with economies in transition have done better than developed economies over the past few years as they have used different policies, having learned painful lessons in the past. In particular, they have learned from a previous loss of "policy space" and have created a margin for government manoeuvre that helps them to cope with economic difficulties when they arise. But global interdependence is such that the "decoupling" theory has not held up, Mr. Calcagno said. Developing countries' efforts to boost and sustain economic growth worked for a while, but the stagnation in developed markets has now has spread to them too, largely because demand from advanced economies for developing-country exports has lagged.

The responses that seem best for developing countries are to seek a new balance in which greater emphasis is given to domestic demand and production, and to strengthen regional South-South links through which developing countries can create durable growth-spurring economic connections with each other, Mr. Calcagno said. Meanwhile, advanced economies must not revert to former economic policies but must address the structural causes of the crisis, he added.

"We cannot return to the growth regime that we had before the crisis - to the economic logic that led to the crisis," Mr. Calcagno said. But given that the diagnosis of the crisis is not shared by all, exactly which reforms are necessary is a fruitful topic for debate by the Trade and Development Board. One finding of the Trade and Development Report is that the financial sector should be better harnessed so that it does not revolve around itself but rather feeds greater investment into such "real" economic activities as manufacturing, agriculture and services, he said. Channelling greater resources to production is a challenge, and will require steps to make additional financing available to developing countries. But it also is recommended that such countries find greater sources of domestic financing, he said.

The Trade and Development Board will continue the meetings that make up its 60th session until 27 September.