The Growth Net, 2nd annual meeting
23 March 2014
Distinguished participants,
For more than a decade, strong global economic growth benefitted the developing world. To quote the title of this session - emerging countries "rode the tide" created by a remarkable expansion of trade, investment and growth. Even when economic crisis flattened advanced economies five years ago, developing countries recovered quickly. As recently as last year, developing countries accounted for about two-thirds of total global output growth in 2013. There were hopes of a de-coupling, as if the new global growth engines - the BRIC economies - could ride a different tide, even create their own, new tide, to lift regional growth and support the global economy.
When UNCTAD addressed this meeting at roughly this time last year, our session was titled "Sustaining the dynamics in emerging markets", because the resilience of emerging markets and developing economies was the bright spot in a lacklustre world. Now, however, this resilience is losing steam. Absent, is a recovery of demand from traditional northern counterparts and facing stumbling growth in BRICS economies, we face the question of this year's Growth Net meeting - "how to reverse the tide" and revive growth?
First, I must emphasize that we should abandon this concept of the "tide" in economics. Tidal metaphors abound, especially in recent years. Some said "a rising tide lifts all boats" during the propitious decade up to 2007. Many countries did benefit from favourable external conditions and a remarkable boom in global trade, but the metaphor was never entirely true. Some countries grew rapidly but others did not. Some grew without creating the jobs that were needed. Export-led sectors flourished while employment grew more slowly in other sectors. Those working in finance benefitted, while incomes elsewhere stayed flat or even fell. So no, not all boats were lifted, nor was the lifting sustainable.
After the crisis, you might think that "now the tide has gone out, so we can see who is not wearing a bathing suit!" But little has been done to learn the lessons that crisis has taught. The changes to the financial sector that are needed to protect against a repeat crisis still need to be put in place. Expansionary monetary policies initiated in advanced economies have had spillover effects, prompting billions of dollars to flood into emerging economies, causing their exchange rates to appreciate rapidly, only to reverse just as quickly as perceptions of risk changed. These massive flows of short-term capital have not sparked the increase in productive investment that developing countries need if they are to finance structural transformation.
Ironically, there is a global surplus of capital while enterprises find it hard to raise finance. The "tide" may seem to have risen everywhere - but there is not a drop of water to drink! However UNCTAD argues that the boom of the previous decade was not a natural or ordained response to "getting the fundamentals right" nor was the crisis that followed the natural ebb to the decade's flow. The tidal metaphor is misleading because the movement of the tides are an immutable force of nature that we can do little about, whereas economic performance is determined by economic policy, and the choices that we make. The boom years were a product of a favourable external environment created by national and international economic policy, and the subsequent crisis was a systemic response to imbalances that resulted from the unbridled application of many of those same policies. Policy drove the remarkable turnaround of the Chinese economy in recent decades, bringing billions of people out of poverty on the basis of carefully sequenced, cautious liberalisation combined with growth-oriented heterodox economic policies. China did not wait for any natural ebb and flow. Instead, its policies helped create the conditions that were needed.
My second message then concerns what developing countries can do, in terms of policies to change the current economic impasse. There is a lot that can be done and tools exist, which we can use to change the situation.
Most importantly, developing countries need to change the strategic nature of their integration into the global economy. It is clear that the old routes to economic growth do not exist anymore. To take just one example, the potential for global trade that existed in previous decades is unlikely to revive, because sources of external demand may remain limited for some time. World economic growth was estimated to be around 2.4% in 2012, down from both 2011 and 2010 as the advanced economies continue to suffer a slow recovery. Growth for the advanced economies was on average 1.3%, around half pre-crisis levels. Developing countries who previously relied on their position in global value chains exporting to advanced economy markets now seek value chains aimed at the emerging class of mass consumers in the developing world. Ideally, they might create their own, new value chains.
It is not only the fact that traditional markets in the advanced economies show slim signs of recovering their former dynamism. The de-coupling story has also lost its appeal also. According to UNCTAD's latest estimates, GDP growth in India in 2013 is around 5%, less than half the level achieved in 2010; China's growth in 2013 is estimated at 7.6%, almost two percentage points lower than two years previous. Brazil, South Africa, the other large emerging economies are also feeling the drag on growth.
One way to help achieve a virtuous circle of expanding output and trade is to boost domestic and regional demand. As historical export-led development strategies become less viable, promoting domestic demand requires more balanced strategies that reconsider the role of wages - focusing less on the role of workers' wages as a cost of production and more strategically on their role as the main source of demand. Policies or practices that clamp down on wages to boost exports have the misguided effect of reducing domestic consumption, undermining domestic multiplier effects and reducing government's tax revenues. In this regard I am encouraged by the revival of concern about inequality, and fresh evidence supporting UNCTAD's long-held argument that inequality is bad for economic stability and growth. National incomes policies and a heightened redistributive role for governments are important tools in the process of moving to a more sustainable growth strategy.
Public expenditure - if appropriately directed - is another powerful means of promoting equality and development, whether through infrastructure investment, education or social protection systems. Fiscal expenditure accounts for just 22% of GDP in Asian economies, compared to almost 30% in Latin America, over 27% in Africa and over 44% in developed countries, indicating that there is scope to increase this considerably. This can enhance public investment in infrastructure to help promote structural transformation and growth.
Another useful policy tool are public development banks, which have been used in recent years in developing and developed countries alike, to fill vital gaps in services not offered by commercial financial service providers. Development banks proved to be particularly important as a counter-cyclical foil to maintain demand during the crisis years between 2007-2009. A World Bank survey of 90 development banks across developed and developing countries found that they increased their loan portfolios by more than three times as much as private banks, during those bad years. They also have an obvious longer-term role to help fund the investment that is needed for development. Reflecting this reappraisal after decades of criticism, new development banks are being established in developing and developed economies alike. They are an essential part of a healthy and robust financial system in good times as well as bad.
Domestic demand will also be boosted by stronger south-south and regional economic ties. Countries that already had strong south-south links were better able to weather the crisis than the northern economies, and there is a strong interest in further enhancing south-south and regional integration on the part of almost all regions in the developing world. These links can be reinforced institutionally, through for example simple trade-related payment systems to reduce exposure to volatile foreign currencies, or more complex exchange rate mechanisms to reduce transactions costs of trade.
But south-south and regional cooperation can go even further through what we at UNCTAD call "developmental regionalism." This means that regional cooperation needs to be a central pillar of national development strategies and industrial policies. Regional mechanisms can provide short-term finance when countries experience Balance of Payments deficits, alongside regional development funds offering long-term finance for major capital investments that would be beyond the reach of a single country alone. Regional approaches to growth-promoting industrial policy have also been considered-- in Latin America, for example.
Regional approaches, or at the least, regional co-ordination of national policies, are a valuable source of strength for developing countries searching for new motors of growth in today's integrated and uncertain global environment. By adopting a more domestic and regional focus, developing economies could avoid the beggar-thy-neighbour policies, which promote contractionary wage and tax races to the bottom that used to be inherent in the old-style export-led, competitive strategies.
There are also clear benefits from a globally collaborative pro-growth approach. The latest UNCTAD Trade and Development Report shows that in a scenario where there are neither policy changes nor shocks ahead, global GDP growth is estimated to rise only slowly and to peak at around 3% by the year 2030. However, if all countries pursued more expansionary macroeconomic policies to the extent needed to ensure a growth-enhancing environment in each country, global GDP growth prospects more than double. This reinforces my argument that the economic environment is a product of policy more than of nature.
Even if such a globally co-ordinated effort is politically out of reach, there are still significant benefits to be gained if only the developing and transition economies followed such an expansionary path. In the case of India, for example, GDP growth could rise sharply to 10% per annum by around 2020 with co-ordinated growth policies on the part of the major world economies, and could still rise strongly to over 7% if only the developing and transition economies followed such a path. On the other hand, in our "baseline" scenario where there are neither significant policy changes nor shocks ahead, Indian GDP growth is expected to decline in the next few years and then to rise only slowly and to remain below 5% by the year 2030.
I hope I have convinced you that there is much that developing countries can do to promote growth, through domestic, regional and global policies. Rather than being victims of a "tide" that rolls in and rolls out with the movement of the moon, we have the policies and the know-how to adapt to the new structural conditions that exist in the global economy, and to attempt to change them. The so-called "tide" is not an immutable force, it is an economic construct that is influenced by policy. This means that it can be reversed, changed and directed.
Thank you.
