Trade and Development Board, 61st session (Item 4: Interdependence)

Excellencies,
Colleagues,
Ladies and Gentlemen

I am pleased to welcome you to this discussion on Interdependence: trade and development policy challenges for a sustained recovery of the global economy. Coming at a time when the world is increasingly interconnected and the global economy has yet to emerge from the doldrums that followed the financial crisis, this is an especially topical discussion. It also goes to the heart of our work here at UNCTAD.

When UNCTAD was created in 1964, many developing countries had just gained independence, post-war reconstruction had been achieved and international trade and capital flows were on the rise again. In that context, UNCTAD's main mandate was to assist developing countries in designing and implementing development strategies, so that they could improve their participation in - and gains from - the international economy. This not only involved policy actions at the national level, but also efforts at international level.

Fifty years later, the process of globalisation has further increased international linkages and made even more evident the need for well-working global governance. And while globalization has contributed to poverty reduction and economic development in parts of the developing world, core challenges remain. These centre on establishing a favourable trade, investment and macroeconomic framework that allows developing countries to gain more from participation in the global economy and provides them with enough policy space to pursue appropriate national development strategies.

The need to address these challenges has become more urgent since the global crisis that erupted in 2008. We observed then the dark side of interdependence, as the financial shock that originated in some developed countries shook the whole world economy.

Because developed countries avoided a great depression, stabilized their financial markets and clawed back most of the output lost due to the economic collapse of 2008-2009, some observers have hailed the arrival of a "new normal", in which growth would be slower than before the crisis, but stable and sustainable. There has also been talk of "decoupling" of developing countries from developed ones.

Such views are excessively optimistic and problematic. We think that the impact of the crisis persists. The world economy has not yet found a new basis or drivers for strong and sustained growth. The recovery of output and employment in developed countries is the slowest seen in any post-war crisis, inequality is rising and financial vulnerability remains.

Furthermore, the current policy mix in developing countries that combines monetary expansion, fiscal austerity and wage restraint is ineffective. It is failing to deliver strong growth and generating new asset bubbles and undesired capital movements to developing countries. UNCTAD has warned since 2010 that such policies were counterproductive in economies affected by insufficient demand. We have since been joined by other voices, including those of the IMF and more recently the President of the European Central Bank and the OECD.

For their part, developing countries recovered faster from the crisis thanks to active counter-cyclical policies, but the effects of this short-term response are fading. Slower growth in the developed world has reduced demand for goods and services from developing countries. There have also been negative spillovers from the policies developed countries adopted to handle the crisis.

Indeed, the combination of fiscal austerity and monetary expansion generated huge short-term capital movements to developing economies, leading to macroeconomic instability and undesired movements in currency and financial markets. It is likely that an eventual return by developed countries to a less supportive monetary policy stance will create a reversal of such capital movements, again with adverse effects on developing countries' macroeconomic and financial stability. Therefore, the so-called decoupling of developing and developed countries has not taken place, and we continue to live in a world where interdependence is at the highest point in the last 100 years.

This situation points to the need for greater policy ambition in both rich and poor countries to get the global economy out of the doldrums and moving towards a more inclusive and sustainable future.

Developed countries must set in place coherent policies for restarting growth, with fiscal, monetary and incomes policies all pushing in the same direction. Countries with external and fiscal conditions that allow more room for manoeuvre should take the lead in helping demand to recover. Developing countries must be able to adopt more active macroeconomic, industrial, financial and trade measures to stimulate productive investment, develop local markets and diversify the economy. To do so, they also need the policy space - and fiscal flexibility - to apply such measures.

Finally, multilateral institutions need to support that ambition simultaneously with strengthening international coordination and action.

I look forward to a stimulating discussion.

Thank you.