Trade and Development Report, 2012

Policies for Inclusive and Balanced Growth

The Trade and Development Report (TDR) 2012 reviews recent trends in the global economy and explores the links between income distribution, growth and development. Global output growth is slowing down. In developed economies, high unemployment, ongoing deleveraging and downward pressures on real wages are causing lack of demand. An exit from recession in crisis-hit countries cannot be left to market forces alone; policies should aim to restore demand, instead of further depressing it with fiscal retrenchment.

GDP growth is stronger in developing and transition economies as countercyclical policies have supported resilient domestic demand. However, no country would be spared in case of a new financial shock in developed countries which would result in capital flows reversals, shrinking global trade and declining commodity prices.

In this contribution to the on-going debate about the relationship between income inequality and growth, UNCTAD argues that rising inequality is neither a necessary condition for sound economic growth, nor its natural result. By contrast, full participation of all citizens in the proceeds of the economy as a whole in indispensable for successful and sustained development.

Empirical evidence shows that increasing income inequality has been a feature in the world economy since the early 1980s. However, in the 2000s in Latin America and in parts of Africa and South East-Asia income inequality fell in a context of improved external conditions. The evidence suggests that the relationship between growth and inequality is complex and can be altered by proactive economic and social policies. The Report also briefly addresses some other aspects of inequality, such as gender disparities, wealth distribution and differences in access to education which are relevant for income distribution and require specific policy actions.

The Report further discusses what are widely perceived to be the main structural causes of recent changes in income distribution, including trade, technological change, and finance-led globalization. It argues that the impacts of globalization and technological change on domestic income distribution are not uniform. Rather, they depend on initial conditions and on how macroeconomic, financial and labour market policies interact with the forces of globalization and technological development. Structural changes do not necessarily lead to greater inequality if appropriate employment, wage, and income distribution policies are in place.

TDR 2012 suggests that policymakers need to apply policies to reduce income gaps, which in turn will influence overall economic and social outcomes. It shows how income distribution has been and may be modified by proactive policies, including the use of fiscal instruments aimed at redistribution. Such instruments do not necessarily reduce incentives to invest in fixed capital, innovation, and skills acquisition. On the contrary, the reduction of inequality that can be achieved is more likely to accelerate growth and employment creation than the past trend towards less progressive taxation and lower social transfers, which have aimed at eliminating distortions in market outcomes.

Finally, the Report examines how labour-market institutions and policies, together with an appropriate macroeconomic framework, can respond to current challenges and lead to sustained growth and more inclusive development. It starts with the proposition that slow growth has a strong impact on inequality, due to high unemployment, which weakens the bargaining power of labour. The Report then argues that the paradigm of labour-market flexibility has not only failed to reduce unemployment but has even tended to exacerbate it. This is because the unemployed are forced to accept lower wages in order to find a job. It suggests an alternative approach based on the recognition that wage growth in line with productivity growth prevents a rise in inequality and supports the process of economic growth and employment creation.