Trade and Development Report, 2014

Global Governance and Policy Space for Development

The Trade and Development Report 2014 examines recent trends in the global economy, with a focus on growth, trade and commodity prices.

The Report highlights that, six years after the onset of the global economic and financial crisis, the world economy has not yet established a new sustainable growth regime. With an expected growth between 2.5 and 3 per cent in 2014, the recovery of global output remains weak. Furthermore, the policies supporting the recovery are frequently inadequate, as they do not address the rise of income inequality, the steady erosion of policy space along with the diminishing economic role of governments and the primacy of the financial sector of the economy, which are the root causes of the crisis of 2008. Putting the world economy on the path of sustainable growth requires strengthening domestic and regional demand, with a reliance on better income distribution rather than new financial bubbles.

The Report then takes a long-term perspective in analysing the evolution of the debate on global governance and policy space. Policy space is understood in the Report as the freedom an ability of governments to identify and pursue the most appropriate mix of economic and social policies to achieve equitable and sustainable development in their own national contexts, but as part of an independent global economy.

With the fiftieth anniversary of UNCTAD coinciding with the seventieth anniversary of the Bretton Woods institutions, the Report looks at how, after the end of the Second World War, the international community tried to build a more inclusive and sustainable international economic order around effective multilateral supports and disciplines without unduly compromising the policy space needed to meet a new set of economic and social goals. Today's efforts to ensure adequate policy space within the global trading system will deliver the desired outcomes only with effective reform of the global financial architecture to ensure more stable and long-term financing, both public and private, for poor economies.

The Report emphasizes the role that proactive trade and industrial policies can play in the post-2015 development agenda and points to various policies which, in the changing dynamics of the world economy, can help achieve sustained income growth, full employment, poverty reduction and other socially desirable outcomes. On trade, TDR 2014 argues that negotiations on rule making need to refocus on multilateral agreements which recognize the legitimate concerns of developing countries. It also argues that developing countries should carefully consider the loss of policy space when engaging in bilateral and regional trade and investment agreements. Such agreements often come with stricter commitments than in the same areas covered by multilateral agreements or extend to new areas, requiring policymakers to forsake the use of instruments that have proved effective in supporting industrialization. The Report also points to problems arising from the current international investment framework and the related ad hoc arbitrage tribunals that have assumed important law-making functions usually allocated to States.

In order to avoid macroeconomic instability and channel financing - both domestic and external - to productive uses, governments need to resort to capital management measures, including capital controls. In addition, the financing of investment and other public spending to meet development needs, requires that governments expand their fiscal space. The Report notes that the current structure of the global economy makes it difficult for countries to increase government revenues and to choose their tax structure. Lower tariffs have led to a significant reduction in border taxes; the conditions for taxing income and wealth have been altered by the increased mobility of capital and the intensive use of tax havens; and tax competition among countries has the potential to trigger a "race to the bottom" in efforts to attract foreign direct investment. Moreover, in many developing countries, fiscal space is still heavily influenced by the activities of the extractive industries. In this context, tax incentives provided to these industries can be excessively costly in terms of foregone revenues. The international tax architecture has failed so far to properly adapt to this reality and there is a risk that the debate on this matter will not fully take into account the needs and views of most developing and transition economies. Consequently, there is a need to strengthen multilateral and national policies to prevent tax leakages stemming from tax competition, tax avoidance practices and unfair distribution of natural resource rents. Given their relevance for many developing and transition economies, fiscal space and governance issues should be prominent in the post-2015 development agenda.