World economy still in disarray

Wednesday, 2 October 2013 00:00 -     - {{hitsCtrl.values.hits}}

UNCTAD released its annual Trade and Development Report for 2013, painting a not-so-rosy picture regarding the world economy. Five years since the global financial crisis, UNCTAD finds the world economy still in disarray and the outlook for the world economy and global environment for development continuing to be ‘highly uncertain’. Commenting on the persistence of dominance of finance over real economic activity which may have even increased, the report notes that although in 2008 and 2009 policy makers of several economically powerful countries had called for urgent reforms of the international monetary and financial system, since then, the momentum in pushing for reform has almost disappeared from the international agenda resulting in uncertainty in the outlook for the world economy and for the global environment for development. In such a situation, the report points out that export oriented growth model is not an option for the immediate future. Showing that exports from developing and transition economies grew rapidly prior to the recession due to buoyant consumer demand mainly in the US, justifying the adoption of an export oriented growth model, the report notes that the expansion of the world economy, though favourable for many developing countries, was built on unsustainable global demand and financing patterns. In a situation where export oriented growth is not an option, many developing and transition economies which have been overly dependent on exports for growth are compelled to re-strategise their development policies. The report therefore recommends the need to rebalance the drivers of growth with greater weight on domestic demand. Such a shift would be a formidable challenge for developing countries as it will require a new perspective on the role of wages and the public sector in the development process. An advantage of such a policy is that many countries can simultaneously follow this development strategy which can even spur South-South trade. The report also shows that in 2013, developing countries are expected to grow by between 4.5 and 5%, similar to 2012, and in many of these economies, growth was driven more by domestic demand than by exports. China is quoted as an example where the contribution of net exports to GDP growth continued to decline while fixed investment and private consumption as a result of faster wage growth have caused output expansion. Other countries such as India, Indonesia, the Philippines and Thailand have also shown similar trends. Commenting on the emerging new pattern of global growth due to the rapid expansion of developing economies as a group increasing their position in the world economy, the report recommends the increased role of domestic demand and South-South trade in their development strategies. It is noted that the potential for South-South trade is much more than in the past when their share in total trade was slightly less than in 30%in 1995, as compared to slightly more than 40% in 2012. Although the report recommends the need to cater more to domestic demand than to exporting, the report also highlights some of the many challenges in moving towards such a strategy. These include boosting domestic purchasing power, managing domestic demand expansion in a way that avoids an excessive increase in import demand and nurturing the inter-relationship between household and government expenditure on the one hand and investment on the other hand to enable the sectoral composition of domestic production to adjust to new demand patterns including through increased regional and South-South trade. The shifting of focus of development strategies to domestic markets does not imply that the importance of the role of exports is minimised. Exports could actually expand if several trade partners were to achieve higher economic growth simultaneously. A domestic demand driven growth strategy has to take into account the fostering of the purchasing power of the population in general and of wage earners in particular. The proportion of the middle class is expected to grow more than four-fold in developing countries and Asia will account for the bulk of this increase. An enlarged middle class will be the most important source of buying power for domestic manufacturers. In relatively poor countries and countries with a large export sector, labour income is said to be the most important source of household consumption. While export led strategies focus on the cost aspect of wages, a domestic demand strategy has to focus on the income aspect of wages. Another important element of a strategy to increase domestic consumption, particularly in countries with a large rural sector with many small producers, is to introduce mechanisms to ensure fair prices for agricultural producers. The importance of this also lies in the fact that this is the segment of population which will spend most of their income on locally produced goods and services. Governments could also take certain fiscal actions such as providing tax rebates on certain consumer goods that are or can be produced locally. But spurring domestic demand by facilitating access to consumer credit for the acquisition of durable consumer goods is risky. International agencies have the expertise and the resources to study future trends and make recommendations. Policy makers should know to study these reports and make necessary adjustments to their plans for development if their economies are to benefit from such recommendations. (Manel de Silva holds an Honours Degree in Political Science from the University of Ceylon, Peradeniya and has engaged in professional training in Commercial Diplomacy at ITC and GATT. She has served as a trade diplomat in several Sri Lankan Missions overseas and was the first female Head of the Department of Commerce as Director General of Commerce.)

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