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Trade and Development Report 2017: Beyond Austerity: Towards a Global New Deal - Overview

Report by UNCTAD, 2017

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This report argues that now is the ideal time to crowd in private investment with the help of a concerted fiscal push – a global new deal – to get the growth engines revving again, and at the same time help rebalance economies and societies that, after three decades of hyperglobalization, are seriously out of kilter. However, in today’s world of mobile finance and liberalized economic policies, no country can do this on its own without risking capital flight, a currency collapse and the threat of a deflationary spiral. What is needed, therefore, is a globally coordinated strategy of expansion led by increased public expenditures, with all countries being offered the opportunity of benefiting from a simultaneous boost to their domestic and external markets. The Sustainable Development Goals (SDGs) agreed to by all members of the United Nations two years ago provide the political impetus for this much-needed shift towards global macroeconomic policy coordination. The report calls for more exacting and encompassing policy measures to address global and national asymmetries in resource mobilization, technological know-how, market power and political influence caused by hyperglobalization that have generated exclusionary outcomes, and will perpetuate them if no action is taken. It argues that, with the appropriate combination of resources, policies and reforms, the international community has the tools available to galvanize the requisite investment push needed to achieve the ambitions of the SDGs and promote sustainable and inclusive outcomes at both global and national levels.




The contents of this Report must not
be quoted or summarized in the print,
broadcast or electronic media before
14 September 2017, 17:00 hours GMT




New York and Geneva, 2017

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Material in this publication may be freely quoted
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or reprint should be sent to the UNCTAD secretariat;
e-mail: tdr@unctad.org.

The Overview contained herein is also issued as
part of the Trade and Development Report 2017.


UNCTAD/TDR/2017 (Overview)


Fifty years ago, at New York’s Riverside Church, Martin Luther
King made a passionate plea for a more equal, more just, more
peaceful and more dignified world. Calling for “a radical revolution
of values”, King concluded, “We must rapidly begin … the shift
from a thing-oriented society to a person-oriented society. When
machines and computers, profit motives and property rights are
considered more important than people, the giant triplets of
racism, extreme materialism and militarism are incapable of being

There is a contemporary ring to King’s call for a more inclusive
agenda. The “giant triplets” that he warned about are resurfacing,
accompanied by a retreat into resentful nationalism and xenophobic
comfort zones. The gaps between the rich, the middle class and the
poor have almost certainly widened since King’s time. And across
much of the world, the drive to achieve full employment with strong
welfare provision was thrown into reverse gear decades ago, as
governments effectively reinvented themselves as “enablers” rather
than “providers”.

Ten years after the gales of financial destruction originating in
Wall Street swept across the heartland of America and beyond,
the world economy remains marooned in a state of sub-standard
growth, while the social and economic inequities exposed by the
crisis show few signs of moderating. Governments have closed
down the most egregious loopholes and toxic instruments exposed
by the crisis; but however good their intentions, the reality is that
few who caused the crash have been held accountable for their
actions, and little has been done to tackle its root causes.

As “hyperglobalization” with the help of the very visible hand
of the State has recovered its poise, business as usual has set in;
the push for “light touch” regulation is under way yet again, and


austerity has become the preferred response to “excessively” high
levels of public debt. Meanwhile robots, rents and intellectual
property rights are taking precedence over the livelihoods of people
and their aspirations. History, it seems, has a troubling knack of
repeating itself.

Unlike the textbook world of pure competition, hyperglobalization
has led to a considerable concentration of economic power and
wealth in the hands of a remarkably small number of people. This
need not necessarily be antithetical to growth. But if history is any
guide, it tends to generate political tensions that clash with wider
public and social interests. Indeed, more clear-headed supporters
of “the market”, since Adam Smith, have warned of the political
dangers that can follow the concentration of economic wealth. It
is therefore hardly surprising to find a popular backlash against a
system that is perceived to have become unduly biased in favour of
a handful of large corporations, financial institutions and wealthy

The real threat now is to the underlying trust, cohesion and sense
of justice that markets depend upon in order to function effectively.
No social or economic order is safe if it fails to ensure a fair
distribution of its benefits in good times and the costs in bad times.

Insisting that “there is no alternative” is yesterday’s political
slogan. People everywhere desire much the same thing: a decent
job, a secure home, a safe environment, a better future for their
children and a government that listens and responds to their
concerns; in truth, they want a different deal from that offered by
hyperglobalization. The 2030 Agenda for Sustainable Development,
codified in a series of goals, targets and indicators, points in that
direction. What is still needed is a supportive policy narrative
and bold political leadership; there are hopeful signs that some
of the discarded strategies and solutions that helped re-build the
global economy after the Second World War are receiving a much
welcomed twenty-first century makeover and are attracting a new
generation determined to build a better world.

This time around, any new deal will need to “lift all boats” in both
developing and developed countries and face up to the challenge
that many of the imbalances inhibiting sustainable and inclusive
growth are global in nature. Prosperity for all cannot be delivered
by austerity-minded politicians, rent-seeking corporations and
speculative bankers. What is urgently needed now is a global new


The global economy: Ten years on

It is ten years since the world economy discovered the dangers of
hyperglobalization. The sudden stop in interbank lending in August
2007, along with heightened counterparty risk, caused serious jitters
in financial markets, plunged several financial institutions into an
insolvency spiral and lit the fuse on a Great Recession. Most of these
countries are yet to return to a sustainable growth trajectory.

Although the United States acted quickly to stem the financial collapse
that came one year later, the subsequent recovery has been sluggish
by historical standards, and unbalanced between the middle class and
the wealthy, between Wall Street and Main Street, and between urban
metropoles and smaller towns and rural communities. The crisis in
Europe was more pronounced and has proved more obdurate, particularly
in some peripheral economies where the resulting economic turmoil
has had devastating social consequences. The rise in unemployment, in
particular, has proved difficult to contain or reverse. A principal reason is
that most developed countries, to varying degrees, retreated prematurely
from the initial expansionary fiscal response to the crisis, relying instead
on monetary policy. This helped banks and financial firms to stabilize
and return to profit-making, but it was less successful in boosting
consumer spending and investment. In response, policymakers have
been nudging interest rates into negative territory in an unprecedented
attempt to push banks to lend. Even so, a strong recovery has remained

Despite buoyant financial markets and signs of a cyclical bounce-back in
Western Europe and Japan towards the end of the year, global economic
growth in 2016 was well below the levels recorded in the run-up to the
crisis. In the United States, signs of a slowdown towards the end of 2016
continued into 2017, with gross domestic product (GDP) growing at a
rate of 1.4 per cent in the first quarter, while real wage growth remained
sluggish despite falling unemployment, as reflected in a significant
deceleration in household spending. Growth across the euro zone has
varied significantly, being stronger in some of the smaller and poorer


countries in the first half of 2017, but subdued in the core countries. The
good news is that unemployment has, on average, dropped to single-
digit levels (with some notable exceptions such as in Greece and Spain),
although the quality of new employment is a concern.

The United Kingdom’s economy remained unexpectedly buoyant in
the second half of 2016, following the Brexit vote, as a result of a fall
in the value of the pound sterling, which boosted exports and increased
household spending, propelled by higher consumer borrowing and rising
house prices. But the subsequent deceleration (down to 0.2 per cent GDP
growth in the first quarter of 2017) may persist due to new political
uncertainties generated by a hung parliament as the Government
negotiates a Brexit deal. In Japan, the recent recovery is, in reality,
an uptick from a prolonged period of low growth, largely driven by
exports following a correction to the long-standing overvaluation of
its currency.

The absence of a robust recovery in developed countries and renewed
volatility of global capital flows have constrained economic growth in
developing countries, albeit with considerable regional and country-
level variation. In general, the rapid recovery from the initial financial
shock of 2008 has given way to a persistent slowdown since 2011.
Growth in the world’s two most populous economies − China and
India − remains relatively buoyant, but the pace is slower than before
the crisis and faces some serious downside risks. The start of 2017 has
seen other larger emerging economies move out of recession, but with
little likelihood of growth at the rates registered in the first decade of
the new millennium.

Two factors have been exercising a major influence on growth. The
first is that oil and commodity prices, while emerging from their recent
troughs, are still well below the highs witnessed during the boom years.
This has dampened recovery in the commodity-exporting countries.
Second, with developed economies abnegating responsibility for
a coordinated expansionary push, austerity has become the default
macroeconomic policy position in many emerging economies facing


fiscal imbalances and mounting debt levels. This could worsen if
an exit of foreign capital necessitates a cutback in imports in order
to reduce trade and current account deficits that become harder to
finance. Not surprisingly, anxious policymakers across the South, who
are increasingly aware that they have limited control over some of the
key elements of their economic future, are closely tracking the United
States Federal Reserve’s interest rate policy, the actions of commodity
traders and the predatory practices of hedge funds.

The Latin America and Caribbean region is expected to register positive
growth this year, but only just, following two years of contraction
in 2015 and 2016 when GDP fell by 0.3 per cent and 0.8 per cent
respectively. The average growth rate for the South American
economies as a group is projected to be 0.6 per cent, but higher
for the Caribbean, at 2.6 per cent. Commodity prices and political
developments in Argentina and Brazil, which together account for over
half of the region’s output, will have a significant bearing on regional
growth prospects. Growth in Mexico has flattened at a low but stable
rate; however inflationary pressures, fiscal consolidation and uncertain
policies of the Trump Administration have added downside risks to
its growth this year.

Growth in the Asia-Pacific region remains robust, albeit lower than the
recent historical trend, rising from 4.9 per cent in 2016 to an estimated
5 per cent in 2017. Much will depend on the performance of its two
largest economies. How China manages the explosion of domestic
debt since 2009 will be of great significance in this regard. China’s
estimated debt-to-GDP ratio is 249 per cent, compared with 248 per cent
in the United States and 279 per cent in the euro zone. As the Chinese
Government introduces measures to contain its rising debt, domestic
demand could be squeezed, with adverse consequences for the rest of
the region. India’s growth performance depends to a large extent on
reforms to its banking sector, which is burdened with large volumes
of stressed and non-performing assets, and there are already signs of
a reduction in the pace of credit creation. Since debt-financed private
investment and consumption have been important drivers of growth in


India, the easing of the credit boom is likely to slow GDP growth. In
addition, the informal sector, which still accounts for at least one third of
the country’s GDP and more than four fifths of employment, was badly
affected by the Government’s “demonetization” move in November
2016, and it may be further affected by the roll-out of the Goods and
Services Tax from July 2017. Thus, even if the current levels of growth
in both China and India are sustained, it is unlikely that these countries
will serve as growth poles for the global economy in the near future.

Meanwhile, lower oil prices and the end of the commodity boom,
especially since 2014, have adversely affected the African region (parts
of which suffered a drought), with regional growth falling from 3.0 per
cent in 2015 to 1.5 per cent in 2016. Only East Africa appeared to buck
this trend with average growth in 2016 remaining above 5 per cent. This
masks significant differences in the growth performance of individual
countries in 2016, from above 7 per cent in Côte d’Ivoire and Ethiopia,
to 1.1 per cent in Morocco and 0.3 per cent in South Africa. Indeed,
South Africa fell into a “technical recession” as GDP declined in two
consecutive quarters, by 0.3 per cent in the fourth quarter of 2016 and
by 0.7 per cent in the first quarter of 2017. This was due to the poor
performance of manufacturing and trade, though there were marked
improvements in agriculture and mining. Nigeria saw its GDP contract
by 1.5 per cent, while in Equatorial Guinea it fell by about 7 per cent.
The recent predicament of many of these economies is the result of their
continued failure to achieve growth through diversification; most of the
countries remain heavily dependent on one or very few commodities.

Where will global demand come from?

Against a backdrop of policy unreliability and capricious expectations,
boom and bust is likely to continue as the default growth pattern in
many countries. There may be fleeting moments of more widespread
optimism, but inclusive growth across the global economy will remain
an elusive goal in the absence of sustained international efforts to
manage a coordinated expansion.


There is much uncertainty as to where the stimulus for a more robust
recovery could come from. In the past, the United States economy
functioned as the principal driver of global demand, importing from
the rest of the world and running large current account deficits. With
the United States dollar serving as the world’s reserve currency, there
were sufficient capital inflows to finance not only those deficits, but
also the large outflows of capital from the country. In the process, there
emerged a mutually convenient relationship between the United States
and the rest of the world.

That changed dramatically after the global financial crisis. Following
a fall in the United States deficit after 2008, its net stimulus has
stabilized at well below the pre-crisis level. Since 2013, other developed
economies have posted growing current account surpluses, implying
that, as a group, they no longer provide a net demand stimulus to the
world economy. Meanwhile, developing and transition economies, as
a group, ran surpluses until 2014, which turned into deficits thereafter.
However, these deficits were much smaller in absolute size, and not
nearly enough to counter the impact of the declining net demand from
the developed economies.

China’s current account surplus, which until 2010 was the largest in the
world, has since been declining, albeit erratically. Germany has taken
over running the largest surpluses, which have even increased recently.
However, unlike the Chinese expansion, which during the boom
fostered growth in a range of other developing countries by drawing
them into value chains for exporting products to the more advanced
countries, the German expansion has not had similar positive impacts
in most developing countries. The resulting adverse effect on the global
economy has been compounded by a wider trend in the euro zone,
where austerity policies have augmented the region’s current account
surplus, exporting the euro zone’s deflation and unemployment to the
rest of the world.

Finding quick and effective ways to recycle and reduce those surpluses is
a singularly critical challenge for the international economic community,


a challenge that will prove difficult to tackle as long as austerity remains
the dominant macroeconomic mood in a hyperglobalized world. Since
2010, the majority of advanced economies have opted for “medium” to
“severe” austerity, and even the countries that have considerable fiscal
room for manoeuvre have resisted robust expansion. Until recently,
some major emerging market economies were exceptions to this trend;
but evidence suggests that they too are now curbing expenditure with
a view to fiscal consolidation.

Significant long-term investments that enable expansion in lower
income countries could be one means of reviving demand globally.
It is, therefore, encouraging that Germany has recently announced its
intention to launch a Marshall Plan for Africa. However, neither the scale
nor the intent appears to match the original model that helped to rebuild
post-war Europe. By contrast, China’s “One Belt, One Road” initiative
seems more ambitious. If implemented as planned, the investments
involved will be huge: an estimated $900 billion. However, so far, much
of the project is on the drawing board, and the pace of implementation
as well as its impact will depend on how China manages its domestic
imbalances, and on the mode of financing the proposed investments in
participating countries.

Testing times for trade and capital flows

Ever since the United States Federal Reserve began to suggest it might
taper its quantitative easing policies, capital flows have been volatile.
Since the second quarter of 2014, net capital flows to developing and
transition economies turned negative. This could have extremely adverse
consequences, as discussed in last year’s Trade and Development
Report. So far, the Federal Reserve has been ultra-cautious in nudging
rates higher (just 50 basis points in the first half of 2017). Nevertheless,
capital flight threatens even the stronger emerging economies. For
example, China experienced sudden and large capital outflows that
caused its foreign exchange reserves to fall from $4.1 trillion in June
2014 to $3.3 trillion in June 2016, and to a further $3.1 trillion by end


October 2016. To stem this tide of outflows, the Government imposed
some capital controls in November 2016, which had a stabilizing
effect. That this could happen in a country that had been the favoured
destination for global capital for decades, and still has the largest
holdings of foreign exchange reserves in the world, suggests that no
country is immune to the potentially destabilizing effects of mobile
capital flows.

World trade is likely to pick up this year from its very sluggish
performance in 2016, but there are doubts about the sustainability of the
export surge from emerging markets that underlies this improvement.
Given weak worldwide demand, global trade is unlikely to serve
as a broad stimulus for growth, other than for particular countries
that benefit from special circumstances. Moreover, hopes of an
imminent breakthrough in multilateral trade negotiations, with a
strong development orientation are fading.

Commodity prices, which increased last year and at the beginning
of 2017, provided some boost to commodity-exporting developing
countries. However, they are already easing off, and remain significantly
below their average in the first decade of the millennium. Crude oil
prices have been particularly volatile since early 2017, but in a generally
downward direction, and are stuck at well below the $50 mark despite
tensions in West Asia. There are also signs of a rise in oil inventories
in the United States as shale makes a comeback (in the context of
earlier price increases and technology-driven cost reductions), which
will further dampen oil prices over the medium term. Prices of metals
have similarly registered declines recently due to weakening demand
in the United States.

* * * *

In today’s challenging and unpredictable global environment, efforts to
build inclusive economies and societies will need to accelerate. Ending
austerity and harnessing finance to serve society once again, rather than
the other way around, are the most urgent challenges. Reinvigorating


the multilateral trading system as a global public good with renewed
momentum and relevance is also essential for achieving the Sustainable
Development Goals. But as long as organized business faces little
pushback across several key sectors, increased market concentration
and the spread of rent-extracting behaviour will continue apace. This
will exacerbate inequalities that have been rising over the past three
decades of hyperglobalization, and technological changes may worsen
the situation if they hamper job creation, adding to a growing sense of
anxiety. As good jobs become scarce, they are also more stringently
rationed, and reinforce patterns of social discrimination, particularly
along gender lines, but also affecting other disadvantaged groups.
Correcting these imbalances requires systematic and concerted action
at the national and international levels. Indeed, there is a pressing need
for a global new deal.

Follow the money: The financial origins of
inequality and instability

The world economy shifted abruptly after the early 1980s following an
extensive deregulation of markets − particularly financial and currency
markets − in rich and poor countries alike, and a steady attrition of the
public sphere. An additional contributory factor was the idolizing of
profit-making, not only across all aspects of economic life, but also in the
social, cultural and political realms. The resulting withdrawal of public
oversight and management of the economy included the curtailment,
and sometimes even the elimination, of measures previously adopted
by States to manage their integration into the global economy; “open
for business” signs were enthusiastically hung up across the global

Hyperglobalization found an eager group of technocratic cheerleaders to
acclaim the creative and calming properties of competitive markets and
profit-maximizing agents. But on the ground, it was financial interests
that led the charge. Under hyperglobalization, finance was not only able
to bend the real economy to its speculative endeavours; it also became


increasingly absorbed in interacting with itself. As a result, banks
became bigger and more diversified and, along with a range of other
financial institutions, invented a myriad of financial assets on which to
speculate. This combination of leverage and financial innovation turned
toxic in 2007, leading eventually to panic and meltdown a year later.

Since 2009, there have been efforts to temper the excesses of the
financial sector with sundry government commissions, some legislative
discipline on bank behaviour, heightened monitoring and calls for self-
restraint, as well as the occasional fine for the most blatant displays of
fraudulent behaviour. But the underlying macrofinancial structures have
remained broadly intact. Despite the trillions of central bank dollars
directed at the sector, the promised broad-based recovery has failed to
materialize in most countries. Above all, there has been almost no effort
to tackle the connections between inequality and instability that have
marked the rise of unregulated finance.

Although financialization started in the early 1980s in many developed
countries, various indicators show its marked acceleration in all
countries from the early 1990s. In most developed countries, total
banking sector assets have more than doubled since then, to over 200 per
cent of GDP in many European countries and the United States, and to
over 400 per cent of GDP in Japan. On a rough calculation, this makes
banking a one hundred trillion dollar sector. The picture for developing
and transition economies is different only in degree, with banking sector
assets peaking at over 200 per cent of GDP in countries such as Chile,
China and South Africa.

Increasing financial openness led to a rapid build-up of international
positions by these ever-larger financial players, exposing individual
countries to forces beyond the control of national policymakers, thereby
intensifying financial vulnerability and heightening systemic risk. At
the time of the 2008 financial crisis, the combined weight of banks’
external assets and liabilities ranged from 100 per cent of GDP in
Brazil, China and Turkey to more than 250 per cent of GDP in Chile
and South Africa. In most developed countries, this indicator hovered


between 300 per cent and 600 per cent of GDP. Such an environment
reflected the expansion of cross-border capital flows and foreign
exchange trading that vastly exceeded the requirements of trading in
goods and services. It also led to greater banking concentration, with
the total assets of the top five banks representing up to four times the
GDP in some developed countries, and up to 130 per cent of GDP in
some large developing countries.

Financialization was given a further boost by the capture of regulatory
and policy agendas, particularly in the most important financial
centres. Faith in the efficiency of the market contributed to the political
momentum for aligning public sector spending and services more
closely with those of private investors. This opened the door for the
privatization of health care, higher education and pensions, and in the
process, in many countries it burdened households with rising debts.
As their status and political clout rose, financiers promoted a culture
of entitlement that switched from justifying to celebrating extravagant
remuneration and rent extraction.

As Keynes recognized from his experience in the run-up to the Great
Depression of the early 1930s, the tendency towards a widening
income gap due to the free play of market forces, combined with
the higher savings propensity of the wealthier classes, has its limits
in insufficient aggregate demand (underconsumption) and excessive
financial gambling that favours short-term speculative and rent-seeking
activities over long-term productive investment. Also, as envisioned
later by Minsky, while these conditions can lead to periods of prosperity
and (apparent) tranquillity, an accelerating pace of financial innovation
encourages even more reckless investment decisions. The result is an
increasingly polarized and fragile global economic system, with stability
feeding instability and instability leading to vulnerability and shocks.

This unfettered development of financial markets encouraged the
extension of credit to poorer households, temporarily compensating for
the stagnation and (relative) decline of labour incomes that accompanied
the competitive pressures released by hyperglobalization. Consequently,


the level of consumption stabilized or even increased in many countries,
but only because it was fuelled by rising household debt. At the same
time, large financial and industrial conglomerates used their growing
profits (derived, in part, from exploiting cross-border wage and
corporate tax rate differentials) to borrow and speculate. Unsustainable
debt-led growth in some countries and export-led successes in others
led to widening global imbalances, adding new layers of vulnerability
and risk to an inherently polarized and unstable system. Financial crises
thus became more frequent and widespread. Many emerging market
economies were the early victims, but these were warm-ups for the
bigger showdown to come.

Two of the dominant socioeconomic trends of recent decades have been
the massive explosion in public and private debt, and the rise of super-
elites, loosely defined as the top one per cent. These trends are associated
with the financialization of the economy and the widening ownership
gap of financial assets, particularly short-term financial instruments. As
such, inequality is hard-wired into the workings of hyperglobalization.
Since the late 1970s, the gap between the top 10 per cent of income
earners and the bottom 40 per cent widened in the run-up to 4 out of
5 observed financial crises, but also in 2 out of 3 post-crisis countries.
While the run-up to a crisis is driven by “the great escape” of top
incomes especially favoured by financial developments, the aftermath
often results from stagnating or falling incomes at the bottom. When
crises occur, macrofinancial dislocations, one-sided reliance on financial
sector bailouts and monetary policy, with a consequent protracted
weakness of aggregate demand and employment, tend to worsen income
distribution and exacerbate tendencies towards instability.

Furthermore, as observed following major crisis episodes, such as the
Asian crisis in 1997−1998 and the global financial crisis in 2008−2009,
in the absence of international coordination, most countries will tend to
pursue austerity policies in an often failed attempt to induce investors to
return to their pre-crisis modus operandi. Thus, while profits accrue to
top income earners during financial booms, during the crises that follow,
the burdens are almost always borne by public sectors and transmitted


to domestic economies; the hardest hit are the most vulnerable sectors,
while large financial and industrial conglomerates tend to be first on
the financial life boats.

Revenge of the rentiers

Since the start of the hyperglobalization era, finance has tended to
generate huge private rewards absurdly disproportionate to its social
returns. Less attention has been given to the ways in which non-financial
corporations have also become adept at using rent-seeking strategies to
bolster their profits and emerge as a pervasive source of rising inequality.

Rents may be broadly defined as income derived solely from the
ownership and control of assets or from a dominant market position,
rather than from innovative entrepreneurial activity or the productive
deployment of a scarce resource. These are being captured by large
corporations through a number of non-financial mechanisms, such as
the systematic use of intellectual property rights (IPRs) to deter rivals.
Others have been acquired through the predation of the public sector,
including large-scale privatizations − which merely shift resources from
taxpayers to corporate managers and shareholders − and the handout
of subsidies to large corporations, often without tangible results in
terms of improved economic efficiencies or income generation. Yet
others have involved near fraudulent behaviour, including tax evasion
and avoidance, and extensive market manipulation by the managers of
leading corporations for their own enrichment.

Given the multiplicity of rent-seeking schemes and lax corporate
reporting requirements globally, it is difficult to measure the size of
corporate rents. One way of approximating their magnitude is by
estimating, by sector, surplus or “excess” corporate profits that deviate
from “typical” profits. On this measure, surplus profits have risen
markedly over the past two decades, from 4 per cent of total profits in
1995−2000 to 23 per cent in 2009−2015. For the top 100 firms, this
share increased from 16 to 40 per cent.


The data point to growing market power as a major driver of rent-
seeking. A rising concentration trend, particularly in developed-country
markets, has been observed with increasing alarm. Moreover, the
contagion is spreading. On several measures – market capitalization,
firms’ revenues and their (physical and other) assets – concentration
is rising across the world economy, but in particular the top 100 firms.
Market concentration and rent extraction can feed off one another,
resulting in a “winner-takes-most competition” that has become a
visible part of the corporate environment, at least in some developed
economies. The resulting intra-firm differences have contributed to
growing inequality. In 2015, the average market capitalization of the
top 100 firms was a staggering 7,000 times that of the average for the
bottom 2,000 firms, whereas in 1995 it was just 31 times higher.

Significantly, while these firms were amassing ever greater control
of markets, their employment share was not rising proportionately.
On one measure, market concentration for the top 100 firms rose
fourfold in terms of market capitalization, but less than doubled in
terms of employment. This lends further support to the view that
hyperglobalization promotes “profits without prosperity”, and that
asymmetric market power is a strong contributory factor to rising
income inequality.

Intense lobbying by the patent community has been a major force
driving the consolidation of market power, along with regulatory capture
by large corporations. As a result, the scope and life of patents, for
example, have been expanded considerably, and patent protection has
been extended to new activities that were not previously considered
areas of technological innovation, such as finance and business methods.
Patents are being granted for “innovations” in finance, e-commerce
and marketing methods that are not tied to any particular technological
product or process, but involve data and information processing in
purely electronic form. This not only fosters greater concentration, but
also restricts access to data and knowledge. Such a strategic, rather than
productive, use of IPRs to boost excess profits by keeping rivals at bay
has become a core rent-seeking strategy.


Multinational corporations’ excessive use of patent protection for
defensive purposes also directly affects innovation dynamics in
major emerging economies such as Brazil, China and India. Sharp
increases in United States affiliates’ sales over the past two decades in
relatively high-technology goods (e.g. information and communication
technologies, chemicals and pharmaceuticals) in these three countries
have generally been closely associated with their strongly expanding
patent protection.

In addition, mounting evidence suggests that other non-financial rent-
seeking strategies, such as tax evasion and avoidance, public sector
gouging (of both assets and subsidies) and rampant market manipulation
to boost compensation schemes for companies’ top management, are
being adopted by firms not only in the more advanced economies, but
also, increasingly, in developing economies.

Reining in endemic rentierism, and the inequalities it generates, requires
fixing the power imbalances that allow such behaviour to flourish.
This will not be easy, but it is indispensable if the objective of truly
inclusive and sustainable growth is to be realized. A good start would
be to recognize that both knowledge and competition are first and
foremost global public goods, and that their manipulation for private
profit should be effectively regulated.

Rage against the machine

Hyperglobalization has ridden a series of technological waves that have
compressed time and distance. These have lent an air of inevitability to
the growth and distribution patterns that have emerged primarily from
political and policy decisions, and have also shaped the policy response
to growing worries about people being “left behind”, with a singular
emphasis on boosting education and training.

In reality, the rise and spread of new technologies and the associated
breakdown of existing ways of life have been a recurring source of


policy debate and design since at least the Industrial Revolution, if
not earlier. And if history is any guide, over time the benefits of new
technologies can outweigh the costs. Past technological breakthroughs,
such as the steam engine, electricity, the automobile and the assembly
line, were disruptive, and resulted in substantial job losses and declining
incomes for some sectors and sections of society, but only in the short
run. These adverse effects were more than offset in the long term when
the fruits of innovation spread from one sector to another, and were
eventually harvested across the economy as workers moved to new
and better-paying jobs.

Still, the digital revolution (in particular the rapid march of robot
technology) is making people more anxious. On some accounts, because
robots are exponentially getting smarter, more dexterous and cheaper,
they are threatening to upend the world of work. With an ever-smaller
number of highly skilled people required for their operation, large-scale
job displacement and wage erosion are already seen to be hollowing out
the middle class in the more advanced economies and halting its rise in
emerging economies. The worry is that the 2030 Agenda’s commitment
to inclusive economies is being technologically subverted before it even
gets off the ground.

While there may be cause for such concerns, in hard economic terms,
these technological changes cannot explain current labour market woes.
This is not to deny the potentially employment-threatening effects of
digital technologies in the future; rather, to point out that their real
novelty lies less in their wider scope, faster speed or greater dexterity
than in their emergence at a time of subdued macroeconomic dynamism
in the more advanced economies and stalled structural transformation
in many developing economies. This has tended to hold back the
investment needed to properly absorb the new technologies and to create
new sectors that can provide improved employment opportunities for
displaced workers.

Industrial robots can affect employment and income distribution
through various channels, but in one way or another their spread


involves firms weighing the potential savings on labour costs against
the cost of investment in the new capital equipment. This means that
job displacement by robots is economically more feasible in relatively
skill-intensive and well-paying manufacturing, such as the automotive
and electronics sectors, than in relatively labour-intensive and low-
paying sectors, such as apparel production. Many existing studies
overestimate the potential adverse employment and income effects of
robots, because they neglect to note that what is technically feasible is
not always also economically profitable. Indeed, the countries currently
most exposed to automation through industrial robots are those with
a large manufacturing sector that is dominated by industries which
offer relatively well-paying jobs, such as automotives and electronics.
By contrast, robotization has had a relatively small direct effect in
most developing countries so far, and this is unlikely to change in the
foreseeable future, given their lack of diversification and technological

Despite the hype surrounding the potential of robot-based automation,
the use of industrial robots remains small, with an estimated total of
only 1.6 million units in 2015. However, their use has increased rapidly
since 2010, and is estimated to exceed 2.5 million units by 2019. The
vast majority of operational industrial robots are located in developed
countries, with Germany, Japan and the United States, combined
accounting for 43 per cent of the total. Robot density (the number
of industrial robots per employee in manufacturing) is the highest in
developed countries and former developing countries that are now at
mature stages of industrialization, such as the Republic of Korea. The
recent annual increase in robot deployment has been the most rapid in
developing countries, but this is mainly due to China, which has a large
manufacturing sector.

The distributional effects of robotics are likely to be diverse and will
depend on various factors, including a country’s stage in structural
transformation, its position in the international division of labour,
demographic developments, and its economic and social policies.
But there are already signs that industrial robots are increasing the


tendency towards concentration of manufacturing activities in a small
group of countries. This concentration tends to harm inclusiveness at
the international level, and given the sluggish global demand, poses
significant challenges for developing countries to achieve structural
transformation towards well-paying jobs in manufacturing. In this sense,
robotics could make it more difficult for countries to pursue economic
development on the basis of traditional industrialization strategies and
achieve the goals of the 2030 Agenda for Sustainable Development.

Indeed, some of the adverse employment and income effects of
robotization may well be felt in countries that do not use robots.
This is because robotization can boost companies’ international cost
competitiveness, thereby spurring exports from the home countries at the
expense of other countries, as the latter will be forced to bear at least part
of the adverse distributional consequences from robot-based automation
through reduced output and employment opportunities. Further,
developing countries’ employment and income opportunities in these
sectors may be adversely affected by the reshoring of manufacturing
activities and jobs back to developed countries. It is true that, so far,
there is relatively little evidence for such reshoring, and where it has
occurred, it has fallen short of the expected positive employment effects
in developed countries. Such reshoring has mostly been accompanied
by capital investment, such as in robots, and the little job creation that
has occurred has been concentrated in high-skilled activities. This
means that jobs that “return” with reshored production will not be the
same as those that left.

Some have suggested that slowing down automation by taxing robots
would give an economy more time to adjust, while also providing
fiscal revenues to finance adjustment. But such a tax may hamper the
most beneficial uses of robots: those where workers and robots are
complementary, and those that could lead to the creation of digitization-
based new products and new jobs. Others have suggested promoting a
more even distribution of the benefits from increased robot use, based
on the fear that robots will take over tasks with higher productivity and
pay compared to the average tasks that continue to be performed by


workers. If unchecked, the distributional effects from robotics would
increase the share of income going to the owners of robots and of the
intellectual property they incorporate, thereby exacerbating existing

Digitization could also create new development opportunities. The
development of collaborative robots could eventually be particularly
beneficial for small enterprises, as they can be set up easily without
the need for special system integrators, and they can rapidly adapt to
new processes and production-run requirements. Combining robots and
three-dimensional printing could create additional new possibilities
for small manufacturing enterprises to overcome size limitations in
production and conduct business on a much larger scale; if local demand
grows in tandem, participation in global value chains may become less
a matter of necessity and more one of strategic choice. At the same
time, digitization may lead to a fragmentation of the global provision
and international trade of services, with a good deal of uncertainty
as to whether digitally-based services would provide greater or less
employment, income and productivity gains as compared to traditional
manufacturing activities.

From a development perspective, the key question is whether the
greater use of robots reduces the effectiveness of industrialization
as a development strategy. This will depend on a number of factors,
including who owns and controls robot technologies, possible first
mover advantages from the use of robots, and in which manufacturing
sectors their impact is likely to be the most pronounced. In all these
respects, what will play a decisive role is the effective design and
implementation of digital industrial policies, and ensuring that countries
have the requisite policy space to implement them.

Harnessing the potential of the digital revolution so that it accelerates
productivity growth and feeds a more equitable and more sustainable
global economic expansion is undoubtedly required for achieving the
goals of the 2030 Agenda. Ultimately, whatever the current impacts
from the digital revolution, the final outcomes for employment and


inclusiveness will be shaped by policy choices, regulatory acumen
and social norms.

Gender and the scramble for bad jobs

For most people, finding a “good job” is the route to a better life, and
providing such jobs is key to creating an inclusive economy. Good
jobs are associated with decent work; and they tend to be in the formal
sector, where earnings are higher, job ladders accessible and working
conditions better regulated. In a development context, these jobs are
more likely to be located in the industrial than in the agricultural or
services sectors.

For half the world’s population, finding a good job encounters the barrier
of gender discrimination. The call for making hyperglobalization more
inclusive has therefore, rightly, acquired a strong female voice. But
there is much more to this challenge than increasing the participation
of women in markets and boardrooms. And even adding a gender
dimension to financial inclusion, entrepreneurship or trade facilitation
offers, at best, a limited path to a more inclusive economy. The
institutions and social norms underlying gender inequality tend to be
reproduced in labour markets. In the workplace, most women experience
discrimination and segmentation – practices that cannot be delinked
from the wider pressures of hyperglobalization.

In particular, the prevailing global policy environment, combined
with the forces of technology and structural change, has limited
the availability of jobs, particularly “good jobs”, relative to labour
supply. And the scarcity of good jobs has intensified both job rationing
by gender and the exclusion of women from better work opportunities,
even as women’s employment participation has increased and that of
men has declined overall.

Against the backdrop of boom and bust cycles, austerity and mobile
capital, there is a danger that greater gender equality in employment


can become gender conflictual, with women’s employment rates
rising (which they are in most countries of the world), and men’s
employment rates falling. This is an almost invisible phenomenon that
is not widely discussed, and although its strongest manifestations are
in the more advanced economies, it is now a troubling feature of job
markets worldwide, barring some cases of declining women’s labour
participation in major economies such as China and India.

The hollowing out of traditional factory jobs and manufacturing
communities has been a very visible feature of growing inequality in
developed countries, and is taking a particularly heavy toll on middle-
aged working class men. But the number of industrial sector jobs is
also declining in many developing countries that are facing premature
deindustrialization and stalled industrialization, and the negative impact
is much larger on women’s industrial employment than on men’s. In
developing countries, the share of industrial employment in men’s
total employment declined by an average of 7.5 per cent between 1991
and 2014, compared with a 39 per cent average decline for women.
Moreover, as industrial production becomes more capital-intensive,
women tend to lose jobs in this sector, even after controlling for
education, thus challenging the argument that women lose these jobs
because of differences in skills. With the increase in capital intensity
and automation, it seems unlikely that a technological revolution in the
South will improve gender equality.

Ultimately, an increase in employment opportunities in the industrial
sector should offer a gender inclusive alternative, but one that will
require a sustainable expansion in demand for industrial goods. For
developing countries, higher net exports of manufactures improve
industrial job prospects for women, provided that public policies
provide a certain amount of protection against imports; hence less trade
liberalization seems to be good for women workers. Expansive fiscal
policies also contribute to inclusion by increasing labour demand in
ways that lower job competition between women and men (it increases
women’s industrial employment without compromising men’s access);
thus austerity may be particularly bad for women.


Simply increasing economic growth, and hoping for a trickle-down
effect on gender equality has not delivered; it has had a limited impact
on women’s relative access to good jobs. What is more worrying for
gender equality is that increasing women’s labour force participation
without supportive demand-side policies and structures to productively
absorb these new market entrants worsens gender segregation in labour
markets and encourages the crowding of women into low-value-added,
informal service sector activities.

Does gender segregation in labour markets (or occupational hoarding
by gender) have a negative impact on labour overall, as reflected in the
wage share of income? In general, class dynamics appear to be gender
cooperative in the sense that what is good for women workers is also
good for labour overall, including men. Controlling for other factors,
there is evidence that the decline of women’s relative access to industrial
sector work has been associated with a decline in labour’s share of
income in developing countries since the early 1990s. However, at the
same time, when good jobs are scarce, higher labour force participation
by women constrains wage growth, potentially setting in motion a low-
wage growth path characterized by increasing economic insecurity and
gender conflict, since women’s labour participation appears to adversely
affect men’s employment prospects.

Given the employment challenges associated with structural and
technological change, and women’s primary responsibility for both
paid and unpaid care work, transforming unpaid and paid care activities
into decent work should become an integral part of strategies aimed at
building more inclusive economies.

A way forward: Towards a global new deal

At present, too many people in too many places are integrated into a
world economy that delivers inequitable and unjust outcomes. Economic
and financial crises, like that of 2008−2009, are only the more visible
manifestations of a world economy that has become increasingly


unbalanced in ways that are not only exclusionary, but also destabilizing
and dangerous for the political, social and environmental health of the
planet. Even when a country has been able to grow, whether through a
domestic consumption binge, a housing boom or exports, the gains have
disproportionately accrued to the privileged few. At the same time, a
combination of too much debt and too little demand at the global level has
hampered expansion. The subsequent turn to austerity in response to the
bust has hit some of the poorest communities hardest, leading to further
polarization and heightening people’s anxieties about what the future
might hold. Meanwhile political elites have been adamant that there is no
alternative. All this has proved fertile economic ground for xenophobic
rhetoric, inward-looking policies and a beggar-thy-neighbour stance.

Identifying technology or trade as the villains of these developments
distracts from an obvious point: without significant, sustainable and
coordinated efforts to revive global demand by increasing wages and
government spending, the global economy will be condemned to
continued sluggish growth, or worse. Now is the ideal time to crowd
in private investment with the help of a concerted fiscal push to get
the growth engines revving again, and at the same time help rebalance
economies and societies that, after three decades of hyperglobalization,
are seriously out of kilter. However, in today’s world of mobile
finance and liberalized economic borders, no country can do this on
its own without risking capital flight, a currency collapse and the
threat of a deflationary spiral. What is needed, therefore, is a globally
coordinated strategy of expansion led by increased public expenditures,
with all countries being offered the opportunity of benefiting from a
simultaneous boost to their domestic and external markets.

Moving away from hyperglobalization to inclusive economies is not a
matter of simply making markets work better, whether by enhancing
human capital, filling information gaps, smartening incentives,
extending credit to poor people, or providing stronger protection to
consumers. Rather, it requires a more exacting and encompassing
agenda that addresses the global and national asymmetries in resource
mobilization, technological know-how, market power and political


influence caused by hyperglobalization, which generate and perpetuate
exclusionary outcomes.

In many ways, the current conjuncture is propitious for such a
transformative agenda. The established order is under attack from both
ends of the ideological spectrum, and its legitimacy is being called into
question by the wider public. The Sustainable Development Goals
agreed to by all members of the United Nations provide the political
impetus for change. The aim should now be to harness this moment of
consensus to ensure an appropriate combination of resources, policies
and reforms needed to galvanize the requisite investment push and
promote inclusive outcomes at both global and national levels.

Despite all the talk of its increasing irrelevance and imminent demise,
the nation State still remains the basic unit of legitimacy and leadership
in today’s interdependent world, and to which citizens ultimately
turn for economic security, social justice and political loyalty. But
no less than in the past, achieving prosperity for all should involve
paying close attention to the biases, asymmetries and deficits in global
governance that can stymie inclusive and sustainable outcomes.
Effective internationalism continues to rest on responsible nationalism,
and finding the right balance remains at the heart of any meaningful
multilateral agenda.

With this in mind, there needs to be widespread support for a global new
deal. The original New Deal, launched in the United States in the 1930s
and replicated elsewhere in the industrialized world, particularly after
the end of the Second World War, established a new development path
that focused on three broad strategic components: recovery, regulation
and redistribution. While these components involved specific policy
goals tailored to particular economic and political circumstances, they
made job creation, the expansion of fiscal space and the taming of
finance a common route to success along this new path.

Building a new deal today could draw on those same components;
and, as before, States require the space to tailor proactive fiscal and


other public policies to boost investment and raise living standards,
supported by regulatory and redistributive strategies that tackle the
triple challenges of large inequalities, demographic pressures and
environmental problems. However, the specific challenges of inequality
and insecurity in the twenty-first century will not be tackled by countries
trying to insulate themselves from global economic forces, but rather
by elevating, where appropriate, some of the elements of Roosevelt’s
New Deal to a global level consistent with today’s interdependent world.

Elements to consider include:

• Ending austerity – This is a basic prerequisite for building
sustainable and inclusive economies. It involves using fiscal policy
to manage demand conditions, and making full employment a central
policy goal. Monetary expansion should also be used differently,
so as to finance public investments which add to inclusive and
sustainable outcomes. As part of a general expansion of government
spending that covers physical and social infrastructure, the state
can act as an “employer of last resort”; specific public employment
schemes can be very effective in job creation, especially in low-
income countries, where much of the workforce is in informal and
self-employed activities. Both public infrastructure investments
and employment schemes are important for reducing regional
imbalances that have arisen in developed and developing countries.

• Enhancing public investment with a strong caring dimension –
This would include major public works programmes for mitigating
and adapting to climate change and promoting the technological
opportunities offered by the Paris Climate Agreement, as well as
addressing problems of pollution and degradation of nature more
generally. It also means dealing with demographic and social
changes that erode local communities and extended families by
making formal public provision of child care and elderly care a
necessity. In both respects, public investments should be designed
to enable and attract more private investment, including SMEs and
in more participatory ownership forms such as cooperatives.


• Raising government revenue – This is key to financing a global
new deal. A greater reliance on progressive taxes, including on
property and other forms of rent income, could help address income
inequalities. Reversing the decline in corporate tax rates should
also be considered but this may be less important than tackling tax
exemptions and loopholes and the corporate abuse of subsidies,
including those used to attract or retain foreign investment.

• Establishing a new global financial register – Clamping down on
the use of tax havens by firms and high-wealth individuals will require
legislative action at both national and international levels. Interim
efforts in this direction could include a global financial register,
recording the owners of financial assets throughout the world.

• A stronger voice for organized labour – Wages need to rise in line
with productivity. This is best achieved by giving a strong voice
to organized labour. At the same time, job insecurity also needs
to be corrected through appropriate legislative action (including
on informal work contracts) and active labour market measures.
More innovative supplementary income support schemes could
be considered for achieving a fairer income distribution, such as a
social fund that could be capitalized through shares issued by the
largest corporations and financial institutions.

• Taming financial capital – Crowding in private investment requires
taming financial institutions to make them serve the broader social
good. In addition to appropriate regulation of the financial sector,
it is important to tackle private banking behemoths, including
through international oversight and regulation, as well as to
address the highly concentrated market for credit rating and the
cosy relationship between rating agencies and the shadow banking
institutions that have allowed “toxic” financial products to flourish.

• Significantly increasing multilateral financial resources – This
should include meeting ODA targets, but also ensuring better
capitalized multilateral and regional development banks. In addition,
the institutional gap in sovereign debt restructuring needs to be filled
at the multilateral level.


• Reining in corporate rentierism – Measures aimed at curtailing
restrictive business practices need to be strengthened considerably
if corporate rentierism is to be reined in. The 2013 OECD BEPS
initiative is a start, but a more inclusive international mechanism
for the regulation of restrictive business practices will be needed.
Earlier attempts in the United Nations, dating back to the 1980s,
would be a good place to begin. Meanwhile, stricter enforcement
of existing national disclosure and reporting requirements for large
corporations would be useful. A global competition observatory
could facilitate the task of systematic information gathering on
the large variety of existing regulatory frameworks, as a first step
towards coordinated international best practice guidelines and
policies, and to monitor global market concentration trends and
patterns. Competition policy more generally should be designed
with an explicit distributional objective.

• Respecting policy space – Meaningful reform of the many restrictive
investment and intellectual property policies enshrined in thousands
of bilateral – and the growing number of regional – trade and
investment agreements, will be impossible without a fundamental
overhaul of the current international investment regime. This should
begin with rethinking its current narrow purpose of protecting
foreign investors in favour of a more balanced approach that takes
the interests of all stakeholders on board and recognizes the right
to regulate at the national level. The international investment
dispute settlement and arbitration system needs to be fixed, and if
necessary, replaced by a more centralized system with proper appeal
procedures and grounding in international law. An Advisory Centre
on International Investment Law could help developing country
governments navigate disputes with multinational corporations on
more egalitarian terms.

In 1947, drawing on the values of the original New Deal, the international
community sought to rebalance a world economy shattered by depression
and war: the International Monetary Fund (IMF) opened its doors to
business, the World Bank provided its first restructuring loan, the
General Agreement on Tariffs and Trade (GATT) concluded its first


multilateral trade deal, George Marshall launched the most successful
development cooperation project in modern history, and the United
Nations opened its first regional office and convened its first major
conference (on trade and employment). Seven decades later, an equally
ambitious effort is needed to tackle the inequities of hyperglobalization
in order to build inclusive and sustainable economies.