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Trade and Development Report 2018 - Power, Platforms and the Free Trade Delusion - Overview

Report by UNCTAD, 2018

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Managing structural transformation is a big challenge at all levels of development. In part, that is because the mixture of creative and destructive forces accompanying such a transformation do not automatically translate into a virtuous growth circle while the rents that are inevitably created in the process can be captured by a privileged group in ways that clog the economic arteries and increase the dangers of a political stroke. There are already signs of this happening with the digital revolution. However, this is not inevitable and if history is any guide, public policy, including industrial policy, can help to manage more inclusive and sustainable outcomes. This set out some elements of that agenda. It has argued that structural transformation will also need to be accompanied by infrastructure planning. It has suggested that the old debate between balanced and unbalanced growth provides a rich discussion for thinking about those techniques, skills and institutional requirements. The bottom line when it comes to infrastructure spending is that it is too important a development matter to be left to the sole responsibility of finance ministries.








New York and Geneva, 2018

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The Overview contained herein is also issued as
part of the Trade and Development Report 2018


UNCTAD/TDR/2018 (Overview)


Technological changes are having a profound impact on the way
we go about our daily lives. Digital innovations have already
changed the way we earn, learn, shop and play. Collectively, as a
fourth industrial revolution, they are changing the geography of
production and the contours of work. But in the end, social and
political actions – in the form of rules, norms and policies – will
determine how the future unfolds.

In this respect, the digital revolution has the misfortune of unfolding
in a neo-liberal era. Over the last four decades, a mixture of
financial chicanery, unrestrained corporate power and economic
austerity has shredded the social contract that emerged after the
Second World War and replaced it with a different set of rules,
norms and policies, at the national, regional and international
levels. This has enabled capital – whether tangible or intangible,
long-term or short-term, industrial or financial – to escape from
regulatory oversight, expand into new areas of profit-making and
restrict the influence of policymakers over how business is done.

This agenda has co-opted a vision of an interconnected digital
world, free from artificial boundaries to the flow of information,
lending a sense of technological euphoria to a belief in its own
inevitability and immutability. Big business has responded by
turning the mining and processing of data into a rent-seeking

Recent events – beginning with the financial crisis, through
the sluggish recovery that has followed, to the fake news and
data privacy scandals now grabbing headlines – have forced
policymakers to face the inequities and imbalances produced by this
agenda. Governments have begun to acknowledge the need to fill
regulatory deficits that harm the public, to provide stronger safety


nets for those adversely affected by technological progress and to
invest in the skills needed for a twenty-first century workforce. But
so far, actions have spoken more softly than words.

Despite the talk, this is neither a brave nor a new world.
The globalization era before 1914 was also one of dramatic
technological changes as telegraph cables, railroads and
steamships speeded up and shrank the world; it was also a world
of unchecked monopoly power, financial speculation, booms and
busts, and rising inequality. Mark Twain castigated a “Gilded
Age” of obscene private wealth, endemic political corruption
and widespread social squalor; and, not unlike today’s digital
overlords, the railroad entrepreneurs of yesteryear were master
manipulators of financial innovations, pricing techniques and
political connections that boosted their profits even as they harmed
business rivals and the public alike.

And much like today, the new communication technologies of
the nineteenth century helped capital to reconfigure the global
economy. Many commentators wistfully describe this as a “free
trade” era, evoking David Ricardo’s idea of comparative advantage
to suggest that even technological laggards were better off
specializing in what they did best and opening up to international
trade. Here was a comforting win–win narrative for a winner-
takes-most world, and an article of faith for the globalist cause,
which led John Maynard Keynes, in his General Theory, to draw
parallels with the Holy Inquisition.

In reality, international trade in the late nineteenth century was
managed through an unholy mixture of colonial controls in the
periphery and rising tariffs in the emerging core, often, as in the
case of the United States, pushed to very high levels. But like
today, talk of free trade provided a useful cover for the unhindered
movement of capital and an accompanying set of rules – the
gold standard, repressive labour laws, balanced budgets – that
disciplined government spending and kept the costs of doing
business in check.

As the growing imbalances and tensions of contemporary
globalization play out in an increasingly financialized and
digitalized world, the multilateral trading system is being stretched
to its limit. Uncomfortable parallels with the 1930s have been
quickly drawn. But if there is one lesson to take from the interwar
years, it is that talking up free trade against a backdrop of austerity
and widespread political mistrust will not hold the centre as things


fall apart. And simply pledging to leave no one behind while
appealing to the goodwill of corporations or the better angels of the
super-rich are, at best, hopeful pleas for a more civic world and, at
worst, wilful attempts to deflect from serious discussion of the real
factors driving growing inequality, indebtedness and insecurity.

The response cannot be to retreat into some mythical vision of
national exceptionalism, or to sit back and hope that a wave of
digital exuberance will wash these problems away. There is, rather,
an urgent need to rethink the multilateral system, if the digital age
is to deliver on its promise.

In the absence of a progressive narrative and bold leadership, it is
no surprise that the interregnum, as Antonio Gramsci would have
predicted, is exhibiting disturbing signs of political morbidity.
Finding the right narrative will be no easy task. For the moment,
we might do best to recall the words of Mary Shelley – whose
monstrous creation, Frankenstein, celebrating 200 years this year,
has lost none of its power to evoke our fear of and fascination with
technological progress – “the beginning is always today”.

Pricking thumbs: Where is the global economy heading?

Ten years ago, in September 2008, Lehman Brothers declared
bankruptcy. Suddenly, no one was quite sure who owed what to
whom, who had risked too much and couldn’t pay back, or who would
go down next; interbank credit markets froze; Wall Street panicked;
businesses went under, not just in the United States but across the
world; politicians struggled for responses; and economic pundits were
left wondering whether the Great Moderation was turning in to another
Great Depression.

What is surprising, with hindsight, is the complacency in the run-up to
the crisis. What is more surprising still is just how little has changed
in its aftermath. The financial system, we are told, is simpler, safer and
fairer. But banks have grown even bigger on the back of public money;
opaque financial instruments are again de rigueur; shadow banking has
grown into a $160 trillion business, twice the size of the global economy;


over-the-counter derivatives have surpassed the $500 trillion figure; and
(little surprise) bonus pools for bankers are overflowing once again.

On the back of trillions of dollars of publicly generated liquidity
(“quantitative easing”), asset markets have rebounded, companies
are merging on a mega scale and buying back shares has become the
measure of managerial acumen. By contrast, the real economy has
spluttered along through ephemeral bouts of optimism and intermittent
talk of downside risk. While some countries have turned to asset markets
to boost incomes, others have looked to export markets – but neither
option has delivered growth on a sustained basis, and both have driven
inequality even higher.

Arguably the greatest damage of all has been dwindling trust in the
system. Here economists have no excuses, at least if they have bothered
to read Adam Smith. In any system claiming to play by rules, perceptions
of rigging are guaranteed eventually to undermine its legitimacy. The
sense that those who caused the crisis not only got away with it but
profited from it has been a lingering source of discontent since 2008;
and that distrust has now infected the political institutions that tie
citizens, communities and countries together, at the national, regional
and international levels.

The paradox of twenty-first century globalization is that – despite an
endless stream of talk about its flexibility, efficiency and competitiveness
– advanced and developing economies are becoming increasingly
brittle, sluggish and fractured. As inequality continues to rise and
indebtedness mounts, with financial chicanery back in the economic
driving seat and political systems drained of trust, what could possibly
go wrong?

At some point in the past year, the mood music around the global
economy changed. The perception of synchronized upswings across
many different economies, developed and developing, suggested a
positive prognosis for future growth. Upbeat forecasts of economic
recovery have led central bankers and macroeconomic policymakers


in advanced economies to accept that the time has come to reverse the
easy money policies in place for the past decade.

The optimism hasn’t lasted very long. Recent growth estimates have
been lower than forecast and show some deceleration. Eurozone growth
in the first quarter of 2018 is estimated to have decelerated relative to
the previous quarter, and is now the slowest rate since the third quarter
of 2016; in the United States, the annualized gross domestic product
(GDP) growth rate for the first quarter has been revised downward,
from 2.3 per cent to 2.0 per cent, significantly lower than the previous
three quarters; and growth in the first quarter in Japan turned negative.

Developing economies are holding out better, with first quarter growth
for 2018 beating expectations in China and India, but no improvement
and even deceleration in Brazil and South Africa. The Russian
Federation, like many other oil exporters, has seen the benefits of higher
prices. Indeed, commodity exporting regions are generally enjoying
the recovery in prices, albeit with some recent signs of a slowdown.

Overall, regional growth forecasts for this year are still on track.
However, the number of countries appearing to be in some kind of
financial stress has increased and forecasts for the medium term are
being revised downwards. Already, as the talk of monetary policy
normalization grows louder, a number of developing countries are
struggling to cope with capital flow reversals, currency depreciation
and associated instability.

The core concern is the continued strong dependence of tepid global
growth on debt, in a context of shifting macroeconomic trends. By early
2018, global debt stocks had risen to nearly $250 trillion –three times
global income – from $142 trillion a decade earlier. UNCTAD’s most
recent estimate is that the ratio of global debt to GDP is now nearly
one third higher than in 2008.

Private debt has exploded, especially in emerging markets and
developing countries, whose share of global debt stock increased from


7 per cent in 2007 to 26 per cent in 2017, while the ratio of credit to
non-financial corporations to GDP in emerging market economies
increased from 56 per cent in 2008 to 105 per cent in 2017.

Vulnerability is reflected in cross-border capital flows, which have
not just become more volatile but turned negative for emerging and
developing countries as a group since late 2014, with outflows especially
large in the second quarter of 2018.

Clearly, markets turned unstable as soon as the central banks in advanced
economies announced their intention to draw back on the monetary
lever. This leaves the global economy on a policy tightrope: reversing
the past loose monetary policy (in the absence of countervailing fiscal
policy) could abort the halting global recovery; but not doing so simply
kicks the policy risks down the road while fuelling further uncertainty
and instability.

What is more, the implications of monetary policy tightening, whether
now or later, could be severe because of the various asset bubbles
that have emerged, even as the chances of global contagion from
problems in any one region or segment now seem greater than ever.
The synchronized movement of equity markets across the globe is one
indicator of this. While property price movements in different countries
have been less synchronized, they have also turned buoyant once again
after some years of decline or stagnation after the Great Recession.

The cheap liquidity made available in developed country markets
led to overheating in asset markets in both advanced and developing
economies, as investors engaged in various forms of carry trade. The
impact of the liquidity surge on equity markets has been marked, as
valuations have touched levels not warranted by potential earnings.
This has resulted in a fundamental disconnect between asset prices
and real economic forces. With no support from fiscal policy, monetary
measures failed to spur robust recovery of the real economy. While asset
prices have exploded to unsustainable levels, nominal wages increased
by much less, and stagnated in many countries. This has led to further


increases in income inequality, which implied that sluggish household
demand could only be boosted through renewed debt bubbles.

Meanwhile, debt expansion has not financed increased new investment.
In advanced economies, the investment ratio dropped from 23 per cent
on average in 2008 to 21 per cent in 2017. Even in emerging markets
and developing countries, the ratio of investment to GDP was 32.3 per
cent in 2017, only marginally higher than the 30.4 per cent achieved
in the crisis year 2008, with some larger economies registering a drop
over this period.

The policy dilemma is made more difficult by other “known unknowns”:
uncertainties about the movement of oil prices that also reflect
geopolitical dynamics, and the possible trajectories and implications
of trade wars that could result from the current muscle-flexing in the
United States and its major trading partners. Trade picked up steam last
year following several years of very sluggish growth and will likely
continue to do so this year; but bets are off for what might happen
beyond that.

In the absence of strong global demand, trade is unlikely to act as an
independent engine of global growth. That said, a sharp escalation of
tariffs and heightened talk of a trade war will only add to the underlying
weakness in the global economy. Because tariffs operate in the first place
by redistributing income among several actors, gauging their impact is
not as straightforward as some of the more apocalyptic trade pundits are
predicting. Still, they will almost certainly not have the desired effect
of reducing the current account deficit in the United States; will raise
uncertainty if tit-for-tat responses ensue; and will cause significant
collateral damage for some developing countries, adding to the pressures
already building from financial instability.

This is not, however, the start of the unravelling of the “post-war liberal
order”. That order has been eroded over the past 30 years by the rise
of footloose capital, the abandonment of full employment policies, the
steady decline of income going to labour, the erosion of social spending


and the intertwining of corporate and political power. Trade wars are a
symptom of an unbalanced hyperglobalized world.

Nor is the rise of emerging economies the source of problems. China’s
determination to assert its right to development has been greeted with
a sense of anxiety, if not hostility, in many Western capitals, despite it
adopting policies that have been part of the standard economic playbook
used in these same countries as they climbed the development ladder.
Indeed, China’s success is exactly what those who gathered in Havana
back in 1947 to design an International Trade Organization wanted
and sought to encourage. The difference in discourse between then and
now speaks to how far the current multilateral order has moved from
its original intent.

The wretched spirit of monopoly

As discussed in last year’s Trade and Development Report, increased
market concentration and rising markups have become commonplace
across many sectors and economies, with rent-seeking behaviour
dominating at the top of the corporate food chain. These trends have
inevitably extended across borders.

International trade has always been dominated by big firms. However,
in the decades following the end of the Second World War, markets
remained contested, as new entrants emerged and as countervailing
bargaining power in the workplace, along with effective State regulations,
constrained the power and reach of large corporations. Many of those
constraints have been eroded in the era of hyperglobalization, even as
more markets were opened up for business.

The resulting expansion of trade has been closely tied to the spread
of global value chains (GVCs) governed by lead firms, principally
headquartered in advanced economies. These have allowed more
developing countries to participate in the international division of labour
by providing specific links in these chains, drawing on their abundance


of unskilled labour. The promise was that such fledgling manufacturing
activities, through a mixture of upgrading and spillover effects, would
quickly establish robust and inclusive growth paths aligned to their
comparative advantage. Things have not turned out quite so simply.

The World Input–Output Database makes it possible to assess changes
in the cross-country distribution of value added in manufactured
output. The domestic share in this can be disaggregated into the shares
received by management, marketing, research and development, and
fabrication (or actual production), taking the capital share as a residual.
From 2000 to 2014, both the domestic share of total value added and
the domestic share of labour income in total value added declined in
most countries, with the significant exception of China. The evidence
for the domestic part of the capital share is more mixed; it increased
sizeably in the United States and to a lesser extent in Mexico, while it
declined in Brazil and China. However, the capital share is affected by
transfer pricing and related practices, which cause returns on capital
to show up in low-tax jurisdictions rather than the country where such
returns originate.

The domestic share of fabrication declined in all countries other than
Canada and China (in which country the share increased to 30 per cent
in 2014). The picture for management and marketing activities is mixed,
but the domestic share of research and development activities in total
value added increased in most developed economies, particularly in
Japan. There was also an increase in this share (from relatively low
levels) in a range of developing economies, notably Brazil, China,
Indonesia, Mexico, the Republic of Korea and Taiwan Province of
China. Nevertheless, developed economies still recorded the highest
levels of domestic shares of research and development activities in
total value added.

One important factor behind these distributional trends has been the
increased bargaining power of corporations, in part due to extremely
concentrated export markets. Recent evidence from firm-level data on
non-oil merchandise exports shows that, within the restricted circle


of exporting firms, the top 1 per cent accounted for 57 per cent of
country exports on average in 2014. The distribution of exports is
thus highly skewed in favour of the largest firms. The concentration is
even more extreme at the top of the distribution and increased further
under hyperglobalization. After the global financial crisis, the 5 largest
exporting firms, on average, accounted for 30 per cent of a country’s total
exports, and the 10 largest exporting firms for 42 per cent. This sheer
size reinforced the gradual dilution of social and political accountability
of large corporations to national constituencies and labour around the

In developing countries, the adverse impact of international trade on
inequality has also resulted from the proliferation of special processing
trade regimes and export-processing zones, which subsidize the
organization of low-cost and low-productivity assembly work by the
lead firms in control of GVCs, with limited benefits for the broader
economy. The mixed outcomes of policies to promote processing trade
often reflect the strategies of transnational corporations to capture value
in GVCs that are designed on their own terms, with high value-added
inputs and protected intellectual property content sold at high prices to
processing exporters, and the actual production in developing countries
accounting for only a tiny fraction of the value of exported final goods.

This raises questions about the strong bets made in many developing
economies on the spillovers expected from processing trade, because
unless developing countries manage to capture part of the surplus
created by these GVCs and reinvest it in productive capacities and
infrastructure, immediate gains in output and employment are unlikely
to translate into a dynamic move up the development ladder.

China’s particular success in using GVCs has crucially relied on its
capacity to claim and use policy space to actively leverage trade through
targeted industrial and other policies aiming at raising domestic value
added in manufacturing exports. It has also relied on the ability of the
Chinese authorities to develop independent financing mechanisms and
acquire control over foreign assets, which are now being perceived


by developed countries as a threat to their own business interests.
Replicating these measures, however, is proving difficult elsewhere.

Along with the rise of export market concentration, large firms have
increased their ability to extract rents from newer and more intangible
barriers to competition, reflected in heightened protection for intellectual
property rights and abilities to exploit national rules and regulations for
profit shifting and tax avoidance purposes. The consequent increase
in returns from monopolies generated by IPRs, as well as reduction in
relative tax costs of larger companies, creates an uneven playing field.
The empirical exercises carried out for this Report suggest that the surge
in the profitability of top transnational corporations – a proxy for the very
large firms dominating international trade and finance – together with
their growing concentration, has acted as a major force pushing down the
global labour income share, thus exacerbating personal income inequality.

The increase in profits of large “superstar” firms has been a major
driver of global functional inequality, widening the gap between a small
number of big winners and a large collection of smaller companies and
workers that are being squeezed.

Given this winner-takes-most world, a key question is whether the
spread of digital technologies risks further concentrating the benefits
among a small number of first movers, both across and within countries,
or whether it will operate to disrupt the status quo and promote greater

All companies, if they are to enjoy efficiency gains and take innovative
steps, should be able to collect and analyse the full range of data on
the markets and cost conditions under which they operate. Lack of
such information and the skills to manage it have long been seen as a
constraint on the growth of most firms in developing countries, as well
as on smaller firms in advanced economies.

The good news for developing countries is that data intelligence,
created by the use of algorithms on big data, can help firms (both in


the digital sector and beyond) to develop unique products and services,
extend and coordinate complex supply chains, and underpin the world
of algorithmic decision-making. Engaging in digital trade could be a
promising first step, by encouraging the provision of hard and soft digital
infrastructure, which is a basic requirement for people and enterprises
to engage successfully in the digital economy. Anecdotal success stories
point to firms from the South exploiting digital technologies to move in
to pre- and post-production tasks in the value chain where value added
is greatest. Significantly, China’s ambitious new industrial strategy aims
to make this an economy-wide goal by 2025.

The bad news comes from trends pointing in a different direction. The
widening gaps across firms have been particularly marked in the digital
world. Of the top 25 big tech firms (in terms of market capitalization)
14 are based in the United States, 3 in the European Union, 3 in China,
4 in other Asian countries and 1 in Africa. The top three big tech firms
in the United States have an average market capitalization of more
than $400 billion, compared with an average of $200 billion in the top
big tech firms in China, $123 billion in Asia, $69 billion in Europe and
$66 billion in Africa. What has been significant is the pace at which the
benefits of market dominance have accrued in this sector: Amazon’s
profits-to-sales ratio increased from 10 per cent in 2005 to 23 per cent
in 2015, while that for Alibaba increased from 10 per cent in 2011 to
32 per cent in 2015.

The size of these gaps and the speed with which they have opened up
are, in large part, due to the extraction, processing and sale of data. Data,
like ideas and knowledge more generally, and unlike most physical
goods and services, if easily available, can be used simultaneously
by multiple users. The challenge for business is twofold: to convert a
seemingly abundant resource into a scarce asset and to realize the scale
economies associated with network effects; if firms can achieve both,
the returns appear to be limitless.

One way in which digitization is profoundly impacting distribution is
through the emergence of platform monopolies. Using a combination of


strengthened property rights, first-mover advantages, market power and
other uncompetitive practices, these platforms control and use digitized
data to organize and mediate transactions between the various actors,
and have the capability of expanding the size of such ecosystems in a
circular, feedback-driven process.

The trend towards greater concentration, in both the digital and
analogue worlds of business, poses several macroeconomic risks and
development challenges, which are starkly evident today. One concern
is the negative impact that trade under hyperglobalization can have on
aggregate demand, as it helps capital to progressively acquire a larger
share of world income at the expense of labour. Many economists have
noted that rising inequality, together with the higher propensity to save
of the rich, creates a bias towards underconsumption or, alternatively,
has encouraged debt-led consumption enabled by financial deregulation.
Both of these processes tend to end badly.

Since the financial crisis, financial markets and major transnational
financial institutions have, with some justification, become the
principal villains in this story – but it is now evident that non-financial
corporations cannot remain immune from criticism. Facing weaker
prospective sales in a context of weak aggregate demand that has been
compounded by the post-crisis turn to austerity, large corporations
have cut back on investment, further depressing aggregate demand and
contributing to slower trade in recent years. This breakdown of the profit
investment nexus is one of the factors behind the reported slowdown in
productivity growth, particularly in advanced economies.

In such an environment, incentives are strong for firms to seek to
boost profitability through rent-seeking strategies, such as intensifying
international competition between workers and between Governments
to reduce labour and tax costs, crushing or buying up competitors to
build up market dominance and increase markups, etc. The unfortunate
truth is that the attempts of big firms to enhance their own market
position through such strategies only make the broader economic
system more fragile and vulnerable, since together they lead to more


inequality, underconsumption, debt and, consequently, macroeconomic

One form of rent extraction attracting increasing attention is aggressive
tax optimization by locating a firm’s tax base in low-tax jurisdictions.
The fact that United States companies generate more investment income
from Luxembourg and Bermuda than from China and Germany is a
reflection of corporate fiscal strategy, not economic fundamentals.
The digital economy may exacerbate tax-base erosion because a
multinational enterprise whose main assets are intellectual property
or data can easily offshore such assets. While the Organization for
Economic Cooperation and Development’s Base Erosion and Profit
Shifting initiative has taken some useful steps towards safeguarding
fiscal revenues, taxing where activities are undertaken rather than
where firms declare themselves as being headquartered redistributes
rents and may be better suited to enlarging the tax bases of developing

Bits and bots: Policy challenges in the digital era

Regulating digital super platforms and developing national marketing
platforms is essential for developing countries to gain from e-commerce.
Without this, linking into existing super platforms will only provide the
companies that run them with more data, strengthening them further
and facilitating their greater access to domestic markets.

Since Alexander Hamilton first set out his economic strategy for the
fledgling United States, it has been understood that catching up requires
active industrial policies to mobilize domestic resources and channel
them in a productive direction. This is no less true when those resources
are data in the form of binary digits. Indeed, given the economic power
imbalances inherent in the data revolution, it will be even more crucial
for countries to devise policies to ensure equitable distribution of gains
arising from data which are generated within national boundaries.


To develop domestic digital capacities and digital infrastructure, some
developing country Governments (such as those of Indonesia, the
Philippines and Viet Nam) are using localization measures, just as
many developed countries have done in both the earlier and current
phases of digitalization. But most developing countries do not have
such policies, implying that data are owned by those who gather and
store it, mainly digital super platforms, which then have full exclusive
and unlimited rights on it. National data policies should be designed
to address four core issues: who can own data, how it can be collected,
who can use it, and under what terms. It should also address the issue
of data sovereignty, which relates to which data can leave the country
and are thereby not governed under domestic law.

For developing countries, moving towards and benefiting from a digital
future is obviously contingent upon the appropriate physical and digital
infrastructure as well as digital capabilities. The challenges faced by
these countries in ensuring such digital infrastructure are evident from
the well-known and still-large gaps with developed countries: the active
broadband subscription in the developed world (at 97 per cent) is more
than double that in the developing world (48 per cent); in Africa, only
22 per cent of individuals use the Internet, as compared with 80 per cent
in Europe. Even an economy such as India, with a more sophisticated
digital sector, is lagging well behind in terms of Internet bandwidth,
connection speed and network readiness.

To develop digital capabilities, efforts are needed at various levels:
introducing digital education in schools and universities; upgrading
the digital skills of the existing workforce; running special basic and
advanced skill development programmes for the youth and older
persons, including digital skills training programmes in existing
professional development programmes; and providing financial support
to develop digital entrepreneurship.

While skills development and infrastructure provision will be necessary,
they are not sufficient to ensure developmental benefits; a more
comprehensive strategy and a much fuller range of policy measures


are needed. Industrial policies for digitalization should seek to exploit
the strong synergies between supply-side and demand-side pressures
in establishing a “digital virtuous circle” of emerging digital sectors
and firms, rising investment and innovation, accelerating productivity
growth and rising incomes and expanding markets. This may require
moving towards a more mission-oriented industrial policy in a
digital world to counter existing market asymmetries. For example,
Governments could invest directly in infant digital platforms or acquire
large equity stakes in them through sovereign digital wealth funds, in
order to spread the fruits of high productivity growth from technological
change more widely.

Mission-oriented industrial policy is also required because of the
changed structure of finance for investment in the digital economy.
Unlike tangible assets, intangible assets – such as data, software, market
analysis, organizational design, patents, copyrights and the like – tend
to be unique or most valuable within narrowly defined specific contexts,
making them difficult to value as collateral. As a result, supporting
investment in intangibles may well require an increased role for
development banks as sources of finance, or of specialized financing
vehicles, as well as policy measures designed to strengthen the profit–
investment nexus, such as changing financial reporting requirements or
imposing restrictions on share buybacks and dividend payments when
investment is low, or preferential fiscal treatment of reinvested profits.

At the same time, the digital economy creates significant new regulatory
policy challenges because the network effects and economies of scale
associated with digitalization can cause rising inequality and generate
barriers to market entry. The overwhelming control over digital
platforms by a few firms points to the need for active consideration of
policies to prevent anticompetitive behaviour by such firms, as well as
potential misuse of data that are collected in the process.

One way of addressing rent-seeking strategies in a digital world would
be to break up the large firms responsible for market concentration.
An alternative would be to accept the tendency towards market


concentration but regulate that tendency with a view to limiting a firm’s
ability to exploit its dominance. Given that a country’s data may have
public utility features, one option could be to regulate large firms as
public utilities with direct public provision of the digitized services.
This means that the digital economy would be considered similarly
to traditional essential network industries, such as water and energy.

To keep up in the ongoing technological revolution, developing
countries are in urgent need of international technology transfers from
the developed countries and other developing countries that have been
able to develop advanced digital technologies. International technology
transfers have become much more complicated in the digital economy
because technology and data analytics are being equated with trade
secrets, and because some binding rules apply to source-code sharing.
South–South digital cooperation can play an important role in helping
developing countries grasp the rising opportunities in the digital
world by providing mutual support for their digital infrastructure and

Still, developing countries will need to preserve, and possibly expand,
their available policy space to implement an industrialization strategy
that should now include digital policies around data localization,
management of data flows, technology transfers and custom duties
on electronic transmissions. Some of the rules in existing trade
agreements, as well as those under negotiation, restrict the flexibilities of
the signatory Governments to adopt localization measures. Negotiations
for the Trade in Services Agreement include a proposal that, for
transferring data outside the national boundaries, the operator simply
needs to establish a need to transfer data offshore “in connection with
the conduct of its business”. The Trans-Pacific Partnership document
includes binding rules on Governments’ ability to restrict the use
or location of computing facilities inside national boundaries and
prohibits Governments from designing policies requiring source-code
sharing, except for national security reasons. Some of the proposals on
e-commerce in the World Trade Organization include binding rules on
cross-border data transfers and localization restrictions.


The international community is just beginning a dialogue on the required
rules and regulations to manage all this, and agreement still needs to be
reached on which issues relating to the digital economy are in the realm
of the World Trade Organization and which fall under other international
organizations. A premature commitment to rules with long-term impacts
in this fast-moving area, where influential actors are driven by narrow
business interests, should be avoided.

BRICS and mortar

There is no doubting that, as trade has accelerated under hyperglobalization,
developing countries have captured a growing share of that trade,
including by trading more with each other. However, turning these
trends into a transformative development process has proved elusive
across many parts of the South.

The significant metamorphosis of trade started in the mid-1980s and
was particularly strong in East and South-East Asia, based on mutually
reinforcing regional dynamics and State-targeted industrial policies that
helped build strong links between profit, investment and exports. A rapid
pace of domestic investment helped to tap both learning and scale
economies, sustaining rapid productivity growth, driving the shift from
resource-based to labour-intensive and subsequently to technology-
intensive production and exports, and opening up Northern markets
to those exports. In the absence of such linkages in other developing
regions, the export of manufactures has been a poorer predictor of
productivity growth during this period.

Over time, a gradual shift within Asia has seen China overtake Japan
as the largest exporter from the region in 2004, and then become the
world’s largest exporter in 2007. This story has, somewhat casually,
been rolled, under the BRICS (Brazil, Russian Federation, India, China
and South Africa) acronym, into a wide narrative about the rise of large
emerging economies. However, while their combined political weight
has important geostrategic consequences, they are too varied a set of


economic experiences to make for a collective economic force. Even
within this group, China’s experience is extraordinary. The share of
BRICS in global output increased from 5.4 per cent in 1990 to 22.2 per
cent in 2016. But excluding China, the share of “RIBS” in global output
went up from 3.7 per cent to around 7.4 per cent – an increase, but not a
spectacular one. This is mirrored in global export shares, where China
significantly outpaces the others in the group. Indeed, in most of the
rest of the developing world, outside East and South-East Asia, export
shares remained roughly constant and in some cases even declined,
other than during the rising phase of the commodity price supercycle,
when major commodity exporters registered a temporary increase of
their market shares.

The growth acceleration and structural transformation in East Asia
have spilled over to the rest of the developing world, mainly in the
form of boosted demand for raw materials. Nevertheless, again with the
exception of some successful cases in Asia, there has been very little
evidence of broad-based trade-induced structural change.

This is, in part, a reflection of asymmetric power relations between
lead firms and suppliers in manufacturing value chains, and weak
bargaining positions for developing countries. The experiences of
Mexico and Central American countries as assembly manufacturers,
for example, have been linked to the creation of enclave economies,
with few domestic linkages and limited, if any, upgrading. The same
can be said about the electronics and automotive industries in Eastern
and Central Europe.

Trade in Value-Added (TiVA) data show that China has been more of
an outlier, one of very few countries that managed to increase their
shares of manufacturing domestic value added in gross exports (with
a 12 percentage point increase between 1995 and 2014). Of 27 other
developing countries recorded in TiVA, only 6 experienced increases,
albeit of much smaller magnitudes. Instead, for many developing
countries, trade under hyperglobalization strengthened the economic
weight of extractive industries; 18 of the 27 developing countries


experienced increases in shares of extractive industries in export value
added. This may partly reflect price effects during the commodity boom,
but the persistence of such effects over many years has strengthened
incentives for investment in extractive industries, private and public,
resulting in higher volumes, which in the long run is likely to have
further entrenched dependence on extractive industries, with adverse
implications for structural change.

Disaggregating developing countries’ exports by the technological
intensity of products points to significant differences in both structure
and dynamics. On the one hand, the first-tier newly industrialized
economies and China depict clear trends towards technological
upgrading. By contrast, Africa and West Asia show limited progress as
their exports remain extremely concentrated in commodities, with hardly
any increase in shares of technology-intensive manufactures, regardless
of their labour skill levels. Latin America and the rest of South, South-
East and East Asia fell between these two extremes. In Latin America,
the 1990s were a period of some structural change with technological
upgrading, but this pattern was partly reversed during the commodity
supercycle. As the commodity price boom receded, Latin America’s
trade structure returned to its position of the late 1990s, suggesting that
technological upgrading has been limited at best. In the rest of South,
South-East and East Asia, tendencies towards relative technological
upgrading appeared in export data only in the 2000s, with a shift towards
high-skill labour and technology-intensive goods. However, there is still
some way to go to reach even the current structure of China, let alone
the first-tier newly industrialized economies.

Overall, bilateral trade data suggest that intraregional trade seems
to have the greatest potential in terms of providing support to move
up the ladder, confirming the validity of previous UNCTAD calls
for strengthening regional trade. By contrast, the expansion of East
and South-East Asia has not triggered significant positive structural
changes in the export structures of other developing regions; rather,
it has intensified their role as providers of commodities. And with the
slowdown of world trade since the global financial crisis, underlying


structural weaknesses have been revealed in many countries. One of
those weaknesses is the lack of a solid infrastructure base.

Whether measured as road density per square kilometre, access to
energy, telephone connectivity (essential in the new digital era), piped
water or basic sanitation facilities, infrastructure bottlenecks are
obstacles to sustained growth in many developing regions, especially in
South Asia and sub-Saharan Africa. This is, in part, a consequence of the
neo-liberal turn in development policy that diluted the original goal of
multilateral finance to fund infrastructure projects: for example, the ratio
of infrastructure lending to total loans made by the World Bank in the
2000s was down 60 per cent from the figures for the 1960s. Combined
with a wider policy assault on public investment, many developing
countries have been left denuded of the infrastructure needed to compete
effectively in more open markets.

However, infrastructure has made a comeback in recent years. The
United Nations’ ambitious 2030 Agenda for Sustainable Development
requires big infrastructure projects if it is to stand any chance of success,
with estimates of annual global investment needs in the range of several
trillion dollars. China’s Belt and Road Initiative, an estimated trillion-
dollar infrastructure package, promises to extend its own investment–
export model to a global stage.

But while headline-grabbing figures on the size of the financing gap
have no doubt helped to raise awareness of the infrastructure challenge,
there is a danger of missing the critical role it plays in structural
transformation, and the importance of complementary policies and
institutions in fostering that role. Moreover, if history is any guide, the
later countries begin their development push, the bigger the resource
mobilization challenge and the more necessary that infrastructure
investments are properly planned and sequenced.

Regardless of a country’s level of development, infrastructure represents
a long-term investment in an uncertain future, and – given the significant
scale economies, large sunk costs, strong complementarities and long


gestation periods that tend to be involved – infrastructure planning is, as
the American banker Felix Rohatyn has dubbed it, a “bold endeavour”. At
the same time, these same features make for both “natural monopolies”
and significant coordination challenges that can generate big returns for
private investors, but often require public sector involvement if they are
to be delivered on the requisite scale and to full effect. An unfortunate
consequence has been to turn the infrastructure challenge into a political
football between the “market failure” and “government failure” camps.

What is needed instead is a paradigm shift that places infrastructure
investment squarely in the context of structural transformation and
provides an alternate perspective on how to plan, execute and coordinate
those investments, particularly for developing countries that are building
their industrial capacities. Doing so means revisiting, and refreshing, an
older debate on development planning. In particular, Albert Hirschman’s
seminal study The Strategy of Economic Development, published
60 years ago, can provide a framework to link what was then commonly
called “social overhead capital” (public infrastructure) and directly
productive activities (private investment).

Hirschman associated planning with a model of “unbalanced growth”, in
which productive resources are best selectively targeted at sectors with
the potential to build backward and forward linkages, thereby revealing
gaps and generating price disruptions which stimulate further rounds
of private investment, promoting organizational and other capabilities
needed to keep the growth process going and sending the right signals to
policymakers on where they should focus their infrastructure investments.

This approach, by tying financial viability to a wider set of developmental
criteria, provides an alternative to the current fashion for reducing
infrastructure planning to a portfolio choice, with a focus on the
bankability of individual projects and risk-adjusted returns in line with
the calculations of private investors.

Despite the current enthusiasm among policy makers for scaling up
private sector involvement in infrastructure projects, financial markets


in the era of hyperglobalization have avoided such projects in favour
of more short-term lending and speculative positions in existing assets.
Even when private sector participation in infrastructure has taken place,
it has often pursued short-term financial gains over public service
delivery, cherry picking projects accordingly and leading to substandard
and fragmented infrastructure systems ill-suited to the promotion of
accelerated growth and structural transformation.

The way forward requires instead a visionary but pragmatic experimen-
talism. Transformative development needs a more strategic approach,
in which infrastructure development is planned to promote linkages
that support industrial development and diversification. Such planning
should pay due consideration to how infrastructure investments are
structured, the key feedback loops between infrastructure and productivity
growth, and the trade-offs involved in the choice of infrastructure. It
matters which infrastructure investments are prioritized and how those
priorities are reached. Some types of infrastructure (such as roads and
telecommunications) have a greater impact on productivity than others
(for example, air transport or sewage). Planning forces policymakers to
think about patient capital, since infrastructure investment typically
begins to have an impact on private sector productivity only after
some time and a threshold level of infrastructure investment has been
reached. This also means that Governments need to be willing to take
some risk; successful infrastructure programmes of the past have been
as much the product of political ambition as of careful public accounting
and cold statistical calculations. Finally, network effects of modern
infrastructure as well as the complementarities between different types
of infrastructure are important – energy promotion in rural areas will
not necessarily lead to higher rates of returns among firms when roads
or telecommunications are not concomitantly provided. These effects
need to be factored into overall planning and coordination efforts.

As such, planning should be seen less as a top-down instruction manual
and more as a coordinating umbrella embracing a wide range of differing
interests and strategic choices, focusing on what sectors to prioritize
and technologies to adopt, the macro coordination of investment


decisions, the amount of resources required and how to mobilize them.
From this perspective, the comeback of national development plans in
many developing countries since the beginning of the new millennium
is encouraging, even though an initial assessment of these initiatives
suggests a continuing disconnect between infrastructure plans and
a country’s development strategy. More work is needed to connect
a country’s different stakeholders and the policy areas with which
infrastructure overlaps, with attention to consistency, the development
of capacities for planning, project preparation and execution, and a clear
system of penalties to ensure that plans are followed through, as well
as accountability to minimize unnecessary costs and ensure legitimacy.
Ultimately, this requires bold political leadership.

Free trade troubadours

The growing backlash against hyperglobalization is not a surprise;
that the international trading system is now on the frontline is more
so, given that the roots of the heightened insecurity, indebtedness and
inequality behind this backlash stem more from the financial system
than the trade regime.

There should be little doubt that using tariffs to mitigate the problems
of hyperglobalization will not only fail, but also runs the danger of
adding to them, through a damaging cycle of retaliatory actions,
heightened economic uncertainty, added pressure on wage earners and
consumers, and eventually slower growth. Still, it would be foolish to
dismiss those voicing concerns about damaging trade shocks as ignorant
of the subtleties of Ricardian trade theory or simply the misguided
victims of populist politicians. Indeed, while the gravity of discontent
in the North is only now pulling towards trade issues, there are long-
standing concerns among developing countries about the workings of
the international trading system.

The dominant narrative of the current era has identified globalization
with the growing reach of markets, an accelerating pace of technological


change and the (welcome) erosion of political boundaries; the language
of “free trade” has been used incessantly to promote the idea that even as
global economic forces have broken free from local political oversight,
a level playing field, governed through a mixture of formal rules, tacit
norms and greater competition, will guarantee prosperity for all.

In reality, hyperglobalization has as much to do with profits and mobile
capital as with prices and mobile phones, and is governed by large
firms that have established increasingly dominant market positions
and operate under “free trade” agreements that have been subject to
intense corporate lobbying and all too frequently enacted with minimal
public scrutiny. As described in previous Reports, this is a world where
money and power have become inseparable and where capital – whether
tangible or intangible, long-term or short-term, industrial or financial –
has extricated itself from regulatory oversight and interference.

As a result, it is hardly surprising that the heightened anxiety among
the growing number of casualties of hyperglobalization has led to
much more questioning of the official story of the shared benefits of
trade. Mainstream economists bear their part of the responsibility for
the current state of affairs. Ignoring their own theoretical subtleties
and the nuances of economic history, they remain biased in favour
of unqualified free trade when it comes to communicating with
policymakers and broader audiences. The mainstream narrative pitches
“comparative advantage” as a “win–win” boost to economic efficiency
and social welfare, without specifying the conditions under which such
beneficial outcomes can occur or how any negative effects could be

There is no doubt that the new protectionist tide, together with the
declining spirit of international cooperation, poses significant challenges
for governments around the world. However, doubling down on business
as usual is not the right response. Resisting isolationism effectively
requires recognizing that many of the rules adopted to promote “free
trade” have failed to move the system in a more inclusive, participatory
and development-friendly direction.


This means that it is now essential to introduce a more evidence-based
and pragmatic approach to managing trade as well as to designing trade
agreements. The narrative around trade should abandon unrealistic
assumptions – such as full employment, perfect competition, savings-
determined investment or constant income distribution – that have
underpinned the dominant policy discourse on trade policy. Instead,
recognition of the lessons from successful export economies and the
insights of new trade models that acknowledge the impact of trade
on inequality need to be combined with an assessment of the causal
relationship between rising inequality, corporate rent seeking, falling
investment and mounting indebtedness.

UNCTAD has argued consistently in the past few years that a new
international compact is required – a Global New Deal – that would aim
for international economic integration in more democratic, equitable
and sustainable forms. Specifically, with reference to strategies for
international trade and the architecture that sustains it, there is a
strong case, on its seventieth anniversary, for revisiting the Havana
Charter for an International Trade Organization, which emerged –
albeit ephemerally – from the original New Deal and can still provide
important pointers for our contemporary concerns.

First of all, the Havana Charter looked to situate trade agreements in
an expansionary macroeconomic setting, noting that “the avoidance
of unemployment or underemployment, through the achievement and
maintenance in each country of useful employment opportunities for
those able and willing to work and of a large and steadily growing
volume of production and effective demand for goods and services,
is not of domestic concern alone, but is also a necessary condition for
the achievement of the general purpose… including the expansion of
international trade, and thus for the well-being of all other countries”.
This focus on full employment has been abandoned in the period of
hyperglobalization, both at the national level and in the “trade” and
“economic cooperation” agreements that have dominated the landscape.
It should be revived if the widespread backlash against trade is not to
gather more strength.


Secondly, the Havana Charter recognized the links between labour
market conditions, inequality and trade, calling for improvements in
wages and working conditions in line with productivity changes. It also
aimed to prevent “business practices affecting international trade which
restrain competition, limit access to markets or foster monopolistic
control”, and dedicated an entire chapter to dealing with the problem of
restrictive business practices. Revisiting these goals in light of twenty-
first century challenges, including those of the digital economy, should
be a priority.

Thirdly, the Havana Charter insisted that there were multiple development
paths to marry local goals with integration into the global economy, and
that countries should have sufficient policy space to pursue pragmatic
experimentation to ensure a harmonious marriage. This need for policy
space also brings to the forefront the matter of negotiating “trade”
agreements that have in recent decades privileged the requirements of
capital and limited the possibilities for development in line with social

A decade after the collapse of Lehman Brothers, the global economy
has been unable to establish a robust and stable growth path. Instead,
weak demand, rising levels of debt and volatile capital flows have left
many economies oscillating between incipient growth recoveries and
financial instability. At the same time, austerity measures and unchecked
corporate rentierism have pushed inequality higher and torn at the social
and political fabric. As the drafters of the Havana Charter knew from
experience, tariffs are treacherous instruments for dealing with these
problems and if a vicious cycle of retaliation takes hold only make
matters worse. But trade wars are a symptom not a cause of economic
morbidity. The tragedy of our times is that just as bolder international
cooperation is needed to address those causes, more than three decades
of relentless banging of the free trade drum has drowned out the sense
of trust, fairness and justice on which such cooperation depends.