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Structural Change, Global Imbalances, and Employment in the Least Developed Countries

Policy brief by ICTSD, 2011

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Economic development in the least developed countries (LDCs) is often seen as being constrained by a range of socio-economic and geophysical impediments, which have made this group of countries extremely vulnerable to external shocks. The current global economic crisis is an extreme example of such an external shock. While the group of LDCs experienced a smaller direct adverse impact of the recent financial turmoil than most other developing countries, some LDCs were also exposed to adverse impacts of increased fuel and food price volatility. These adverse effects have been reinforced by the decline in export opportunities caused by the recent weak economic performance in advanced economies.This essay addresses the effects of changes in the level and composition of global demand, and especially of global rebalancing, on trade flows and employment from a demand perspective. It emphasizes that these effects depend on the relative importance of rich and poor countries, as well as of different components of aggregate demand, in global growth. These effects, in turn, affect export opportunities of all countries, including the LDCs, as well as structural change and employment opportunities in their economies.

POL ICY BR IEF NumBER 1 . JANuARY 2011


Structural Change, Global
Imbalances, and Employment in
the Least Developed Countries


Economic development in the least developed countries (LDCs) is often


seen as being constrained by a range of socio-economic and geophysical


impediments, which have made this group of countries extremely vulnerable


to external shocks. The current global economic crisis is an extreme


example of such an external shock. While the group of LDCs experienced


a smaller direct adverse impact of the recent financial turmoil than most


other developing countries, some LDCs were also exposed to adverse


impacts of increased fuel and food price volatility. These adverse effects


have been reinforced by the decline in export opportunities caused by the


recent weak economic performance in advanced economies.


The persistence of weak external demand could deepen the structural


weaknesses of LDCs and jeopardize industrialization. This would most probably


retard these countries’ convergence with more advanced economies, as the


development process has traditionally been equated with industrialization.


The importance of manufacturing for economic development relates, on


the supply side, to its potential for strong productivity growth and, on


the demand side, to the high elasticity of demand for manufactures. The


productivity growth potential in manufacturing activities derives from the


growing tendency towards specialization and learning and agglomeration


economies as well as from static and dynamic economies of scale. As labour


and capital move into these activities, average productivity in the economy


climbs. This further enhances the demand for services and industrial


products, which generates profitable new investment opportunities in these


areas and growing demand for labour.


Both the rate of growth and the pattern of international demand are likely to


become less favourable. Prior to the current global economic crisis, a sharp


increase in demand for manufactured imports in the United States provided


a strong stimulus to exporters of manufactures and further supported the


role of industrializing Asian economies, particularly China, in global growth


and trade flows. This in turn reinforced growing demand and soaring prices


for primary commodities from 2002 to 2008, which temporarily reversed


the usually bleak demand prospects for primary commodity production.1


These developments have been accompanied by the accumulation of


persistently large imbalances in the world economy – with sizeable current


account deficits in some countries, particularly the United States, and
sizeable current account surpluses in others, notably Germany; Japan;


developing countries in East Asia, especially China; and a number of oil-


exporting countries. These imbalances contributed to the outbreak of the


1 Another factor has to do with the substantial changes that have occurred in
the services sector over the past few years. For example, the information and
communications technology (ICT) revolution has increased the tradability of
services, as well as the potential for productivity growth of ICT-based services.
This will not be further discussed here.


Jörg Mayer


1. Introduction




2


current crisis and facilitated its global spread. While


global imbalances declined in the immediate aftermath


of the crisis, they have been widening again with the


ongoing recovery of the world economy.


There is widespread agreement that the current


imbalances are unsustainable. A smooth and non-


deflationary reduction of global imbalances is


indispensable not only for ensuring that the recent


global economic upturn continues, but also for


minimizing the risk of recurrent global economic


turmoil. A reduction in consumer spending in the


United States and in its imports of consumer goods,


combined with an increase of consumer spending in


China and a decline in its exports, is usually seen as


being indispensable for a sustained unwinding of global


imbalances, as reflected in the various documents and


statements emanating from the Group of Twenty’s


(G-20) Mutual Assessment Process. But, given that the


production of consumer goods is a relatively labour-


intensive activity, global rebalancing is likely to affect


employment in addition to trade flows. LDCs may be


particularly exposed to such risks because they often


lack domestic purchasing power for consumer goods, so


that the extent of their labour-intensive manufacturing


activities is frequently determined by demand levels


in developed country markets and the facilities for


accessing those markets.


This essay addresses the effects of changes in the level


and composition of global demand, and especially of


global rebalancing, on trade flows and employment


from a demand perspective. It emphasizes that these


effects depend on the relative importance of rich and


poor countries, as well as of different components of


aggregate demand, in global growth. These effects,


in turn, affect export opportunities of all countries,


including the LDCs, as well as structural change and


employment opportunities in their economies.


2. Structural Change: Recent Evidence


Evidence on the patterns of aggregate and sector-


specific growth indicates that rapid per capita income


growth in developing and transition economies is, in


the vast majority of cases — including for the LDCs


taken as a group — associated with rapid growth of


manufactured or services output. Where aggregate


growth rates are negative or low, so are the growth rates


of manufactured output. This pattern holds for both


the period 1995–2002 (when several emerging-market


economies experienced slow growth and financial


crises) and the period 2002–2008 (when economic


growth accelerated in a number of emerging market


economies that joined the United States as major


drivers of global demand and boosted the demand for


primary commodities), even though rates of aggregate


and sectoral growth were significantly larger in the


second than in the first of these two periods.


The fact that rapid income growth mainly drives


growth in demand for manufactures means that


the growth rates in the manufacturing and services


sectors exceeded those in the agricultural and


mining sectors even for the period 2002–2008 when


the prices for primary commodities were rising very


rapidly on international markets. Several factors


could explain this feature: it could indicate that


policymakers managed well the inflow of windfall


profits resulting from the commodity price boom and


avoided the adverse impact on non-resource sectors


that in the past was often associated with natural-


resource booms. It could also indicate that rapidly


expanding household consumption in the United


States provided sufficiently high external demand for


many developing countries such that, on aggregate,


developing and transition economies enjoyed buoyant


external demand across all economic sectors. Such


imports are likely to have provided favourable export


opportunities for manufactured exported from the


LDCs, such as in the apparel sector.


3. Medium-Term Shifts in World
Demand Structure


A country’s export opportunities strongly depend on


the level and structure of global trade. The degree and


structure of changes in world trade, in turn, depends


on the relative importance of rich and poor countries


and of different elements of demand in global growth.


As long as per capita income growth in rich countries


drives the rate of global economic growth, their demand


pattern will have a key effect for global trade patterns.


Given their already high levels of industrialization and


per capita income, their demand preferences will,


in addition to often non-tradeable services, tend to


emphasize manufactured consumer goods. By contrast,


industrial raw materials, energy and food products will


feature more prominently in the demand patterns of


rapidly industrializing poorer countries. The growing


importance of emerging economies in global demand


growth and the attendant changes in trade flows alter


relative prices on world markets and shift the demand


functions faced by producers – inward for the products


usually demanded by rich countries and outward for


products usually demanded by poor countries.


Structural Change, Global Imbalances, and Employment in the Least Developed Countries January 2011




3


Whether global income growth is driven by investment,


consumption or exports will also affect the level


and composition of trade flows. There are sizeable


differences in the import intensity of different


components of demand. Numerical evidence indicates


that import intensities vary over time but that, in most


countries and at most times, the import intensity of


exports exceeds that of consumption which, in turn,


exceeds that of investment.


Differences in import intensity imply that changes in


the composition of a country’s aggregate demand will


cause significant shifts in its imports even if the level
of national aggregate demand itself does not change. In


the lead-up to the current crisis, global output growth


was characterized by a relatively high import intensity,


based on the combination of three factors: (i) rapid


growth in the United States based on import-intensive


consumption; (ii) the export-oriented development


strategy that many countries in East and South East Asia


have been following over the past two or three decades,


which was embedded in global production sharing and


an associated high import content of these countries’


exports; and (iii) the ensuing rapid industrialization in


Asian developing economies, especially China, which


was one of the factors that supported rapidly growing


demand and booming prices for primary commodities


between 2002 and 2008.


4. Rebalancing: Which Countries
Could Compensate Decline in US
Consumer Demand?


It is clear that a correction of current account imbalances


and – their domestic mirror image – the savings-


investment disequilibria will change the structure of


world demand and affect the sectoral composition of


domestic output, trade flows and employment. These


mechanisms are global in scope, affecting developed


and developing countries, but the following focuses


on the two main protagonists in this story (China and


the United States) with some additional discussion of


effects that result from rebalancing that also includes


adjustment in Germany.


Adopting an initial bipolar perspective appears useful


for several reasons. First, China and the United States


have accounted for sizeable shares of global imbalances


[China for about 25 percent of surpluses and the United


States for about 45 percent of deficits in 2008, i.e. the
year when the sum of individual countries’ absolute


current account positions reached a post-war peak of


over 5 percent of global Gross Domestic Product (GDP)].


Second, the recent growth trajectories of China and the


United States appear to have developed in opposite


directions. Consumption as a share of GDP increased in


the United States, but fell in China; investment rose


dramatically in China while its importance shrunk in


the United States; and China’s trade surplus sharply


contrasted with the substantial deficit in the United
States. Thus the United States current account deficit
has been associated with a low national savings rate


and a continuously rising share of private consumption


in GDP. At the same time, along with China’s current


account surplus, it has had a very high national savings


rate and a very low share of household consumption in


GDP. However, the external position of neither of these


two countries is sustainable. In the United States, unless


another asset bubble occurs, there is no alternative to


deleveraging debt-financed household consumption,
and in China, the need to embark on a major structural


transformation from investment- and export- to


consumer-led growth has been officially recognized.


A return of United States household savings to about


4 percent of disposable income – the average of


the mid-1990s (i.e. before those households went


on a spending spree) – would translate into a fall in


household consumption of about 3 percent of GDP.


Given that before the crisis United States household


consumption accounted for about 16 percent of global


demand and that a sizeable part of United States


consumption consisted of imports, this would imply a


reduction in world demand and therefore a decline in


other countries’ export opportunities.


A key question that arises is whether other countries’


consumer demand could make up for the decline in


United States consumer demand.2 This raises at least


two issues: (i) the importance of the absolute level


of United States household consumption at the global


level, and (ii) the composition of United States imports


of consumer goods.


With respect to the first question, United States


consumer demand is by far the largest in the world


in absolute terms. It is unlikely that a sharp decline


in United States imports of consumer goods could be


2 In principle, other types of demand could replace household consumption demand for imports. But this is unlikely to occur. Public-
sector demand is generally less import intensive than private demand because public servant wages are an important component of
government consumption and services are an important component of public investment. Moreover, the import intensity of United
States exports is very low (see H Kranendonk and J Verbruggen, 2008, Decomposition of GDP-growth in some European countries
and the United States, CPB Memorandum 203, Netherlands Bureau for Economic Policy Analysis).




4


compensated by an increase in consumer spending –


and associated imports of consumer goods – by China


or any other developing country. Given that China’s


consumption is only about one eighth of United States


consumption and that its GDP at current exchange rates


is only one third that of the United States, there is little


reason to believe that household consumption in China


could supplant United States household consumption


as a driver of global growth any time soon. In order for


Chinese consumption to compensate for the decline of


United States consumption back towards its average


long-term trend, the share of consumer spending in


GDP in China would need to increase by about 10–15


percentage points (depending on the difference in


the two countries’ rates of GDP-growth) – an unlikely


occurrence in the foreseeable future.3 Domestic


demand could also expand in other relatively large and


rapidly growing developing countries, notably Brazil


and India. However, compared with the United States


economy, the economies of these countries are still


small, making it unlikely that they could compensate


fully for the decline in United States consumption.


Rather, household consumption in developed countries


in the European Union, particularly Germany, as well


as Japan, would be better placed to achieve this.


Perhaps even more important, the composition of


United States imports of consumer goods differs


greatly from that in many other countries. An import


similarity index based on 428 different consumer goods


indicates that China’s basket of imported consumer


goods overlaps that of the United States by only


about 45 percent. This index also indicates that the


composition of imports of consumer goods by major


developed countries with current account surpluses,


namely Germany and Japan, is very similar to that of


the United States. Combined with the evidence on the


size of household consumption, this shows that these


two developed countries would be in a better position


than China to compensate for the decline in United


States consumer goods imports (as further discussed in


the following section).


5. Impact of Rebalancing on Trade
Flows and Employment


The implications of global rebalancing for trade flows


and employment are inferred from a simulation of the


impact of reduced consumer spending in the United


States and increased consumer spending in China (both


measured as a share in GDP) on changes in sectoral


trade flows and employment.4 The simulation is based


on the assumptions that adjustment in the United


States would lead to a slowdown in the rate of GDP


growth there,5 and that in both China and the United


States the share of household consumption in GDP


would be restored to historic levels. Taking account of


differences in the size of GDP in China and the United


States, the latter assumption implies that the increase


in China’s consumption would compensate about half


of the decline in United States consumption.6


The main result of this simulation indicates that this


way of rebalancing would remove much of the demand


stimulus, which, prior to the outbreak of the current crisis,


the United States was providing to the world economy,


and that this would not be compensated by a stimulus of


similar size from increased consumption in China. Perhaps


more important, given that high-demand consumer goods


(such as wearing apparel and leather goods) are among


the most labour-intensive manufactures, labour-intensive


sectors would be affected most by the decline in world


industrial exports.


These adverse effects of global rebalancing for trade


flows and employment generation in industrial sectors
would be mitigated if other surplus economies,


particularly Germany, were also rebalancing. Ongoing


stagnation of private consumption in Europe and


the tendency to embark on perhaps premature fiscal


3 According to the Bank for International Settlements’ 2007 Annual Report (p. 56) “final consumption goods constitute only 4 percent
of China’s total imports and calculations suggest that the elasticity of demand for its ordinary imports (i.e. those not used for
processing in the export sector) with respect to domestic spending is insignificant”. For further numerical evidence, see below.


4 The results from the simulation may be considered as reflecting the medium-term effects (i.e. spanning a period of 5–10 years) of
rebalancing confined to China and the United States. However, it should be borne in mind that the results of the simulation are only
partial; they are not intended to describe the overall impact of a global rebalancing. In addition, they should be interpreted with
considerable caution since they do not take into account a number of factors, such as difficulties in moving labour across sectors,
subsidies and problems of market access. Nevertheless, simulations are useful for identifying the countries and sectors that are
vulnerable to global rebalancing and for forming an idea of the order of magnitudes involved.


5 This assumption is consistent with earlier experiences of rebalancing in countries with an external deficit that is typically associated
with a slowdown in output growth, as noted in the International Monetary Fund’s World Economic Outlook of April 2010.


6 Given that China’s GDP is about one third that of the United States, the assumed 7 percentage point increase in China’s share of
consumption in GDP is about half of what would be required to compensate for the assumed 5 percentage decline in the United
States’ share of consumption on GDP, assuming no change in the level of GDP in either country.


Structural Change, Global Imbalances, and Employment in the Least Developed Countries January 2011




5


consolidation programmes strongly reduces the


probability of such a scenario to occur. Nevertheless,


it may be useful to examine the trade and employment


effects that would result if the share of consumption in


GDP in Germany increased by 10 percentage points and


reached the historic level in the United States of about 66


percent. This increase in Germany’s consumption would


compensate the second half of the decline in United


States consumption, i.e. the part of the decline that


would be left uncompensated by the increase in China’s


consumption. Contrary to the bilateral rebalancing


scenario examined above, it may also be assumed that


such a multilateral rebalancing would not reduce the


rate of GDP growth in the United States.7


The decline in world exports of labour-intensive


industrial goods will have different implications for


different countries, depending on their sectoral


production and trade structure. The simulation results


for changes in sectoral employment of industrial


sectors suggest that in sub-Saharan Africa (SSA), i.e.


the region where most LDCs are located, employment


opportunities would decline in labour-intensive


sectors, such as apparel, as well as simple transport


equipment. Thus, global rebalancing is unlikely to spur


industrialization and employment creation in LDCs.


To highlight the differences between bilateral and


multilateral rebalancing, it is useful to compare the


impact on trade flows and employment generation of


such a multilateral rebalancing scenario with those


resulting from rebalancing confined to China and the


United States. Multilaterally coordinated rebalancing


would lead to a smaller deterioration in the trade


balance of SSA (driven by both a smaller decline in


the volume of exports and a smaller increase in the


volume if imports, as shown in Table 1). It would also


cause much less detrimental effects for employment,


including in some of the most labour-intensive


industrial sectors, such as apparel and textiles (Table


2). This means that a multilaterally coordinated


rebalancing would sizeably reduce the adverse effects


on export opportunities and employment creation in


the industrial sectors of SSA.


7 In any case, the effects of this assumption are small compared with those caused by changes in the shares of consumption in GDP.
The estimation results that support this finding are available from the author on request.


Table 1: GTAP simulation results of the impact of rebalancing in China, Germany and the United States on trade
flows, selected countries and country groups


Source: Author’s calculations based on GTAP simulations.
Note: All changes relative to 2008.


Change in trade balance Share of trade balance in GDP
Change in


export volume
Change in import


volume


(Percentage points) (Per cent)


Scenario 1: rebalancing in China and United States


China -8.2 1.8 -17.6 3.7


United States 5.2 0.6 41.9 -15.4


Sub-Saharan Africa -1.7 1.2 -2.5 3.1


Scenario 2: rebalancing in China, Germany and United States


China -7.4 2.6 -16.1 3.0


United States 5.2 0.6 42.2 -14.6


Germany -11.3 -5.6 -24.8 13.9


Sub-Saharan Africa -0.6 2.3 -0.8 1.1




6


However, in spite of the assumed full com-pensation of


the decline in United States consumption by an opposite


development in China and Germany, world exports of


industrial goods would decline. Indeed, as indicated above,


the absolute level of consumer spending is only one element


that determines consumer good imports. Another one is


the similarity of consumer good imports across countries.


While the basket of consumer good imports in Germany is


fairly similar to that of the United States, this is not the


case for China. Perhaps the most important element in


this context concerns differences in the import intensity


of consumption and exports in different countries. In


China, the import intensity of exports is much larger than


that of consumption, as well as much larger than that of


United States exports. Hence, a rebalancing from exports


to consumption in China and from consumption to exports


in the United States would cause an overall decline in


imports. The result of rebalancing in the United States


and Germany would go in the same direction. The import


intensity of consumption in the United States is about


one half that in Germany, while the same proportion is


about one third for exports, as already mentioned. This


means that the combined effect of a shift from exports


to consumption in Germany and a shift from consumption


to exports in the United States would also be an overall


reduction in imports.


Table 2: GTAP simulation results for changes in sectoral employment in sub-Saharan Africa


Source: Author’s calculations based on GTAP-simulations, and UNIDO Industrial Statistics database CD-ROM 2009.
Note: The data in the table refer to percentage changes in the demand for unskilled labour relative to 2008. The percentage
changes in the demand for skilled labour are very similar, and thus are not shown. Industrial goods are listed by increasing labour
intensity, measured as the unweighted world average of the share of wages and salaries in sectoral value added during the period
1995–2005.


Scenario 1: Rebalancing in China
and United States


Scenario 2: Rebalancing in China,
Germany and United States


Industrial goods


Petroleum and coal products 0.5 0.2


Processed food -0.2 0.1


Livestock and meat products 0.3 0.1


Metals nes -4.4 -2.3


Chemicals, rubber, plastic products -1.6 -0.5


Ferrous metals 0.3 0.6


Non-metallic mineral products nes 2.2 1.2


Paper products and publishing -0.4 0.3


Electronic equipment 1.1 0.8


Metal products 1.8 1.2


Wood products 0.5 1.6


Motor vehicles and parts 1.5 1.8


Manufactures nes -0.5 -0.4


Machinery and equipment nes -0.8 0.2


Textiles -0.2 1.1


Leather products 2.2 3.0


Wearing apparel -1.9 -1.5


Transport equipment nes -8.7 -6.8


Memo items:


Agriculture and mining


Grains and crops -0.6 -0.2


Forestry and fishing 0.5 0.5


Mining -0.3 -0.4


Utilities and services


Utilities and construction 5.2 1.8


Trade and transport 0.1 0.0


Commercial services -0.3 -0.2


Other services -0.1 -0.3


Structural Change, Global Imbalances, and Employment in the Least Developed Countries January 2011




7


6. Conclusions and Policy Implications


Policies to ensure adequate and balanced global


demand are indispensable for sustained income growth


in all countries and especially the poorest among


them. It is crucial in this respect that concerted and


effective international policy coordination, such as


intended through the G-20 process, be pursued. All


countries, developed and developing alike, must


avert the risk of deficient global demand posed by a
premature withdrawal of policy stimulus and refrain


from introducing protectionist trade actions.


Such actions are at the top of the agenda in the G-20


process. Nevertheless, cross-country differences in


economic growth, as well as in the contribution of


consumption and exports to economic growth, which


played a key role in the accumulation of substantial


global imbalances, will persist and play a crucial role


also for the reduction of global imbalances. Focusing


on the adjustments in the two large economies of China


and the United States combined, the net effect for the


world economy is likely to be deflationary, but at the
same time insufficient to bring about an unwinding of
the large global imbalances. This is because not only the


absolute value of the consumer goods bought by Chinese


households, but also their import content is much smaller


than that of goods bought by United States households.


Moreover, the composition of consumer goods imported


by China differs considerably from that of the goods


imported by the United States. As a result, there will be


a tendency toward deterioration in the trade balance


of many other countries in the world economy, unless


the necessary adjustments in the United States and


the structural changes in China are accompanied by


rebalancing efforts in other surplus economies.


Since world exports are set to decline, especially for


industrial goods, with the largest declines likely to


occur in the most labour-intensive industrial sectors,


the net effect of adjustments by China and the United


States could well have a sizeable adverse impact on


employment worldwide. The impact will differ across


countries, depending on their sectoral production


and trade structure. As long as China’s robust growth


trajectory remains in tact and investment in the


country’s large infrastructure projects are pursued, its


raw material imports are likely to remain strong as well.


This will support direct exports to China, as well as put


a floor under prices of primary commodities, especially
energy and metals. Thus, countries for which buoyant


exports of primary commodities were supporting


rapid economic growth prior to the crisis are likely to


experience only marginal adverse effects from global


rebalancing from this end. On the other hand, buoyant


primary exports combined with reduced manufactured


exports risk reducing incentives to promote structural


change in natural-resource-rich developing countries,


many of which are LDCs.


Preferential access to developed country markets,


such as that granted under the African Growth and


Opportunity Act (AGOA), is unlikely to be sufficient to
preserve manufactured exports from African LDCs to


the United States. Data on United States imports of


articles of apparel and clothing raise some concern in


this respect. For the period 2005–2009, such imports


from sub-Saharan Africa declined by 37 percent, which


was four times the decline of United States total apparel


and clothing imports. This has been accompanied by


a continuous erosion of sub-Saharan Africa’s market


share from about 2 percent in 2005 (the first year after
the phasing out of quota regulations in global trade in


textiles and clothing) to less than 1 percent in the first
half of 2010.8 This calls for ways to make preferential


market access for the exports of LDCs commercially


meaningful. One approach could be that developed


countries provide favourable tax treatment or other


forms of support to their domestic firms to develop
supply sources in the LDCs.9


An expansion of South-South trade in manu-factures could


help support manufacturing output and employment in


LDCs. It has sometimes been argued that liberalization


of trade among developing countries, including through


the granting of preferences under the Global System


of Trade Preferences (GSTP),10 could give a significant
boost to manufactured exports from sub-Saharan African


countries.11 However, such results come from simulations


that assume no significant change in manufactured


8 Data from United States Department of Commerce, International Trade Administration; data accessed on 27 October 2010 at http://
www.ita.doc.gov/.


9 For further discussion, see UNCTAD, 2010, Developing Productive Capacities in Least Developed Countries: Issues for Discussion,
Document UNCTAD/ALDC/2010/1, 15 October.


10 The GSTP agreement covers seven LDCs (Bangladesh, Benin, Guinea, Mozambique, Myanmar, Sudan and the United Republic
of Tanzania). In December 2009, Ministers of participating developing countries agreed to substantially reduce tariffs and hold
additional voluntary negotiations on further liberalizing market access.


11 See, e.g. M Fugazza, 2007, A new geography of preferences for sub-Saharan African countries in a globalizing trading system,
available at mpra.ub.uni-muenchen.de/11575/1/MPRA_paper_11575.pdf.




8


exports from developing to developed countries. This


is unlikely to be the case in a post-crisis world. Rather,


very competitive developing country producers of


apparel that will face declining export opportunities in


the United States may well attempt redirecting their


exports to developing countries, thereby absorbing export


opportunities that might otherwise have benefited less


competitive developing country exporters, including


those in LDCs. By contrast, South-South and intra-regional


trade could be strengthened by adding a cross-border or


regional dimension to infrastructure investment and trade


facilitation reforms.12 This would be particularly helpful


for small land-locked economies whose manufacturing


activities may need to rely, especially in earlier stages


when both domestic purchasing power and production


of intermediate inputs is weak, on imported inputs and


exported outputs.


Maximizing the developmental impact of developing


countries’ foreign direct investment (FDI) in LDCs could also


play a crucial role in fostering trade between LDCs and more


advanced developing countries. This is the case in particular


where outward investors from emerging economies are state-


owned companies whose behaviour could be influenced by


home-country governments relatively easily. Examples of


related LDC host-country government action include targets


for sourcing a certain proportion of inputs domestically or


for conducting some research and development activities in


the LDC host countries.13


The overall decline in trading opportunities in durable


consumer goods that the current global economic crisis


has brought about reinforces the urgency of improving


supply capacity in LDCs. Overseas development


assistance in general, and support given through the aid-


for-trade initiatives in particular, could make important


contributions in this context. Valuable steps in this


respect could be increased public investment (e.g. in


infrastructure, including transportation), as well as easier


access (and at more favourable conditions) to credit for


activities in line with potential changes in global demand


structure. Such improved access could be provided


through financial support schemes (credit subsidies


and guarantees) and through credit from national


development banks, including in the form of private-


public partnerships. International financing could further


support such measures. For example, the International


Spark Initiative could support private sector innovation


by facilitating equipment modernization and technology


transfers from abroad, etc.14


All these various policy measures, at both the national


and international levels, must form part of a coherent


development policy package. In particular, efforts by


LDCs to strengthen their supply capacity are probably


insufficient to sustain exports and employment


creation in these countries if advanced economies


adopt deflationary macroeconomic policies or resort to


protectionist measures.


About the International Centre for Trade and Sustainable Development


Founded in 1996, the International Centre for Trade and Sustainable Development (ICTSD) is an independent non-profit and nongovernmental
organization based in Geneva. By empowering stakeholders in trade policy through information, networking, dialogue, well-targeted research
and capacity-building, ICTSD aims to influence the international trade system so that it advances the goal of sustainable development.


Part of this essay draws on the author’s contribution to UNCTAD’s Trade and Development Report 2010. For further discussion of these
issues, as well as for the sources of numerical evidence given in this essay, see J. Mayer (2010), Global Rebalancing: Effects on Trade
Flows and Employment, UNCTAD Discussion Paper No. 200. The author is grateful to Paolo Ghisu, Christophe Bellmann and two referees for
helpful comments and suggestions on an earlier draft and to Juan Pizarro for carrying out the GTAP simulations. The opinions expressed
are solely those of the author and do not necessarily reflect the views of UNCTAD or its Member States.


© ICTSD, 2010. Readers are encouraged to quote and reproduce this material for educational, non-profit purposes, provided the source is
acknowledged. The work is licensed under the Creative Commons Attribution-Noncommercial-No Derivative Works 3.0 Licence. To view a
copy of this licence, visit http://creativecommons.org/licenses/by-nc-nd/3.0/ or send a letter to Creative Commons, 171 Second Street,
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ISSN 1684 9825


12 For further discussion, see UNCTAD (2007), Trade and Development Report 2007, chapter VI.
13 For further discussion, see UNCTAD (2010), op. cit.
14 For further discussion, see UNCTAD (2010), op. cit.




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