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Trade and Development Report 2013 - Adjusting to the Changing Dynamic of the World Economy

Report by UNCTAD, 2013

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Overview of the world economy and financial situation in 2013 by major economic regions. It discusses their financial markets, commodity prices, growth and trade patterns. Discusses expected economic activity for the year which seems to have slowed down and has brought international trade into a halt. It also discusses the economic activity that developed and developing countries have had since the 2008 economic crisis.

Adjusting to the
changing dynamics


of the world economy


U N I T E D N AT I O N S C O N F E R E N C E O N T R A D E A N D D E V E L O P M E N T


TRADE AND DEVELOPMENT
REPORT, 2013


EMBARGO
The contents of this Report must not be


quoted or summarized in the print,
broadcast or electronic media before


12 September 2013, 17:00 hours GMT






UNITED NATIONS CONFERENCE ON TRADE AND DEVELOPMENT
GENEVA


TRADE AND DEVELOPMENT
REPORT, 2013


Report by the secretariat of the
United Nations Conference on Trade and Development


UNITED NATIONS
New York and Geneva, 2013




• Symbols ofUnitedNations documents are
composed of capital letters combinedwith
figures.Mentionofsuchasymbolindicatesa
referencetoaUnitedNationsdocument.


• Thedesignationsemployedandthepresentation
ofthematerialinthispublicationdonotimply
theexpressionofanyopinionwhatsoeveron
thepartoftheSecretariatoftheUnitedNations
concerning the legal status of any country,
territory,cityorarea,orofitsauthorities,or
concerningthedelimitationofitsfrontiersor
boundaries.


• Material in this publicationmay be freely
quoted or reprinted, but acknowledgement
isrequested,togetherwithareferencetothe
documentnumber.Acopyofthepublication
containingthequotationorreprintshouldbe
senttotheUNCTADsecretariat.


Note


UNCTAD/TDR/2013


UNiTeDNATioNSPUbliCATioN


Sales No.e.13.ii.D.3


iSbN978-92-1-112867-3
eiSbN978-92-1-056284-3


iSSN0255-4607


Copyright©UnitedNations,2013
Allrightsreserved




iii


Explanatory notes .......................................................................................................................................xi


Abbreviations ........................................................................................................................................... xiii


OVERVIEW ...................................................................................................................................... I–XVIII


Trade and Development Report, 2013


Contents


Page


Chapter I


Current trends and Challenges in the World eConomy......................................1


a. recent trends in the world economy...................................................................................................1
1. Globalgrowth....................................................................................................................................1
2. internationaltrade.............................................................................................................................4
3. Recenttrendsincommodityprices...................................................................................................8


B. the structural nature of the latest crisis...........................................................................................10
1. Animpossiblereturntothepre-crisisgrowthpattern..................................................................... 11
2. Rootsofthecrisis:thebuild-upofstructuralproblems..................................................................14


C. developing and transition economies are continuing to grow, but remain vulnerable................21
1. Growthperformancesincetheearly1990s.....................................................................................21
2. Vulnerabilitytotradeshocks...........................................................................................................25
3. Vulnerabilitytofinancialinstability................................................................................................29
notes...........................................................................................................................................................32
references..................................................................................................................................................35


Annex to chapter I


alternative scenarios for the World economy.......................................................................................37




iv


Page


Chapter II


toWards more BalanCed groWth: a greater role
for domestiC demand in development strategies .................................................47


a. introduction.........................................................................................................................................47


B. global trade shocks and long-term trends: terms-of-trade and volume effects...........................49
1. Volumeandpricecomponentsofexternaltradeshocks..................................................................49
2. Recentmovementsinthetermsoftrade.........................................................................................50
3. Factorsaffectingcommodityprices:isasupercyclepeteringout?................................................52
4. Commodityprices:prospects..........................................................................................................59


C. volume effects on exporters of manufactures..................................................................................60


d. towards more domestic-demand-oriented growth strategies.........................................................62
1. Domestic-demand-orientedgrowthandbalanceofpayments........................................................63
2. Changesintheproductcompositionofdomesticdemand..............................................................67


e. policy implications..............................................................................................................................70
1. Policiestoboostdomesticdemand..................................................................................................72
2. Theroleofthepublicsectorinstrengtheningdomesticdemand....................................................80
3. Policiesforfosteringdomesticproductivitygrowthandstructuralchange....................................84
4. Conclusions.....................................................................................................................................87


notes...........................................................................................................................................................89


references..................................................................................................................................................91


Annex to chapter II


shifting growth strategies: main implications and Challenges..........................................................95


Chapter III


finanCing the real eConomy................................................................................................103


a. introduction.......................................................................................................................................103


B. Globaltrendsinfinanceandtheirimpactsondevelopingandtransitioneconomies................105
1. Trendsincross-bordercapitalmovementsandfinancialflowstodevelopingcountries..............105
2. Capitalflows,boomsandbustsinemergingmarketeconomies...................................................108




v


Page


C. the global crisis and the challenges ahead......................................................................................111
1. Thefinancialsituationandmonetarypoliciesindevelopedcountries...........................................111
2. impactsandpolicyresponsesindevelopingeconomies............................................................... 118


d. lessons and policy recommendations.............................................................................................125
1. Theroleandimpactoffinancialmarkets:areassessment.............................................................125
2. Counteringfinancialinstability....................................................................................................127
3. orientingthefinancialsectortowardsservingtherealeconomy..................................................132


e. summary and conclusions...............................................................................................................137


notes.........................................................................................................................................................138


references................................................................................................................................................140






vii


List of tables


Table Page


List of boxes


Box Page


2.1 Ashiftindevelopmentstrategies:lessonsfromthelatinAmericanexperience
afterthecrisisofthe1930s...........................................................................................................64


3.1 Capitalinflowsintoemergingmarketeconomies:someeconometricrelationships..................120


1.1 Worldoutputgrowth,2005–2013...................................................................................................2


1.2 exportandimportvolumesofgoods,selectedregionsandcountries,2009–2012.......................5


1.3 Worldprimarycommodityprices,2007–2013...............................................................................9


1.4 Short-termfiscalmultipliers.........................................................................................................13


1.5 Comparativeoutputgrowthperformance,selectedcountriesandcountrygroups,1991–2013..22


1.6 SharesinglobalGDP,selectedcountriesandcountrygroups,1970–2012.................................23


1.7 GDPbytypeofexpenditure,selectedcountriesandcountrygroups,1981–2011.......................24


1.8 Worldexportsbyoriginanddestination,selectedcountrygroups,1995–2012...........................27


1.9 South-Southexports,byregionandproductcategory,1995–2012..............................................28


1.A.1 Privateconsumption,privateinvestmentandemploymentgainsunderthetwoscenarios,
byregion/group,Chinaandindia,2007–2030.............................................................................43


1.A.2 Publicspending,netpubliclendingandcurrentaccountbalanceunderthetwoscenarios,
byregion/group,Chinaandindia,2007–2030.............................................................................44


2.1 Consumptionofselectedcommodities,byregionandeconomicgroup,2002–2012..................54


3.1 Netcapitalinflowsbyeconomicgroupandregion,1976–2011................................................107


3.2 Compositionofexternalfinancingtoemergingmarketeconomies,1979–2012.......................108


3.3 Sourcesofinvestmentfinance,selectedcountrygroups,2005–2012........................................133




viii


List of charts


Chart Page


1.1 Worldtradebyvolume,January2004–April2013........................................................................7


1.2 Monthlycommoditypriceindicesbycommoditygroup,Jan.2002–May2013.............................. 8


1.3 Changesintotalemploymentandemploymentratesindevelopedand
developingcountries,2008–2012.................................................................................................12


1.4 Shareofworldlabourincomeinworldgrossoutput,1980–2011...............................................14


1.5 Financialpositionsofpublicandprivatesectorsintheworldeconomy,1971–2011..................16


1.6 Contributionstoglobalimbalancesofselectedgroupsofcountries,1970–2011........................19


1.7 Tradeshocks,bydevelopingregionandexportspecialization,2004–2012................................26


1.8 evolutionofdeveloping-countryexportsbybroadproductcategory,1995–2012......................30


1.9 Pricetrendsinglobalassetmarkets,1980–2012..........................................................................31


1.A.1 GDPgrowth:historicalandestimatedunderthetwoscenarios,byregion/group,
Chinaandindia,1995–2030.........................................................................................................40


1.A.2 labour-incomeshare:historicalandestimatedunderthetwoscenarios,
byregion/group,Chinaandindia,1995–2030.............................................................................41


1.A.3 Globalimbalancesundertwoscenarios,1980–2030...................................................................45


2.1 Theglobaltradecollapseof2008–2009:mostaffectedeconomies,byexportspecialization....50


2.2 Trendsinthetermsoftrade,selectedprimarycommoditygroups
versusmanufactures,1865–2009.................................................................................................51


2.3 Netbartertermsoftrade,2000–2012...........................................................................................52


2.4 UnitedStatesimports,selectedconsumergoodscategories,
1stquarter1999–4thquarter2012..................................................................................................61


2.5 UnitedStatesimportsofconsumergoods(excl.foodandautomobiles),
bycategoryandselectedsourcecountries,1995–2012................................................................62


2.6 Percapitaincomeanddifferentincomeclasses,selectedcountries,2005...................................69


2.7 TypeofexpenditureasashareofGDP,selectedeconomies,2000–2011....................................71


2.8 Changesinwageshares,privateconsumptionandprivateinvestment
inselectedgroupsofcountriesfrom1991–1994to2004–2007..................................................74


2.9 HouseholddebtandhousepricesintheUnitedStates,1995–2012.............................................77


2.10 Householddebtandhouseprices,selecteddevelopingcountries,2000–2012............................78


3.1 Netcapitalinflowsbyeconomicgroup,1976–2011..................................................................106


3.2 Netprivatecapitalinflowstoemergingmarketeconomies,1978–2012...................................109


3.3 Privatesectorandgrosspublicdebt,selecteddevelopedcountries,1995–2012....................... 112


3.4 Netlending/borrowingbysector,UnitedStatesandeuroarea,2000–2012.............................. 113




ix


Chart Page


3.5 AssetcompositionoftheeuropeanCentralbankandtheUnitedStates
FederalReserve,2003–2013...................................................................................................... 114


3.6 Monetarybaseandbankclaimsontheprivatesector,2001–2012............................................ 115


3.7 Netcapitalinflowsandoutflows,2005–2012............................................................................ 117


3.8 europeanUnion:corecountries’commercialbankexposureto
peripherycountries,2001–2012................................................................................................. 118


3.9 Realeffectiveexchangerates(ReeR),selectedcountries,1990–2012.....................................122


3.10 bankclaimsontheprivatesector,selectedcountries,1990–2012............................................123






xi


Classification by country or commodity group


The classification of countries in thisReport has been adopted solely for the purposes of statistical or
analyticalconvenienceanddoesnotnecessarilyimplyanyjudgementconcerningthestageofdevelopment
ofaparticularcountryorarea.

Themajor country groupings used in thisReport follow the classification by theUnitedNations
Statisticaloffice(UNSo).Theyaredistinguishedas:


» Developedorindustrial(ized)countries:thecountriesmembersoftheoeCD(otherthanChile,Mexico,
theRepublicofKoreaandTurkey)plusallothereUmembercountries.


» TransitioneconomiesreferstoSouth-easteurope,theCommonwealthofindependentStates(CiS)
andGeorgia.


» Developingcountries:allcountries,territoriesorareasnotspecifiedabove.


Theterms“country”/“economy”refer,asappropriate,alsototerritoriesorareas.


References to “latinAmerica” in the text or tables include theCaribbean countries unless otherwise
indicated.


Referencesto“sub-SaharanAfrica”inthetextortablesincludeSouthAfricaunlessotherwiseindicated.


Forstatisticalpurposes,regionalgroupingsandclassificationsbycommoditygroupusedinthisReportfollow
generallythoseemployedintheUNCTAD Handbook of Statistics 2012(UnitedNationspublication,sales
no.b.12.ii.D.1)unlessotherwisestated.ThedataforChinadonotincludethoseforHongKongSpecial
AdministrativeRegion(HongKongSAR),MacaoSpecialAdministrativeRegion(MacaoSAR)andTaiwan
ProvinceofChina.


Other notes


ReferencesinthetexttoTDRaretotheTrade and Development Report(ofaparticularyear).Forexample,
TDR 2012referstoTrade and Development Report, 2012(UnitedNationspublication,salesno.e.12.ii.D.6).


Theterm“dollar”($)referstoUnitedStatesdollars,unlessotherwisestated.


Theterm“billion”signifies1,000million.


Theterm“tons”referstometrictons.


Annualratesofgrowthandchangerefertocompoundrates.


exportsarevaluedFobandimportsCiF,unlessotherwisespecified.


Useofadash(–)betweendatesrepresentingyears,e.g.1988–1990,signifiesthefullperiodinvolved,
includingtheinitialandfinalyears.


Anobliquestroke(/)betweentwoyears,e.g.2000/01,signifiesafiscalorcropyear.


Adot(.)indicatesthattheitemisnotapplicable.


Twodots(..)indicatethatthedataarenotavailable,orarenotseparatelyreported.


Adash(-)orazero(0)indicatesthattheamountisnilornegligible.


Decimalsandpercentagesdonotnecessarilyadduptototalsbecauseofrounding.


Explanatory notes






xiii


Abbreviations


biS bankforinternationalSettlements
CiS CommonwealthofindependentStates
eCb europeanCentralbank
eClAC economicCommissionforlatinAmericaandtheCaribbean
eib europeaninvestmentbank
eRM europeanexchangeRateMechanism
eSCAP economicandSocialCommissionforAsiaandthePacific
eU europeanUnion
FAo FoodandAgricultureorganizationoftheUnitedNations
FDi foreigndirectinvestment
FSb FinancialStabilityboard
GDP grossdomesticproduct
ieA internationalenergyAgency
ilo internationallabourorganization(oroffice)
iMF internationalMonetaryFund
lDC leastdevelopedcountry
llR lenderoflastresort
oDA officialdevelopmentassistance
oeCD organisationforeconomicCo-operationandDevelopment
oPeC organizationofthePetroleumexportingCountries
PPP purchasingpowerparity
ReeR realeffectiveexchangerate
SMe smallandmedium-sizedenterprise
TDR TradeandDevelopmentReport
TNC transnationalcorporation
UNCTAD UnitedNationsConferenceonTradeandDevelopment
UN-DeSA UnitedNationsDepartmentofeconomicandSocialAffairs
UNSD UnitedNationsStatisticsDivision
USDA UnitedStatesDepartmentofAgriculture
WTo WorldTradeorganization






OVERVIEw


Five years after the onset of the global financial crisis the world economy remains in a state of
disarray. Strong expansionary monetary policies in the major developed economies have not
succeeded in fostering credit creation and strengthening aggregate demand. Fiscal austerity and
wage compression in many developed countries are further darkening the outlook, not only for
the short term, but also for the medium term. The burden of adjustment of the global imbalances
that contributed to the outbreak of the financial crisis remains with the deficit countries, thus
strengthening deflationary forces in the world economy.


The dominance of finance over real economic activities persists, and may even have increased
further. Yet financial reforms at the national level have been timid at best, advancing very slowly,
if at all. In 2008 and 2009, policymakers of several economically powerful countries had called
for urgent reforms of the international monetary and financial system. However, since then,
the momentum in pushing for reform has all but disappeared from the international agenda.
Consequently, the outlook for the world economy and for the global environment for development
continues to be highly uncertain.


Some developing and transition economies have been able to mitigate the impact of the financial
and economic crises in the developed countries by means of expansionary macroeconomic policies.
But with the effects of such a response petering out and the external economic environment showing
few signs of improvement, these economies are struggling to regain their growth momentum.


Prior to the Great Recession, exports from developing and transition economies grew rapidly
owing to buoyant consumer demand in the developed countries, mainly the United States. This
seemed to justify the adoption of an export-oriented growth model. But the expansion of the world
economy, though favourable for many developing countries, was built on unsustainable global
demand and financing patterns. Thus, reverting to pre-crisis growth strategies cannot be an option.
Rather, in order to adjust to what now appears to be a structural shift in the world economy, many
developing and transition economies are obliged to review their development strategies that have
been overly dependent on exports for growth.


It is not a new insight that growth strategies that rely primarily on exports must sooner or later
reach their limits when many countries pursue them simultaneously: competition among economies
based on low unit labour costs and taxes leads to a race to the bottom, with few development
gains but potentially disastrous social consequences. At the present juncture, where growth of
demand from developed countries is expected to remain weak for a protracted period of time, the
limitations of such a growth strategy are becoming even more obvious. Therefore, a rebalancing
of the drivers of growth, with greater weight given to domestic demand, is indispensable. This will
be a formidable challenge for all developing countries, though more difficult for some than for
others. In any case, it will require a new perspective on the role of wages and the public sector
in the development process. Distinct from export-led growth, development strategies that give
a greater role than in the past to domestic demand for growth can be pursued by all countries
simultaneously without beggar-thy-neighbour effects, and without counterproductive wage and
tax competition. Moreover, if many trade partners in the developing world manage to expand
their domestic demand simultaneously, they can spur South-South trade.




II


No sustained recovery of the world economy in sight


Theglobaleconomyisstillstrugglingtoreturntoastrongandsustainedgrowthpath.Therateofworld
output,whichwas2.2percentin2012,isforecasttogrowatasimilarratein2013.Asinpreviousyears,
developedcountriesareexpectedtoshowthepoorestperformance,witharound1percentincreaseingross
domesticproduct(GDP).Developingandtransitioneconomiesarelikelytogrowbyalmost5percentand
3percentrespectively.


economicactivityinmanydevelopedcountriesandanumberofemergingmarketeconomiesisstill
sufferingfromtheimpactsofthefinancialandeconomiccrisisthatstartedin2008,andfromtheunsustainable
financialprocessesanddomesticandinternationalimbalancesthatledtoit.However,continuingweakgrowth
inseveralcountriesmayalsobepartlyduetotheircurrentmacroeconomicpolicystance.


intheeuropeanUnion(eU),GDPisexpectedtoshrinkforthesecondconsecutiveyear.economic
contractionislikelytobemoresevereintheeuroareathaninothereUcountries.Privatedemandremains
subdued,especiallyintheperipheryeconomies,duetohighunemployment,wagecompression,lowconsumer
confidenceandthestillincompleteprocessofbalancesheetconsolidation.Giventheongoingprocessof
deleveraging,expansionarymonetarypolicieshavefailedtoinducebankstoprovidemuch-needednewcredit
totheprivatesectorthatcouldreinvigoratedemand.inthiscontext,theincreasedtendencytowardsfiscal
tighteningmakesaquickreturntoahighergrowthtrajectoryhighlyunlikely.indeed,attemptstoresolve
thecrisisintheeuroareathroughfiscalausteritymaybackfirebadly,asitaddsadeflationaryimpulseto
alreadyweakprivatedemand.Thecountriesintheeurozonethathavebeensufferingthemostfromthe
crisiscontinuetooperateunderextremelyadverseconditions,whilegrowthinthesurpluscountrieshas
largelyreliedonstrongexports.Sincegovernmentsinthelattercountrieshavebeenreluctanttostimulate
domesticdemandbyothermeansthanmonetarypolicy,disequilibriumwithinthezonepersists.


Atthegloballevel,itisnotablethatJapanisbuckingthecurrentausteritytrendbyprovidingstrong
fiscalstimulusandmonetaryexpansionthatareaimedatrevivingeconomicgrowthandcurbingdeflationary
trends.ThesemeasurescouldhelpmaintainitsGDPgrowthatcloseto2percentin2013.TheUnitedStates
isexpectedtogrowatasimilarrate,butbasedonadifferentsetoffactors.Partlyowingtosignificantprogress
madeintheconsolidationofitsbankingsector,privatedomesticdemandhasbeguntorecover.ontheother
hand,cutsinpublicspending,includingforneededinvestmentininfrastructure,arehavingacontractionary
effect.Sincethenetoutcomeoftheseopposingtendenciesisunclear,thereisalsoconsiderableuncertainty
aboutwhethertheexpansionarymonetarypolicystancewillbemaintained.


Growth in many developing countries driven by domestic demand


Developingcountriesareexpectedtogrowbybetween4.5and5percentin2013,similarto2012.in
manyofthem,growthhasbeendrivenmorebydomesticdemandthanbyexports,asexternaldemandfrom
developedeconomieshasremainedweak.inaddition,short-termcapitalinflows,attractedbyhigherinterest
ratesthaninthemajordevelopedcountries,havebeenexertingappreciationpressureonthecurrenciesof
severalemergingmarketeconomies,thusweakeningtheirexportsectors.


Asbefore,in2012outputgrowthwasstrongineast,SouthandSouth-eastAsia,at5.3percent,but
recentlytherehasbeenaslowdown,reflectingweakdemandfromsomeofthemajorexportmarkets.in
China,thecontributionofnetexportstoGDPgrowthdeclinedfurther,whilefixedinvestmentandprivate
consumption,asaresultoffasterwagegrowth,continuedtodriveoutputexpansion.Domesticdemand,
encouragedbyvariousincomespolicymeasuresinanumberofothercountriesintheregion,suchasindia,
indonesia,thePhilippinesandThailand,isalsosupportingoutputgrowth,whichmaythereforeaccelerate
moderatelyintheregionasawholein2013.




III


economicgrowthinWestAsiasloweddowndramatically,from7.1percentin2011to3.2percentin
2012,alevelthatisexpectedtobemaintainedin2013.Weakerexternaldemand,especiallyfromeurope,
affectedtheentireregion,mostprominentlyTurkey,whosegrowthratedroppedsharplyfromaround9per
centin2010and2011to2.2percentin2012.TheGulfCooperationCouncil(GCC)countriesmaintained
largepublicspendingprogrammestosupportdomesticdemandandgrowth,despitescalingbacktheiroil
productionduringthelastquarterof2012tosupportoilprices.


GrowthinAfricaisexpectedtoslowdownin2013,owingtoweakerperformanceinNorthAfrica,
wherepolitical instability insomecountrieshasbeenmirrored in recentyearsbystrongfluctuations in
growth.insub-SaharanAfrica,bycontrast,GDPgrowthhasremainedstable,atabove5percent,owing
tocontinuedhighearningsfromexportsofprimarycommoditiesandrelativelystrongpublicandprivate
investmentinsomecountries.However,thetwolargesteconomiesoftheregion,NigeriaandSouthAfrica,
faceconsiderabledownsiderisksduetofalteringexternaldemandandsomeweaknessesonthesupplyside.
inaddition,severalleastdevelopedcountries(lDCs)oftheregionremainvulnerabletosuddenanddrastic
swingsindemandforcertaincommodities.


GrowthisalsoexpectedtoremainrelativelystableinlatinAmericaandtheCaribbean,ataround
3percent,onaverage,asaslowdowninsomecountries,includingMexico,islikelytobeoffsetbyfaster
growthinArgentinaandbrazil.overall,growthintheregionisbeingdrivenbydomesticdemand,based
onpublicandprivateconsumption.


Thetransitioneconomieshaveexperiencedadownwardtrendintheireconomicperformance.Under
theimpactofthecontinuingcrisisinmuchofWesterneurope,mostofthetransitioneconomiesofSouth-
easterneuropeenteredintorecessionin2012.ThemembersoftheCommonwealthofindependentState
(CiS)maintainedagrowthrateofover3percentin2012basedonsustaineddomesticdemand,butthisis
expectedtoslowdownslightlyin2013.Theeconomicoutlookfortheregionremainscloselylinkedtothe
performanceoftheeconomyoftheRussianFederationandtocommoditypricedevelopments.


Astherapidexpansionofdevelopingeconomiesasagrouphasfurtherincreasedtheirweightinthe
worldeconomy,anewpatternofglobalgrowthseemstobeemerging.Whiledevelopedcountriesremainthe
mainexportmarketsfordevelopingcountries,theshareofthelatter’scontributiontogrowthintheworld
economyhasincreased,from28percentinthe1990stoabout40percentintheperiod2003–2007,and
tocloseto75percentsince2008.However,morerecently,growthintheseeconomieshasdecelerated.if
developingcountriescanincreasetheroleofdomesticdemandandSouth-Southtradeintheirdevelopment
strategies,theymaycontinuetogrowatarelativelyfastpace,withincreasingpotentialtorelyoneachother
fortheexpansionofaggregatedemand.However,theycannotbeexpectedtoliftdevelopedcountriesout
oftheirsluggishgrowthpatternthroughhigherimportsfromthem.


Global trade expansion has virtually ground to a halt


internationaltradeingoodsandserviceshasnotreturnedtotherapidgrowthrateoftheyearspreceding
thecrisis.Afterasharpfallin2008–2009andaquickrecoveryin2010,thevolumeoftradeingoodsexpanded
byonly5percentin2011andbylessthan2percentin2012,anditaffecteddeveloped,developingand
transitioneconomiesalike.


Sluggisheconomicactivityindevelopedeconomiesaccountedformostoftheslowdownininternational
trade.in2012,europeanimportsofgoodsshrankbyalmost3percentinvolumeandby5percentinvalue.
extremelyweakintra-europeantradewasresponsibleforalmost90percentofthedeclineineuropean
exportsin2012.Japan’sexportshavenotyetrecoveredfromtheirsharpfallcausedbytheearthquakeof
2011,whilethevolumeofitsimportshascontinuedtogrowatamoderatepace.Amongthemajordeveloped




IV


economies, only the United States maintained a positive growth rate in its international trade, although this
appears to be slowing down in 2013.


Trade also decelerated considerably in developing and transition economies. Both exports and imports
grew sluggishly in 2012 and the first months of 2013 in most developing regions. The sole exception was
Africa, where exports recovered in countries previously affected by civil conflict. Export growth declined to
4 per cent in the developing countries as a whole. This slowdown included Asian countries that had previously
played a major role in boosting international trade.


The rate of growth of China’s exports, by volume, declined from an average annual rate of 27 per cent
during the period 2002–2007 to 13 per cent in 2011 and to 7 per cent in 2012, a lower rate than its GDP
growth. Concomitantly, China’s imports, by volume, decelerated to 6 per cent in 2012 from 19 per cent, on
average, between 2002 and 2007. Only regions exporting a large proportion of primary commodities (i.e.
Africa, West Asia and, to a lesser extent, Latin America) saw a significant increase in their exports to China.
Several exporters of manufactures in Asia registered a sizeable slowdown of growth in their external trade.
This was the result not only of lower imports from Europe, but also of slower growth in some developing
regions, in particular in East Asia.


The crisis of 2008–2009 has altered trade patterns in both developed and developing countries. Imports
by all developed regions remain below their pre-crisis level, and only the United States has managed to
increase its exports to a higher level than their previous peak of August 2008. On the other hand, exports
from the group of emerging market economies were 22 per cent above their pre-crisis peaks, while the
corresponding figure for their imports was 26 per cent higher. However, the pace of growth of trade of these
economies has slowed down significantly: during the pre-crisis years, between 2002 and 2007, their export
volume grew at an average annual rate of 11.3 per cent, but fell to only 3.5 per cent between January 2011
and April 2013. Growth in the volume of their imports also slowed down from 12.4 per cent to 5.5 per cent
over the same period.


Overall, this general downward trend in international trade highlights the vulnerabilities developing
countries continue to face at a time of lacklustre growth in developed countries. It is also indicative of a
probably less favourable external trade environment over the next few years.


The particularities of a protracted downturn in developed countries


The difficulties of the developed countries as a group to find their way towards a path of sustained
recovery following the recession of 2008–2009 suggests that the latest crisis is of quite a different nature
than the cyclical crises of the past. From 2008 to 2012, global output growth averaged just 1.7 per cent.
This is much slower than during any of the five-year periods that followed recessions in the global economy
since the 1970s.


In this situation, expansionary policies would be needed to spur domestic demand and restore the
confidence of households and firms. However, policymakers have instead been focusing their attention
on restoring the confidence of financial markets. A central element of this strategy in developed countries
has been fiscal austerity, based on the belief that high public debt ratios may eventually trigger a general
aversion to sovereign debt, which could increase the risk premium and thereby impose a heavier debt burden
on public finances. This strategy has not yielded the expected results. The outcome of fiscal contraction has
negatively affected growth and job creation, as the expected increase in private demand has not materialized
to compensate, or overcompensate, for the cuts in public spending. In addition, the fact that several countries
that had strong trade relations with each other have been following austerity regimes at the same time has
amplified their deflationary impact in the same way as simultaneous fiscal stimulus in 2009 generated very




V


positive results.Moreover,monetarypolicieshaveproved ineffective in thesense thatstrongmonetary
expansionhasnottranslatedintoanincreaseinloanstotheprivatesector.Thisshowsthat,withoutthe
prospectofagrowth indemand, the increasingavailabilityofcredit isnotenough to stimulateprivate
investmentandcreatejobs.


experiencehasshownthatanexpansionaryfiscalpolicycanhaveamuchstrongerimpactinsucha
situation,becausethisispreciselywhenithasaparticularlystrongmultipliereffect.Thelegitimateobjective
ofimprovingfiscalbalancesismorelikelytobeachievedthroughanexpansionofaggregatedemand,and
thusthetaxbase,thanbyfiscalcontractionwhichreducesincomeandemploymentgrowth.inaddition,
centralbankoperationsthatfocusonreducingtheriskofsovereigndebtandmaintaininglowinterestrates
wouldenableareductioninpublicdebtservicing,andtherebylowermedium-tolong-termpublicdebt
ratiosthatareconsideredtoohigh.


Structural reforms are needed, but what kinds?


Despitemarkeddifferencesineconomicperformanceacrossregions,ingeneral,policiespursuedover
thepastthreeyearshavenotsucceededinresolvingthecrisis.Therecanbelittledoubtthat,inadditionto
demand-enhancingpolicies,structuralreformsareneededinmanycountriestoleadtheirnationaleconomies
andtheglobaleconomybacktoapathofsustainedgrowth.Severalproposalsforreformhavebeenmade,
inparticularrelatingtothefinancialsector,thelabourmarket,publicfinancesandcentralbanking,butnot
allofthemhaveadequatelyaddressedthecausesofthecrisis.


Amajorreasonforthecrisishasbeenthedominanceofthefinancialsectorovertherealsector.Financial
liberalizationhas resulted ingovernmentsbeing increasingly influencedby thebelief that theyneed to
maintainorregainthe“confidence”offinancialmarkets.Thereformsadoptedsince2008,whichaimat
improvingsupervisionandcapitalizationofthebankingsystem,arehelpfulbutareunlikelytobesufficient
topreventactivitiesofthefinancialmarketsfromposingathreattoeconomicstability.Governmentsneedto
controlfinancialmarketsmoreresolutelythaninthepastandlimitthepowerofthosemarketsovernational,
regionalandglobaleconomies.


Formanyyearsprecedingthefinancialandeconomiccrisis,structuralreformwasvirtuallysynonymous
withintroducinggreaterflexibilityintothelabourmarket,especiallywageflexibility,andsuchreformisagain
suggestedasawayoutofthecrisis.butastrategyaimedatstrengtheningthecompetitivenessofeconomies
byreducinglabourcostscompletelyneglectsthefactthatwagesareusuallyamajorsourceofdomestic
demand.Moreover,whensuchastrategyispursuedbymanycountriesatthesametime,itleadstoarace
tothebottom,worsensincomedistributionandposesathreattosocialcohesion.Andgreaterinequalityof
incomedistributionwasoneofthefactorsthatledtothecrisisinthefirstplace.instead,anincomespolicy
aimedatacceleratingconsumptiongrowthcouldcontributedecisivelytorestoringnationaleconomies,and
theglobaleconomy,toastrongerbutalsomorebalancedgrowthpath.


Reformsaimedatfiscalconsolidationmaybenecessaryinmanycountries,buttheyneedtoconsider
theoverallmacroeconomiccontext.Publicfinancescannotbemanagedlikethefinancesofahousehold
becausetheyinevitablyhaveanimpactontheentireeconomyandthespendingbehaviouroftheprivatesector.
Attemptstoachievefiscalconsolidationintheshortrunhavebeenunsuccessfulatbest,andcounterproductive
andprocyclicalatworst.Suchconsolidationcanonlybeachievedafterseveralyearsofsustainedeconomic
growth,andshouldnotbeconsideredaprerequisiteforeconomicrecovery.


Centralbanksofmanydevelopedcountrieshaverespondedtothefinancialcrisis,and,intheeurozone,
tothecrisisinsomememberStates’publicfinances,withanumberofunorthodoxmeasures.buttheymay
alsohavetofindnewwaysofmakingcreditavailabletonon-financialagentstouseinawaythatgenerates
demand,incomeandemployment.




VI


Thesevariousnationalreformsalsorequiremoredeterminedinternationalcooperation,includinglong
overduereformoftheinternationalmonetarysystem,inordertoachievegreatersymmetryofadjustment
effortsamongdeficitandsurpluseconomies.inthepresentsituation,severalcountrieswithlargecurrent
accountsurplusescouldprobablydomuchmoretohelprevivetheworldeconomy.


Developing and transition economies:
better performance but continued vulnerability


oneofthemostsignificantchangesintheshapeoftheworldeconomyhasbeentheincreaseinthe
shareofdevelopingcountriesinglobalGDP.Theonsetoftheglobaleconomicandfinancialcrisisinitially
reinforcedthistrend,asgrowthindevelopingcountriesin2008–2009deceleratedlessandrecoveredmore
rapidlythanindevelopedcountries.Asaresult,theshareofdevelopedcountriesinglobalGDPdeclined
from79percentin1990toabout60percentin2012,whilethatofdevelopingcountriesmorethandoubled,
from17percentto36percent,overthesameperiod.Mostofthischangeoccurredfrom2004onwards.


Nevertheless,economicdevelopmentsindevelopedcountriesremaincrucialforgrowthindeveloping
countries.indeed,thegrowthaccelerationinthelattersetofcountriesduringthe1990s,andespeciallyduring
theperiod2003–2007,wasassociatedwithalargerproportionofinternationaltradeinthecompositionof
theiraggregatedemand.Combinedwiththegenerallyfavourableexternaleconomicenvironment,suchas
growingimportsbydevelopedcountries(especiallytheUnitedStates)andhistoricallyhighcommodity
prices,particularlyduringthefiveyearspriortotheonsetofthecurrentcrisis,thegreateroutwardorientation
ofdevelopingcountriescontributedtotheirgrowth.


However,anexport-orientedgrowthstrategyalsoimpliesgreatervulnerabilitytoadeteriorationof
theexternalenvironment,ashasoccurredsince2008.Theinternationalpriceanddemandshocksduring
2008–2009hadasevereimpactonbothexportersofprimarycommoditiesandexportersofmanufactures.The
subsequentreboundwasmorerapidanditsbeneficialimpactgreateroncountrieswhoseexportscomprise
alargeproportionofprimarycommoditiesthanforcountriesthatexportmainlymanufactures.


WeakerdemandfromdevelopedcountriessuggeststhatSouth-Southtrademayneedtoplayagreater
roleindevelopingcountries’growthstrategy.inthisrespect,itoffersgreaterpotentialthaninthepast,given
thattheshareofSouth-Southtradeintotalworldtradeincreasedfromslightlylessthan30percentin1995to
slightlymorethan40percentin2012.Moreover,theshareofmanufacturesinadevelopingcountry’sexports
tootherdevelopingcountriesandthevalueaddedinsuchtradeareusuallymuchhigherthantheyareinits
exportstodevelopedcountries,whichistestimonytothepotentialdevelopmentalroleofSouth-Southtrade.


Commodity price trends and outlook


UptothefinancialcrisisandtheGreatRecessionof2008–2009,rapidoutputgrowthinmanydeveloping
andtransitioneconomieswastheresultoftheirstrongincreaseinexportsofmanufacturestodeveloped
countries.Thisinturncontributedtohigherexportearningsofotherdevelopingcountriesthatreliedonexports
ofprimarycommodities.Sincetheturnofthemillennium,theselattercountrieshavealsobenefitedfroma
trendchangeinthetermsoftrade.Thischangereflectednotonlyanupwardmovementinthemedium-term
commoditypricetrend,interruptedonlybrieflyin2008–2009,butalsoadeclineinworldpricesofcertain
manufactures,especiallylabour-intensivemanufactures.


Theincreasingdemandforcommoditiesinrapidlygrowingdevelopingcountries,notablyChina,and
theresultinghigherpricelevelsofmanyprimarycommodities,signifiesastructuralshiftinphysicalmarket
fundamentals.Theupwardtrendinpriceshasalsobeensupportedbyaslowsupplyresponse,ashistorically
lowpricelevelsinthe1990shadledtoalongperiodofunderinvestmentinproductioncapacityforseveral
keycommodities,especiallyinthemineralandminingsectors.Atthesametime,theincreasingpresenceof




VII


financialinvestorsincommoditymarketshasaccentuatedtheproblemofpricevolatility.Projectionsabout
thefurtherevolutionofcommoditypricesareparticularlydifficultinthecurrentuncertainglobaleconomic
environment,butthereislittledoubtthatthegrowthoutlookfordevelopingcountrieswillhaveasignificant
impactonfuturecommoditydemandtrends.


Continuingfastpopulationgrowthandrisingincomeindevelopingcountriesshouldleadtogreater
demandforseveralfooditems.Moreover,asproductionisunlikelytoincreaseinlinewiththegrowing
demand,includingforbiofuels,agriculturalcommoditypricescouldremainhighoverthenextdecade.


Demandconditionsinthemarketsofmanyprimarycommoditiesthatareusedasinputsfortheproduction
ofmanufacturesandforconstructionaredeterminedbyanumberoffactors.onefactoriswhetherChina
succeedsinrebalancingitsgrowththroughanincreaseindomesticconsumption.Anotheriswhetherother
highlypopulatedandrapidlygrowingdevelopingcountrieswillmovetoamorecommodity-intensivephase
ofeconomicgrowthandindustrialization.evenifChina’sGDPgrowthslowsdown,resultinginalower
useofsomecommodities, itsongoingindustrializationandpercapita incomegrowthcouldcontinueto
haveaconsiderableimpactonglobalmarkets,giventhesizeofitseconomy.if,inaddition,otherlargeand
highlypopulateddevelopingcountriesalsopursueapathofrapidindustrialization,thedemandprospects
forindustrialcommodities,particularlymetals,couldremainrobust.infrastructuredevelopmentassociated
withrapidurbanizationalsooffersstrongpotentialtoincreasedemandforcommodities.


in addition, rising living standards inmany developing countriesmay boost demand for energy
commoditiesinthemediumterm,despiteimprovementsinenergyefficiencythatcouldcontributetoadecline
inenergyuseperunitofGDP.oilpricescouldremainhistoricallyhigh,eveniftheyfallslightlycompared
withtheir2011–2012levels,asdemandfromsomeoftherapidlygrowingdevelopingcountrieswillcontinue
toriseandbecausetheexploitationcostsofnewsuppliesarehigherthanthosefromconventionalsources.


overall,commoditypricesmaynotriseasfastastheyhaveoverthepastdecade,but,followingsome
downwardadjustmentsintheshortterm,theyshouldstabilizeatarelativelyhighlevelincomparisonwith
theearly2000s.However,thisshouldnotleadtocomplacencyinthedesignofdevelopmentstrategiesin
natural-resource-richcountries.Theirmainchallengeremainsthatofappropriatingafairshareoftheresource
rentsandchannellingrevenuestowardsinvestmentintherealeconomyinordertospurthediversification
andupgradingofproductionandexports.


Export-led growth strategies are reaching their limits


Akeyproblemforpolicymakersinthedevelopingandtransitioneconomiesthathavealargeshareof
manufacturesintheirexportsisthatgrowthofexportsandincomesintheircountriesislikelytobeadversely
affectedbycontinuedslowgrowthindevelopedcountries’finalexpenditureforseveralyearstocome.ina
numberofthesecountries,productionofmanufacturedgoodsfortheworldmarkethasdriventheexpansion
oftheirformalmodernsectors,butinmostofthemdomesticdemandhasnotincreasedapace.Thishasbeen
partlyduetoweaklinkagesbetweentheexportsectorandtherestoftheeconomy,andpartlytothestrategy
oftheirfirmsandgovernmentstostrengthentheinternationalcompetitivenessoftheirdomesticproducersby
keepingwageslow.Suchastrategywilleventuallyreachitslimit,aslowwagesdampendomesticdemand
growth,especiallywhenmanyothercountriespursuethesamestrategysimultaneously.Sincethegrowth
ofdemandindevelopedcountriesislikelytoremainweakforanextendedperiodoftime,thelimitations
of sucha strategybecomeevenmoreacute. in thesecircumstances,continuingwithexport-ledgrowth
strategiesthroughwageandtaxcompetitionwouldexacerbatetheharmcausedbyslowergrowthinexport
marketsandreduceanyoverallbenefits.


Theadoptionofcountercyclicalmacroeconomicpoliciescancompensateforresultinggrowthshortfalls
forsometime.indeed,mostdevelopingcountriesreactedtothedeclineintheirnetexportsbyincreasing
theshareofgovernmentexpenditureinGDP.Therewasalsoanincreaseofprivateconsumptionasashare




VIII


ofGDPinsomeofthesecountries,andofgrossfixedcapitalformationasashareofGDPinsomeothers.
However,beyondsuchshort-termresponses,developingcountriesmayneedtotakeamorecomprehensive
andlongertermperspective,involvingashiftindevelopmentstrategiesthatgivesgreaterweighttodomestic
demandasanengineofgrowth.Suchamovetowardsamorebalancedgrowthpathcouldcompensatefor
theadverseimpactofslowergrowingexportstodevelopedcountries.Moreover,thismorebalancedgrowth
strategycouldbepursuedbyalldevelopingcountriessimultaneouslywithoutbeggar-thy-neighboureffects.
However,therearemanychallengesinvolvedinmovingtowardsamorebalancedgrowthstrategy.These
includeboostingdomesticpurchasingpower,managingdomesticdemandexpansioninawaythatavoidsan
excessiveincreaseinimportdemand,andnurturingtheinterrelationshipbetweenhouseholdandgovernment
expenditure,ontheonehand,andinvestmentontheother,toenablethesectoralcompositionofdomestic
productiontoadjusttonewdemandpatterns,includingthroughincreasedregionalandSouth-Southtrade.


Hence,shiftingthefocusofdevelopmentstrategiestodomesticmarketsdoesnotmeanminimizing
theimportanceoftheroleofexports.indeed,exportscouldexpandfurtherifseveraltradepartnerswereto
achievehighereconomicgrowthatthesametime.


Rebalancing domestic and external forces of growth


inseekinggreaterintegrationintoarapidlyglobalizingeconomy,thecriticalimportanceofdomestic
demandasamajorimpetusforindustrializationisoftenoverlooked.Growthofdomesticdemandaccounts
foraboutthreequartersoftheincreaseindomesticindustrialoutputinlargeeconomies,andslightlymore
thanhalfinsmalleconomies.Acceleratingdomesticdemandgrowthcouldthereforebehighlybeneficial
foroutputgrowthandindustrialization,particularlyinacontextofweakeningexternaldemandgrowth.The
possibilityofchangingrapidlytowardsamoredomestic-demand-orientedgrowthstrategywilldependlargely
onhowcloselythesectoralstructureofdomesticproductionislinkedtothepatternofdomesticdemand.
Thislinkagewillbeparticularlyweakincountriesthatexportalargeproportionofprimarycommodities.it
thereforeremainsveryimportantforthesecountriestousetheirresource-relatedrevenuestodiversifytheir
sectoralstructureofproductionbyincreasingthesharesofmanufacturesandmodernservices,bothpublic
andprivate.bydeveloping the linkagesbetween theexportingsectorsand the restof theeconomy, this
diversificationwouldgeneratenewemploymentandincomeopportunities,andstrengthenthedomesticmarket.


Astrategythatplacesgreateremphasisondomesticdemandwillneedtoaimatanappropriatebalance
betweenincreasesinhouseholdconsumption,privateinvestmentandpublicexpenditure.Thereisastrong
interrelationshipbetweenthesethreecomponentsofdomesticdemand.increasedconsumptionofgoodsand
servicesthatcanbeproduceddomesticallymakesproducersofthosegoodsandservicesmorewillingto
investintheirproductivecapacity.Higherinvestmentisnotonlyitselfasourceofdomesticdemand(even
ifalargeshareofthecapitalgoodsmayhavetobeimported),butitisalsoapreconditionforthecreationof
employmentandforproductivitygainsthatallowwagestogrowalongwiththepurchasingpowerofdomestic
consumers.Moreover,higherincomesofhouseholdsandfirmsraisetaxrevenues,whichcanthenbespent
bythegovernmentforenhancingpublicservicesandinfrastructuredevelopment,evenatunchangedtax
rates.Higherpublicspending,inturn,cancreateadditionalincomeforhouseholdsandfirms,andimprove
the conditions for private investment.Such investment is indispensable for increasingdomestic supply
capacity,andthusforreducingleakagesofdomesticdemandgrowththroughimports.


Increasing domestic consumption


labourincomeisthemostimportantsourceofhouseholdconsumption,whichgenerallyaccountsfor
betweenhalfandthreequartersofaggregatedemand,eveninrelativelypoorcountriesandcountrieswitha
relativelylargeexportsector.Thusfosteringthepurchasingpowerofthepopulationingeneral,andofwage
earnersinparticular,shouldbethemainingredientofadomestic-demand-drivengrowthstrategy.




IX


Whileexport-ledstrategiesfocusonthecostaspectofwages,adomestic-demand-orientedstrategy
wouldfocusprimarilyontheincomeaspectofwages,asitisbasedonhouseholdspendingasthelargest
componentofeffectivedemand.ifwagegrowthfollowsthepathofproductivitygrowth,itwillcreatea
sufficientamountofdomesticdemandtofullyemploythegrowingproductivecapacitiesoftheeconomy
withouthavingtorelyoncontinuedexportgrowth.


ineconomieswith fairly large formalsectors, the functioningofsuchan incomespolicycouldbe
enhancedbybuildinginstitutionsforcollectivebargainingandtheintroductionoflegalminimumwages.
incountrieswhereinformalemploymentandself-employmentarewidespread,targetedsocialtransfersand
publicsectoremploymentschemescanplayanimportantcomplementaryrole.incountrieswithalargerural
sectorwithmanysmallproducers,introducingmechanismsthatensurefairpricesforagriculturalproducers
–forinstancebylinkingthosepricestotheoverallproductivitygrowthoftheeconomy–wouldbeanother
elementofastrategytoincreasedomesticconsumption,strengthensocialcohesionandatthesametime
inducemoreproductivity-enhancinginvestments.Moreover,thelayersofthepopulationthatwillprimarily
benefitfromsuchanincomespolicywouldbelikelytospendmostoftheirincomeonlocallyproduced
goodsandservices.inaddition,governmentscantakediscretionaryfiscalactions,suchasprovidingtax
rebatesoncertainconsumergoodsthatare,orcanbe,produceddomestically.


Spurringdomesticdemandby facilitatingaccess toconsumercredit for theacquisitionofdurable
consumergoodstendstoberisky,asamplydemonstratedbyrecentexperiencesinanumberofdeveloped
countries.Thedebtservicingburdenofhouseholdsmayrapidlybecomeexcessive if interest rates rise,
growthofhouseholdincomesstallsorthepricesofassetsusedascollateralfall.


Increasing domestic investment


Domesticinvestment,bothprivateandpublic,playsacrucialroleinanygrowthstrategy,regardless
ofwhetheritisorientedtowardsexportsordomesticdemand.Theexpectationthatfuturedemandwillbe
highenoughtofullyutilizeadditionalproductivecapacityisthemainincentiveforentrepreneurstoinvest
inexpandingthatcapacity.Sinceexportsareunlikelytogrowatthesamepaceasinthepast,giventhe
currentstateoftheworldeconomy,domesticdemandgrowthwillbecomemoreimportantinformingthe
demandexpectationsofpotentialinvestors.Akeydeterminantoftheirabilitytostrengthenproductive
capacityistheavailabilityoflong-termfinanceatanaffordablecostandacompetitiveexchangerate.
Thisinturndepends,toalargeextent,oncentralbankpolicyandthestructureandfunctioningofthe
domesticfinancialsystem.


Direct and indirect demand effects of public expenditure


Thepossibilityofstrengtheningdomesticdemandbyincreasingpublicsectorspendingdependsonthe
initialconditionsofthepublicfinancesineachcountry,butalsoontheeffectsofincreasedpublicexpenditure
onpublicrevenue.Publicspendingandtaxationarepotentiallykeyinstrumentsforshapingthedistribution
ofpurchasingpowerinaneconomy.beyonditsdirecteffectsonaggregatedemand,publicinvestmentin
infrastructureand/orpublicservicestospecificindustrialclustersareoftenapreconditionfortheviability
ofprivateinvestment,forenhancingtheproductivityofprivatecapital,andforcomplementingthemarket
mechanismbyfacilitatingthecreationoflinkagesbetweenexportindustriesandtherestoftheeconomy.in
addition,publicexpenditureoneducationandtrainingcaninfluencethepotentialoflabourtocontributeto
productivitygrowth.Moreover,countercyclicalfiscalpolicycanstabilizedomesticdemandduringperiods
ofslowgrowthorrecession,andthuspreventaloweringofthedemandexpectationsofdomesticinvestors.
Thisstabilizationpotentialwillbegreater,thelargertheshareofthepublicsectorinGDP.




X


incomeredistributionthroughthetaxationstructureandtransfers tohouseholdscanstrengthenthe
purchasingpowerofthoseincomegroupsthatspendalargershareoftheirincomeonconsumptioningeneral,
andondomesticallyproducedgoodsandservices,inparticular,thanhigherincomegroups.


Raising public revenues


The“fiscalspace”forstrengtheningdomesticdemand,directlyorindirectly,throughincreasedpublic
spendingindevelopingcountries,especiallyinlow-incomeandleastdevelopedcountries,tendstobemore
limitedthanindevelopedcountries.Thisisnotonlybecausetheirtaxbaseissmaller,butalsotheircapacity
toadministerandenforcetaxlegislationisoftenweak.Moreover,inmanyofthesecountriespublicfinances
arestronglyinfluencedbyfactorsthatarebeyondthecontroloftheirgovernments,suchasfluctuations
incommoditypricesandininterestratesontheirexternaldebt.buttoalargeextentfiscalspaceisalso
determinedendogenously,sincespendingofpublicrevenuecreatesincome,andthusadditionalspending
intheprivatesector,therebyenlargingthetaxbase.Theseincomeeffectsvary,dependingonhowthetax
burdenisdistributedandpublicrevenueisspent.Takingaccountofsuchcompositionaleffectsofboththe
revenueandtheexpendituresideimpliesthatthescopeforusingtaxationandgovernmentspendingfor
strengtheningdomesticforcesofgrowthmaybegreaterthanisoftenassumed.


inmanydevelopingandtransitioneconomies,thereappearstobescopeformoreprogressivetaxation
andfortaxingwealthandinheritance,aswellasforraisingadditionalrevenuebyimposinghighertaxes
onmultinationalcorporations.Thelatterwouldrequirethatdevelopingcountries,intheireffortstoattract
foreigndirectinvestment(FDi),avoidengagingintaxcompetitionwitheachother.Suchcompetition,like
internationalwagecompetition,isattheexpenseofallthecountriesconcerned.Theseconsiderationsare
ofparticularrelevanceforcountriesthatarerichinmineralresources,whereoftenonlyaverysmallshare
oftheresourcerentsremainsintherespectivecountriesintheformofprivateincomeorpublicrevenue.


inseverallow-incomeandleastdevelopedcountriesmultilateralfinancialinstitutionsandbilateraldonors
wouldneedtohelpbyprovidingadditionalresourcesforsocialspending,aswellassupportforimproving
theadministrativecapacitiesneededtostrengthentheroleofpublicfinancesindevelopmentstrategies.


The rationale for debt-financed public spending


Rebalancingdomesticandexternal forcesofgrowthmayalsorequireadifferentapproach todebt
financingofpublicexpenditure.itcanbeastrategicinstrumentnotonlyinthecontextofacountercyclical
fiscalpolicy,butalsoforstretchingthefiscalburdenoflargepublicinfrastructureprojects.Suchprojects
typicallyhelptoincreasetheproductivityoftheeconomyatlargeandgeneratebenefitsforhouseholdsand
firmsinthefuture,bywhichtimeeconomicgrowthwouldhelpservicetheinitiallyincurreddebt.


Whileitmaybepreferableforgovernmentstopayallpublicexpenditureoutofcurrentrevenue,a
rationalapproachinafast-growingdevelopingeconomycouldalsobebasedontheprinciplethatcurrent
expenditure, including social expenditure, should befinanced by taxation and other current revenues,
whereaspublicinvestmentmaybefinancedbyborrowing,sincesuchinvestmenthasapay-offintheform
ofadditionaltaxreceiptsfromanenlargedtaxbaseinthefuture.Governmentsshouldconsiderborrowing
inforeigncurrencyonlytotheextentthatpublicinvestmentsorgovernmentsupporttoprivateinvestments
requireimportingcapitalgoods,materialsandknow-how.Wherethereisasufficientpossibilityforpublic
sectorborrowingforthesepurposes,anincreaseincredit-financedpublicexpendituremaybeconsidereda
waytoboostnotonlydomesticdemandbutalsodomesticsupplycapacities.




XI


Changing composition of consumption with rising personal incomes


Consumptionpatternsarechangingwithrisingincomelevels.oncetheincomeofindividualconsumers
crossesacertainthreshold,theywilluseasmallershareofthatincomeforsatisfyingtheirbasicorsubsistence
needs.Thethresholdswhichtriggeranaccelerationofdemandforotherconsumptionitemstypicallycluster
atalevelofpercapitaincomeatwhichanindividualisconsideredtoenterthe“middleclass”(i.e.those
segmentsofthepopulationinanysocietythathaveacertainamountofdiscretionaryincomeattheirdisposal,
whichallowsthemtoengageinconsumptionpatternsbeyondjustthesatisfactionoftheirbasicneeds).The
futureevolutionofconsumptionpatternsthereforedependsonthenumberofpeoplethatareataroundthe
entrylevelofthemiddleclass,wherethenewspendingpatternsstartemerging.


basedonanumberofprojections,ithasbeenestimatedthattheproportionofthemiddleclassinthe
totalworldpopulationwillincreasefrom26percentin2009to41percentin2020and58percentin2030,
andthatthisproportionwillgrowmorethanfourfoldindevelopingcountries.Asiawillaccountforthe
bulkofthisincrease,withthenumberofpeoplebelongingtothemiddleclassinthisregionestimatedto
growsixfold;inCentralandSouthAmericathenumberisexpectedtogrowbyafactorof2.5,andinsub-
SaharanAfricaitshouldtriple.Astrategythatgivesgreateremphasistodomestic-demand-drivengrowth,
ifsuccessful,mightwellacceleratethesetrends,asitwouldbeassociatedwithfasterwageincreasesanda
moreequalincomedistributionthaninthepast.Therefore,manydevelopingandtransitioneconomiescould
achievearapidaccelerationofconsumptionofdurableconsumergoodsinthemediumterm.


Anenlargedmiddleclassmaybethemostimportantsourceofbuyingpowerfordomesticmanufacturers,
becauseitwilleventuallydeterminetheextentofhorizontalcomplementaritiesacrossallindustriesofthe
economy.And to theextent that thepurchasingpowerof incomegroupsbelowthe levelof themiddle
classalsogrows,theremaybeadditionalproductivitygainsinsectorsandfirmsthatproduceprimarilyfor
thedomesticmarket,asthelowerincomegroupstendtospendtheirincomesonagreatershareoflocally
producedorproduciblegoodsandservices.


Domestic demand growth and its implications for
the development of productive capacities


The import intensity of the three components of domestic demand (i.e. household consumption,
governmentexpenditureandinvestment)varieswidely.importstendtobestronglycorrelated,onaverage,
withinvestmentandproductionforexport,butlesswithconsumption(especiallyconsumptionbyhouseholds
inthelowerincomebrackets)andpublicexpenditure.Still,ifdomesticproductivecapacityisnotupgradedin
accordancewiththechangingpatternofdemandinagrowingeconomy,theincreaseindomesticconsumption
expenditurewilltendtoinducehigherimports.inordertopreventadeteriorationinthetradebalanceasa
resultofbothfastergrowthandthechangingcompositionofdomesticdemandgrowth,coupledwithlower
exportgrowth,itwillbeessentialtostrengthendomesticinvestmentandinnovationdynamicstobringabout
appropriatechangesinthesectoralcompositionofdomesticproduction.


effortstoorientdomesticproductiontorespondtothechanginglevelandcompositionofdomestic
demandwilltendtobeeasierforthosecountrieswhichinthepasthavereliedsignificantlyonexportsof
manufactures to developed countries, because they canbuild on their considerable existingproductive
capacityandexperienceinmanufacturingactivities.However,itwillbemoredifficultiftheseactivitieshave
beengearedmainlytotheproductionofsophisticatedgoodsforaffluentconsumersindevelopedcountries,
whichfewdomesticconsumerscanafford.Arapidshiftfromanexport-drivengrowthstrategytoonethat
givesgreateremphasistoanexpansionofdomesticdemandtodrivegrowthwillbeevenmoredifficultin
countriesthathavebeenrelyingontheproductionandexportofprimarycommodities.




XII


ontheotherhand,whiledevelopingcountriesshouldstillseektodeveloporadaptnewtechnologies
accordingtotheirspecificneeds,anadvantageforproducersindevelopingandtransitioneconomiesthatfocus
moreondomesticthanonglobalmarketsisthattechnologicallaggingtendstobelessofaconstrainingfactor.


Advantages of proximity to markets and regional integration


Anotheradvantageforproducersindevelopingcountriesistheirproximitytotheirdomesticmarket
and,where applicable, their regionalmarket.Changes inmarket conditions arising from the expansion
andchangingcompositionofdomesticdemandnecessitatetheidentificationof“latentdemand”andthe
“steering”offirmstomeetrequirementsspecifictothosenewmarkets.inthisregard,thelocalknowledge
ofdomesticfirmsforthedevelopmentofappropriatenewproducts,distributionnetworksandmarketing
strategiesmaybecomeavaluableassetincompetingwithforeignsuppliersofsimilargoods.inaddition,to
theextentthatdevelopingandtransitioneconomiesassumeagreaterweightinglobalconsumptiongrowth,
theresultingchangesinthepatternofglobaldemandarelikelytoinfluencemarketopportunitiesforallthese
economiesinareasofproductionthataremorealignedthaninthepasttothepatternsofdemandprevailing
indevelopingcountries.Thisinturnwillleadtochangesinthesectoralallocationofinvestmentsinaway
thatbettercorrespondstothepatternofdomesticdemandinthosecountries.


Moreover, ifmany tradepartners in thedevelopingworldwere to expand their domestic demand
simultaneously,theycouldbecomemarketsforeachother’sgoodsandservices.Theresultingincreasein
exportswouldhelpreducethebalance-of-paymentsconstraintsthatarisefromaslowdownofexportsto
developedcountries.Consequently,strengthenedregionalintegrationand,moregenerally,intensifiedefforts
tostrengthenSouth-Southtrade,maybeimportantcomplementstodomestic-demand-ledgrowthstrategies.


Industrial policies in support of investment and structural change


experienceindevelopedanddevelopingcountrieshasshownthatgovernments,inadditiontomarket
forces,canplayanimportantroleinsupportofindustrialization.inthepast,industrialpolicieshaveoften
focusedonstrengtheningexportcapacitiesandestablishinganexport-investmentnexus.However,achange
intherespectiveweightsofforeignanddomesticdemandmayrequireanadaptationofindustrialpolicy,
withagreateremphasisonstrengtheningthecompetitivenessofdomesticproducersindomesticmarkets
andgearingproductionstructurestothechangingcompositionofdomesticdemandaspercapitaincome
grows.Suchadaptationmayneedtofullyutilizethepolicyspacestillavailabletothesecountriesfollowing
theUruguayRoundtradeagreementsandvariousregionalandbilateraltradeandinvestmentagreements.
Furthermore,someoftheseagreementsmayneedtoberevisedtotakebetteraccountoftheinterestsof
developingcountries,forexamplebyallowingthemagreaterdegreeoftemporaryprotectionofcertain
industriesthatareatanearlystageofdevelopment.


Capitalformationthatrespondstochangingdemandpatternsmaybesupportedbyhelpingprivatefirms
toidentifytheproductgroupsthatshowthegreatestdynamismasanincreasingshareofthepopulation
entersthemiddleclass.Publicsupportmeasuresmayalsofacilitatecoordinationofproductionalongthe
value-addedchain,includingfiscalandfinancialsupportfornewproductionactivitiesthatareconsidered
strategicallyimportantfordomesticproductionnetworks.Aproactiveindustrialpolicymaybeespecially
important−andhavethegreatestimpact−ineconomiesthatarestilldependentonnaturalresourcesand
wherethereisanurgentneedfordiversificationofproduction.




XIII


Challenges for financial policies in developing countries


Theadjustmentofproductivecapacitiestochangesinthecompositionofaggregatedemandindeveloping
andtransitioneconomiesrequiresreliableandlow-costaccessoftheirproducerstofinancialresourcesfor
productiveinvestment.inthecurrentglobalcontext,althoughthereisampleliquidityinthebankingsystems
ofthemajordevelopedcountries,uncertaintyinfinancialmarketsisparticularlyhigh.Thisincreasestherisk
ofemergingmarketsbeingaffectedbydisturbancesemanatingfromthebehaviourofinternationalcapital
markets,sinceavolatileinternationalfinancialenvironment,fragilenationalbankingsystemsandweak
domesticfinancialinstitutionshaveoftenhinderedinvestmentinmanycountries.


Thispresentsanumberofchallengesforfinancialpolicyindevelopingandtransitioneconomies:first,
theyneedtoprotecttheirnationalfinancialsystemsagainstthevagariesofinternationalfinance;second,
policymakersshoulddraw the right lessons frompastfinancialcrises, inparticular, thatanunregulated
financialsectortendstogenerateeconomicinstabilityandresourcemisallocation;andthird,theyshouldaim
tomaketheirdomesticfinancialsystems,especiallytheirbankingsystems,moresupportiveofinvestment
inrealproductivecapacity.


Atypical behaviour of international capital flows since 2008


overthepastthreedecadesemergingmarketeconomiesexperiencedfrequentwavesofinternational
capitalflows.Suchwavestypicallystartedwhengrowthwasslow,liquiditywasabundantandinterestrates
werelowinthedevelopedcountries.Thismadeemergingmarketsseemattractivedestinationsforprivate
internationalcapitalflows.However,thosewavesebbedwheninterestratesroseinthedevelopedcountries
orwhenfinancialmarketparticipantsdeemedexternaldeficitsortheforeignindebtednessofthedestination
countriestohavebecomeunsustainable.


Atpresent,monetaryandfinancialconditionsinmajordevelopedcountriesresemblethosethatinthe
pastprovedtobeconducivetosurgesofcapitalflowstoemergingmarketeconomies.indevelopedcountries,
interestrateshavefallentoalmostzeroinanefforttotackleboththeprotractedcrisisandthedifficulties
intheirfinancialsectors.Theircentralbankshavealsoinjectedlargeamountsofliquidityintothefinancial
system.However, thesemeasureshavenotsucceededininducingbankstoincreasetheir lendingtothe
privatesector.Moreover,therearefairlylargeinterestratedifferentialsinfavourofemergingmarkets.So
far,theseconditionshavenotresultedinstrongandsustainedcapitaloutflowsfromdevelopedtodeveloping
countries;rather,wheresuchoutflowshaveoccurred,theyhavebeenveryvolatile.


Priortotheeruptionofthefinancialcrisis,therewerelargecapitalflowsfromdevelopedcountriesto
emergingmarketeconomies,whichendedabruptlyin2008.but,distinctfrompastepisodes,this“sudden
stop”wasnottriggeredeitherbyanincreaseininterestratesinthedevelopedcountries,orbyexcessive
currentaccountdeficitsordebtservicingproblemsintheemergingmarketeconomies.Rather,theyappear
tohavebeenmotivatedbyuncertaintyaboutthepossiblerepercussionsofthefinancialcrisisonthelatter
economies,andattemptsbyinternationalinvestorstominimizetheiroverallriskexposure.Whenprivate
capitalflowstoemergingmarketeconomiessurgedagainin2010and2011,thistoowasatypical,because
suddenstopsareusuallyfollowedbyaprolongedperiodofstagnationofinflowsorevenoutflowsfrom
thesecountries.Facedwith lowprofit-makingopportunities in themajorfinancial centres, itmayhave
beenexpectedthatinvestorswouldbeencouragedbytherapidresumptionofGDPgrowthintheemerging
marketeconomiesandtheperceptionthattheirfinancialsystemsweremorestablethanthoseofdeveloped
countries.However,newlyworseningprospectsindevelopedcountriesinthesecondhalfof2011,including
higherperceivedrisksrelatedtothesovereigndebtofsomeofthem,againcurtailedcapitalflowstowards
theemergingmarketeconomiesasinvestorssoughttoreducetheiroverallportfoliorisks.




XIV


The vagaries of international finance remain a threat


emergingmarketeconomieshavebeenrelativelyresilientinthefaceofthedestabilizingeffectsofthe
latestwavesofcapitalflowsontheirnationalfinancialsystems.Thisobservationdoesnotmean,however,
thattheyhavebecomestructurallylessvulnerable.Rather,itshowsthemeritsoftheirpolicyreorientation
withrespecttoexternalfinancesincetheturnofthemillennium.Anincreasingnumberofdeveloping-country
governmentshaveadoptedamorecautiousattitudetowardslargecapitalinflows.Someofthemwereableto
preventoratleastmitigatecurrencyappreciationthroughinterventionintheforeignexchangemarket,along
withassociatedreserveaccumulation.othersalsoresortedtocapitalcontrols.Anotherfactorexplaining
howseveralofthemwereabletocopewiththeadversefinancialeventswastheirlowerlevelsofexternal
debtanditsmorefavourablecurrencycompositioncomparedwithearlierepisodes.


However,sinceglobalfinancialassetsamounttomorethanthreetimesthevalueofglobaloutput,even
minorportfolioadjustmentsorientedtowardsdevelopingcountriescanleadtoanincreaseinsuchflows
ataratethathasthepotentialtodestabilizetheeconomiesofthesecountriesinthefuture.inthecurrent
situationofhighuncertainty,investorsentiment,ratherthanmacroeconomicfundamentals,istendingto
drivecapitalmovements,ashasfrequentlybeenthecaseinthepast.butthereisalsouncertaintywithregard
tothefundamentals.ontheonehand,anextendedperiodoflowinterestratesinthedevelopedcountries,
combinedwithstrongergrowthandatendencytowardshigherinterestratesinemergingmarketeconomies
couldleadtoanewsurgeofcapitalflowstothelatter.ontheotherhand,atighteningofmonetarypolicyin
themajorreservecurrencycountriescouldcauseadrasticreductionorreversalofnetprivatecapitalflows
fromthem.


Reducing exposure to international financial markets


As longas the internationalcommunity fails toagreeon fundamental reformsof the international
financialandmonetarysystem,developingandtransitioneconomiesneedtodesignnationalstrategiesand,
wherepossible,regionalstrategies,aimedatreducingtheirvulnerabilitytoglobalfinancialshocks.inthe
currentsituation,thismeansthattheseeconomiesneedtoexerciseextremecautiontowardscross-border
capitalflows,bearinginmindthattheseedsofafuturecrisisaresowninthephaseofeuphoria,whena
waveoffinancialinflowsisinthemaking.


Formanyyears,theprevalentviewconsideredalmostanykindofforeigncapitalflowstodeveloping
countriesasbeneficial.Thisviewwasbasedontheassumptionthat“foreignsavings”wouldcomplement
thenationalsavingsoftherecipientcountriesandleadtohigherratesofinvestmentthere.However,both
theoreticalconsiderationsandempiricalevidenceshowthatevenhugecapitalinflowscanbeaccompanied
bystagnatinginvestmentrates,becausethelinkbetweencapital inflowsandthefinancingofnewfixed
investmenttendstobeveryweak.Forthesamereason,substantialincreasesinfixedinvestmentcanbe
accompaniedbystrongcapitaloutflows.


externalfinancing of developing and transition economies has repeatedly proved to be a double-
edgedsword.ontheonehand,itcanbeawayofalleviatingbalance-of-paymentsconstraintsongrowth
andinvestment.ontheotherhand,alargeproportionofforeigncapitalinflowshasoftenbeendirectedto
privatebanksforfinancingconsumptionorspeculativefinancialinvestmentsthathavegeneratedassetprice
bubbles.Moreover,whencapitalinflowsarenotusedforfinancingimportsofgoodsandservices,theyoften
leadtoastrongcurrencyappreciationthatmakesdomesticindustrieslesspricecompetitiveininternational
markets.Financialinflowsandoutflows,andtheirinstability,haveoftenledtolendingboomsandbusts,
inflationarypressuresandthebuild-upofforeignliabilitieswithoutcontributingtoaneconomy’scapacity
togrowandservicesuchobligations.Adryinguporreversalofinflowsexertspressureonthebalanceof
paymentsandonthefinancingofboththeprivateandpublicsectors.Arelianceonprivatecapitalinflows
hasthereforetendedtoincreasemacroeconomicandfinancialinstabilityandhamper,ratherthansupport,




XV


long-termgrowth.Moreover,privatecapitalflowshavebeenmostlyprocyclical.Forboththesereasons,
theyhaveplayedamajorroleinbalance-of-paymentsandfinancialcrisesinthedevelopingworldoverthe
lastthreedecades.


Greaterrelianceondomesticcapitalmarketsforthefinancingofgovernmentexpenditurehelpsreduce
vulnerabilitytocreditcrunchesandexchange-rateinstability.Debtdenominatedinlocalcurrencyalsoallows
monetaryauthoritiestocounterexternalshocksorgrowingtradedeficitswithadevaluationofthenominal
exchangeratewithoutincreasingthedomesticcurrencyvalueofthatdebt.Finally,debtdenominatedinlocal
currencyallowsthegovernmentalast-resortoptionofusingdebtmonetizationinatimeofcrisis,thereby
reducingtheinsolvencyriskandloweringtheriskpremiumonthedebt.ontheotherhand,theamountand
directionofforeigncapitalflowsarelargelydeterminedbyfactorsthatareoftenunrelatedtotheinvestment
andtrade-financingneedsofthereceivingcountriesandarebeyondthecontroloftheirauthorities.


Protective measures against external disturbances


Pragmatic exchange-ratemanagement aimed at preventing currency overvaluation can limit the
destabilizingeffectsofspeculativecapitalflows.inaddition,interestratedifferentials,whichoftenattract
carry-tradespeculation,canbelimitedwheninflationiskeptundercontrol.Thiscanbedonenotprimarilyby
meansofarestrictivemonetarypolicyandhighpolicyinterestrates,butwiththehelpofotherinstruments,
suchasanincomespolicythataimsatkeepingaveragewageincreasesinlinewith,andnotexceeding,
productivitygrowthandtheinflationtargetofthecentralbank.


Destabilizingeffectsofcapitalflowscanalsobeprevented,oratleastmitigated,byresortingtocapital
controls,whicharepermittedundertheinternationalMonetaryFund’s(iMF)ArticlesofAgreement,andfor
whichthereisextensiveexperienceinbothdevelopedanddevelopingcountries.WhiletheiMFhasrecently
recognizedthatcapitalcontrolsarelegitimateinstruments,itrecommendsresortingtothemonlyinsituations
whenabalance-of-paymentscrisisisalreadyevident,andafterallothermeasures(e.g.monetaryandfiscal
adjustment)havefailed.Theproblemwithsuchanapproachisthatitdoesnotrecognizethemacroprudential
rolethatcontrolofcapitalinflowscanplayinpreventingsuchacrisisfromoccurringinthefirstplace.


Reconsidering regulation of the financial system


Thehypothesisthatderegulatedfinancialmarketsareefficientbecauseactorsinthesemarketspossess
alltheinformationnecessarytoanticipatefutureoutcomes,andwillusethisinformationrationallysothatthe
financialsystemcanregulateitself,hasbeenrefutedbythepresentcrisis.Thisshouldpromptpolicymakersin
developingandtransitioneconomiestodrawtheirownlessonsforshapingtheircountries’financialsystems.


Certainregulatorymeasuresthatarenowenvisagedindevelopedcountriesmayalsoberelevantand
important to developing countries. Suchmeasures include, in particular, those aimed at improving the
governanceofbanks,reducingincentivesforhighlyriskybehaviourofmarketparticipants,andresolution
mechanisms allowing authorities towinddownbadbanks and recapitalize institutions throughpublic
ownership.Theseparationofcommercialretailbanking(receivingdeposits,deliveringloansandmanaging
payments)fromriskyinvestmentbankingactivitiesisaprinciplethatshouldalsoguidebankregulationsin
developingcountries.Thiswouldhelppreventindividualfinancialinstitutionsfromgrowingexcessively
largeandassumingsuchadiversityofactivitiesthattheirperformancebecomessystemicallyimportant.Such
measuresmaybeeasiertoimplementincountrieswherefinancialsystemsarestillintheprocessoftaking
shape,andwherethefinancialsectorisstillrelativelysmallbutboundtoexpandastheireconomiesgrow.


internationalstandardsandrulesrelatingtocapitalrequirementsandliquidityunderthebaselaccords,
whichaimatreducingtheriskofbankfailureandtheneedforpublicbailoutsbycontainingexcessive




XVI


leveraging,maynotalwaysbesuitedtothespecificcircumstancesandrequirementsofdevelopingcountries.
Relativelysmallbanksindevelopingcountriesmayrequiredifferentrulesthanlarge,internationallyoperating
banksindevelopedcountries.butitalsoneedstoberecognizedthatinmanyofthedevelopingcountries
whichhaveexperiencedseriousbankingcrisessincethe1980s,capitalandliquidityrequirementsweremuch
higherthanthoseprescribedbythebaselrules,andthattheapplicationofthoserulesledtoarestrictionof
banklending,especiallytosmallandmedium-sizedenterprises(SMes).Thesecountriesshouldtherefore
beallowedtoadaptprudentialrulestotheirspecificsituationandneeds.


inanycase,financialregulationshouldbeconceivedinsuchawaythatitisnotinimicaltogrowth.
inparticular,itshouldencouragelong-termbanklendingtofinanceproductiveinvestmentanddiscourage
lendingforunproductiveandspeculativepurposes.Thisisimportantbecauseoftheinterdependencebetween
financialstabilityandgrowth:financialstabilitysupportsgrowthbecauseitreducestheuncertaintythatis
inevitablyinvolvedinanyfinancingoperation,whilestablegrowthsupportsfinancialstabilitybecauseit
reducestheriskofloansbecomingnon-performing.


Monetary versus financial stability


Thecurrentexperienceinmajordevelopedcountriesshowsthatmassivemoneycreationbycentralbanks
hashadlittle,ifany,effectontheexpansionofcredittotheprivatesector.Thissuggeststhat,contrarytothe
monetaristapproach,policymakersshouldfocusmoreonthevolumeofbankcreditthanonmoneycreation
forpromotingfinancialstability.Moreover,thepurposesforwhichbankcreditisusedhaveanimpacton
thelevelandcompositionofaggregatedemand.inprovidingcredit,bankscanplayakeyroleinensuring
financialstability.Theyhavetodiscriminatebetweengoodandbadprojects,andreliableandunreliable
borrowers,insteadofbehavinglikepassiveintermediaries,orlosinginterestintheeconomicperformance
oftheirborrowersaftersecuritizingtheirdebtandtransferringtherisktoanotherentity.


Theexperienceofthedevelopedcountriesinthepastfewyearshasshownthatmonetarystability,in
thesenseofconsumerpricestability,cancoexistwithconsiderablefinancialinstability.intheeurozone,the
eliminationofexchangerateriskandlowinflationevenservedtogeneratefinancialinstability:itfavoured
largecapitalflowsfrombanksinthecorecountriesofthezonetocountriesintheperipheryandthevirtual
eliminationofinterestratedifferentialsbetweenthesetwosetsofcountries.However,thosecapitalflows
werenotusedforspurringcompetitivenessandproductioncapacities,butratherforfeedingbubblesand
thefinancingofcurrentaccountdeficits.Thisamplifiedintraregionaldisparities,insteadofreducingthem,
andgeneratedthecrisisinthedeficitcountrieswithinthecommoncurrencyarea.Thisoutcomeissimilar
tothatofmanydevelopingandtransitioneconomiesinpreviousdecades,particularlyinlatinAmericaand
South-eastAsia,wheremonetarystabilitybasedonafixednominalexchangerateledtofinancialcrises.


Fostering the financing of domestic investment


Thefinancialsectorcanplayakeyroleinacceleratingeconomicgrowththroughthefinancingoffixed
capitalformationthatboostsproductionandgeneratesemployment.Thus,inordertosupportdevelopment
strategiesthatpromotedomesticdemandasadriverofgrowth,itisessentialfordevelopingcountriesto
strengthentheirfinancialsystems.


Retainedprofitsconstitutethemostimportantsourceforthefinancingofinvestmentinrealproductive
capacity.Atthesametime,risingdemandisdecisiveforhelpingtomeetexpectationsofprofitabilityof
additional investment in productive capacity, and that profitability in turnfinances private investment,
resulting in a strongprofit-investment nexus. in addition, bank credit is essential, although its relative
importancedependsoncountry-specificcircumstances.bankfinancingenablesfirms toaccelerate their




XVII


capitalformationoverandabovewhatispossiblefromretainedprofits.Therefore,growthdynamicsdepend
criticallyontheavailabilityofsufficientamountsofbankcreditatacostthatiscommensuratewiththe
expectedprofitabilityofinvestmentprojects.Thebankingsystemasawholecanprovideinvestmentcredit
withoutthepriorexistenceofacorrespondingamountoffinancialsavings.Thecentralbankcansupport
thecreationofsuchcreditthroughtheprovisionofadequateliquiditytothebankingsystemandbykeeping
thepolicyinterestrateaslowaspossible.


beyondthat,governmentinterventionmayfacilitateaccesstocredit,especiallyforsectorsandfirms
engagedinactivitiesthatareofstrategicimportanceforthestructuraltransformationandgrowthofthe
economy.onepossibilitymaybetheprovisionofinterestsubsidiesforthefinancingofinvestmentinareas
ofactivity thatareconsideredtobeofstrategic importance;another is influencingthebehaviourof the
bankingsysteminthewayitallocatescredit.


The banking system and credit orientation


Publicinterventionintheprovisionofbankcreditwillbeespeciallyimportantindevelopingcountries
that are aiming at strengthening domestic forces of growth, since long-term loans for investment and
innovation,aswellas loans tomicro,smallandmedium-sizedenterprisesareextremelyscarceevenin
goodtimes.Commercialbanksindevelopingcountriesoftenprefertograntshort-termpersonalloansor
tobuygovernmentsecurities,becausetheyconsidertherisksassociatedwithmaturitytransformation(i.e.
providinglong-termcreditsmatchedbyshort-termdeposits)tobetoohigh.


A revised regulatory framework could include elements that favour a different allocationof bank
assetsandcreditportfolios.bankscouldbeencouraged,orobliged,toundertakeamorereasonabledegree
ofmaturitytransformationthaninthepast.Publicguaranteesforcommercialbankcreditforthefinancing
ofprivateinvestmentprojects,mayencourageprivatecommercialbankstoprovidemorelendingforsuch
purposes.Sucharrangementswouldreducethecreditdefaultrisk,andhencealsotheriskpremiumonlong-
terminvestmentloans.Theresultinglowerinterestcostforinvestorswouldfurtherreducetheprobabilityof
loanlossesandthusthelikelihoodofrequiringgovernmentstocoversuchlossesunderaguaranteescheme.


Similarly,withintheframeworkofacomprehensiveindustrialpolicy,co-financingbyprivatebanks,
whichtakeamicroeconomicperspective,andpublicfinancialinstitutionsthatactintheinterestofsocietyas
awhole,couldhelptoensurethatinvestmentprojectsarebothcommerciallyviableandsupportastrategy
ofstructuralchangeintheeconomyatlarge.


Therearemanyexampleswherecreditpolicyhasbeenimplementedwiththehelpofvariouspublic,
semi-publicandcooperativespecializedinstitutionswhichhavefinancedagriculturalandindustrialinvestment
bySMes at preferential rates.National developmentbanksmayprovidefinancial services that private
financialinstitutionsareunableorunwillingtoprovidetotheextentdesired.Suchbanksplayedanimportant
countercyclicalroleduringthecurrentcrisiswhentheyincreasedlendingjustasmanyprivatebankswere
scalingbacktheirs.inaddition,smaller,morespecializedsourcesoffinancealsohaveanimportantroleto
playintheoveralldynamicsofthedevelopmentprocess.


Changing views about the role of central banks


Strengtheningthesupportiveroleofthebankingsystemmayalsorequirereviewingthemandateof
centralbanks,andevenreconsideringtheprincipleofcentralbankindependence.indeed,thetraditionalrole
ofcentralbanksonlyasdefendersofpricestabilitymaybetoonarrowwhentherequirementsofdevelopment
andtheneedtostabilizethefinancialsectoraretakenintoaccount.




XVIII


Theiruseofmonetarypolicyasthesoleinstrumentforfightinginflationhasoftenledtohighrealinterest
ratesthatdiscouragedprivatedomesticinvestmentandattractedforeigncapitalinflowsofaspeculativenature.
Thistendedtoleadtocurrencyovervaluationwithaconsequentdecreaseinexports,andthusaloweringof
demandexpectationsofdomesticproducers.Anincomespolicybasedonproductivity-relatedwagegrowth
wouldfacilitatetheconductofmonetarypolicy,becauseitwouldexclude,oratleastsignificantlyreduce,
theriskofinflationgeneratedbyrisingunitlabourcosts.Thiswouldfacilitatethetaskofthecentralbanksto
geartheirmonetarypolicymoretothecreationoffavourablefinancingconditionsfordomesticinvestment.


Theneedforreconsideringtheroleofcentralbankshasneverbeenmoreevidentthanduringthelatest
financialcrisis.Centralbankindependencedidnotpreventthiscrisis,butwheniteruptedthesebankshad
totake“unconventional”measurestostabilizefinancialmarketsintheinterestsoftheeconomyasawhole,
ratherthansimplymaintainingpricestability.Theconcertedactionofcentralbanksandgovernmentswas
indispensableintacklingtheeffectsofthecrisis,includingbybailingoutinstitutionsthatwereconsidered
“toobigtofail”.Thisexperiencehasledtoarecognitionthatcentralbankscanmakeamajorcontribution
tothestabilityoffinancialmarketsandthebankingsystem.


Afurtherstepwouldbetorecognizethatcentralbankscanplayanactiveroleintheimplementationof
agrowthanddevelopmentstrategy.Sincefinancialstabilitydependsontheperformanceoftherealsector
of the economy,bolstering economicgrowth should alsobe considered amajor responsibilityof these
institutions.Theycansupportmaturitytransformationinthebankingsystemthroughtheirroleaslenders
oflastresortandtheirprovisionofdepositinsurance.Thelatterreducestheriskofasuddenwithdrawal
ofdeposits,whichwouldcauseliquidityconstraintsforbanks,whiletheformercouldrespondtoliquidity
shortages,shouldtheyoccur.buttherearealsonumerousexamplesfrombothdevelopedanddeveloping
countriesofcentralbankinvolvementindirectingcredit, through,forexample,directfinancingofnon-
financialfirms,selectiverefinancingofcommercialloansatpreferentialrates,orexemptingcertaintypes
ofbanklendingfromquantitativecreditceilings.


Theseschemesplayedapivotalroleintherapidindustrializationofmanycountries.However,theydid
notalwaysdelivertheexpectedoutcomes.Forexample,inseveralcountrieswherepublicbankssometimes
providedcredittootherpublicentitiesforpurposesthatwerenotrelatedtoproductiveinvestment,non-
performingloansburdenedtheirbalancesheetsandunderminedtheirlendingcapacities.butitalsoneedsto
berecognizedthatitwastheprivatizationofpublicbanksandthederegulationoffinancialsystemsthatpaved
thewaytomajorfinancialcrisesinlatinAmericaandineastandSouth-eastAsia.inlightofthesedifferent
experiences,developingcountriesneedtocarefullyweightheprosandconsofgovernmentinvolvementin
creditallocationwhenshapingorreformingtheirdomesticfinancialsectors.Theyshouldalsoimplement
well-designedgovernanceandcontrolmechanismsforbothpublicandprivatefinancialinstitutionsinorder
toensurethattheseinstitutionsoperateintheinterestsoftheeconomyandsocietyasawhole.


SupachaiPanitchpakdi
Secretary-GeneralofUNCTAD




Current Trends and Challenges in the World Economy 1


1. Global growth


Theglobaleconomyisstillstrugglingtoreturn
toastrongandsustainedgrowthpath.Worldoutput,
whichgrewatarateof2.2percentin2012,isforecast
togrowatasimilarratein2013.Developedcountries
willcontinuetolagbehindtheworldaverage,witha
likely1percent increaseingrossdomesticproduct
(GDP),duetoaslightdecelerationintheUnitedStates
andacontinuingrecessionintheeuroarea.Developing
andtransitioneconomiesshouldgrowbyabout4.7per
cent and2.7per cent respectively (table1.1).even
thoughthesegrowthratesaresignificantlyhigherthan
thoseofdevelopedcountries,theyremainwellbelow
theirpre-crisislevels.Furthermore,theyconfirmthe
paceofdecelerationthatstartedin2012.


economicactivityinmanydevelopedcountries
andanumberofemergingmarketeconomiesisstill
sufferingfromtheimpactsofthefinancialandeco-
nomiccrisisthatstartedin2008andthepersistence
of domestic and international imbalances that led
toit.However,continuingweakgrowthinseveral
countriesmay also be partly due to their current
macroeconomicpolicystance.


Amongdeveloped economies, growth in the
europeanUnion (eU) is expected to shrink for the
second consecutive year,with a particularly severe
economiccontractionintheeuroarea.Privatedemand
remainssubdued,especiallyintheeuro-zoneperiphery
countries(Greece,ireland,italy,PortugalandSpain),
duetohighunemployment,wagecompression,low
consumerconfidenceandthestillincompleteprocess
ofbalancesheetconsolidation.Given theongoing
process of deleveraging, expansionarymonetary
policieshavefailedtoincreasethesupplyofcredit
forproductiveactivities.inthiscontext,continued
fiscaltighteningmakesareturntoahighergrowth
trajectoryhighlyunlikely,asitaddsadeflationary
impulsetoalreadyweakprivatedemand.Whilefor-
eigntrade(mainlythroughthereductionofimports)
contributedtogrowthintheeuroarea,thiswasmore
than offset by the negative effect of contracting
domesticdemand,whicheventhesurpluscountries
havebeen reluctant to stimulate.This perpetuates
disequilibriumwithintheeurozoneandreducesthe
scopeforanexport-ledrecoveryofothercountries
inthezone.Hence,despitethefactthatthetensions
inthefinancialmarketsoftheeuroareahavereceded
following intervention by the europeanCentral
bank(eCb),prospectsforaresumptionofgrowth


Chapter I


CURRENT TRENDS AND ChALLENGES IN
ThE wORLD ECONOMy


A. Recent trends in the world economy




Trade and Development Report, 20132


Table 1.1


World output groWth, 2005–2013
(Annual percentage change)


Region/country 2005 2006 2007 2008 2009 2010 2011 2012 2013a


World 3.5 4.1 4.0 1.5 -2.2 4.1 2.8 2.2 2.1


developed countries 2.4 2.8 2.6 0.0 -3.8 2.6 1.5 1.2 1.0
of which:


Japan 1.3 1.7 2.2 -1.0 -5.5 4.7 -0.6 1.9 1.9
United States 3.1 2.7 1.9 -0.3 -3.1 2.4 1.8 2.2 1.7
European Union (EU-27) 2.1 3.3 3.2 0.3 -4.3 2.1 1.6 -0.3 -0.2
of which:


Euro area 1.7 3.3 3.0 0.4 -4.4 2.0 1.5 -0.6 -0.7
France 1.8 2.5 2.3 -0.1 -3.1 1.7 2.0 0.0 -0.2
Germany 0.7 3.7 3.3 1.1 -5.1 4.2 3.0 0.7 0.3
Italy 0.9 2.2 1.7 -1.2 -5.5 1.7 0.4 -2.4 -1.8


United Kingdom 2.8 2.6 3.6 -1.0 -4.0 1.8 0.9 0.2 1.1


South-East Europe and CIS 6.5 8.3 8.6 5.2 -6.6 4.5 4.5 3.0 2.7


South-East Europeb 4.7 4.8 5.5 3.7 -4.3 0.0 1.1 -1.4 0.3
CIS 6.7 8.7 8.9 5.3 -6.8 4.9 4.8 3.4 2.9
of which:


Russian Federation 6.4 8.2 8.5 5.2 -7.8 4.5 4.3 3.4 2.5


developing countries 6.8 7.6 7.9 5.3 2.4 7.9 5.9 4.6 4.7
Africa 5.8 5.9 6.2 5.2 2.8 4.9 1.0 5.4 4.0


North Africa, excl. Sudan 5.1 5.4 4.7 4.6 3.2 4.1 -6.1 7.8 3.6
Sub-Saharan Africa, excl. South Africa 6.7 6.5 7.7 6.6 4.9 6.4 4.8 5.3 5.4
South Africa 5.3 5.6 5.5 3.6 -1.5 3.1 3.5 2.5 1.7


Latin America and the Caribbean 4.5 5.6 5.6 4.0 -1.9 5.9 4.3 3.0 3.1
Caribbean 7.4 9.4 5.8 3.1 -0.1 2.6 2.4 2.5 2.7
Central America, excl. Mexico 4.8 6.4 7.0 4.1 -0.2 4.1 5.2 5.0 4.1
Mexico 3.2 5.2 3.3 1.2 -6.0 5.5 4.0 3.9 2.8
South America 5.0 5.5 6.6 5.5 -0.2 6.4 4.6 2.5 3.2
of which:


Brazil 3.2 4.0 6.1 5.2 -0.3 7.5 2.7 0.9 2.5
Asia 7.8 8.6 9.0 5.8 3.9 8.9 7.1 5.0 5.2


East Asia 8.6 9.9 11.0 6.9 5.9 9.5 7.7 6.0 6.1
of which:


China 11.3 12.7 14.2 9.6 9.2 10.4 9.3 7.8 7.6
South Asia 8.0 8.3 8.9 5.2 4.7 9.4 6.6 3.0 4.3
of which:


India 9.0 9.4 10.1 6.2 5.0 11.2 7.7 3.8 5.2
South-East Asia 5.8 6.1 6.6 4.3 1.2 8.0 4.5 5.4 4.7
West Asia 6.8 7.0 4.6 3.8 -1.7 7.0 7.1 3.2 3.5


Oceania 3.4 2.9 3.5 2.7 2.3 3.6 4.3 4.1 2.7


Source: UNCTAD secretariat calculations, based on United Nations, Department of Economic and Social Affairs (UN-DESA), National
Accounts Main Aggregates database, and World Economic Situation and Prospects (WESP): Update as of mid-2013; ECLAC,
2013; ESCAP, 2013; OECD, 2013; IMF, World Economic Outlook, April 2013; Economist Intelligence Unit, EIU CountryData
database; JP Morgan, Global Data Watch; and national sources.


Note: Calculations for country aggregates are based on GDP at constant 2005 dollars. CIS includes Georgia.
a Forecasts.
b Albania, Bosnia and Herzegovina, Croatia, Montenegro, Serbia and the former Yugoslav Republic of Macedonia.




Current Trends and Challenges in the World Economy 3


of consumption and investment in these countries
remaingrim.


Japanisbuckingthecurrentausteritytrendof
other developed economies byproviding a strong
fiscalstimulusinconjunctionwithmonetarypolicy
expansionwiththeaimofrevivingeconomicgrowth
and curbing deflationary trends.An increase of
government spendingon infrastructure and social
services, includinghealth care and education, has
been announced, to be accompanied by efforts to
boostdemandandstructuralpoliciesorientedtowards
innovation and investment.To complement these
efforts,inApril2013thebankofJapanannounced
thatitwillincreaseitspurchaseofgovernmentbonds
andotherassetsby50trillionyenperyear(equivalent
to10percentofJapan’sGDP)inordertoachievean
inflationtargetof2percent.overall,thesemeasures
couldhelpmaintainJapan’sGDPgrowthatcloseto
2percentin2013.


TheUnitedStatesisexpectedtogrowat1.7per
cent,comparedwith2.2percentin2012,duetoanew
configurationoffactors.Partlyowingtosignificant
progressmade in the consolidationof its banking
sector,privatedomesticdemandhasbeguntorecover.
Thepaceof job creation in the private sector has
enabledagradualfallintheunemploymentrate.on
theotherhand, cuts in federalgovernment spend-
ing,enactedinMarch2013,andbudgetconstraints
facedbyseveralStateandmunicipalgovernments
areastrongdragoneconomicgrowth.Sincethenet
outcomeof these opposing tendencies is unclear,
thereisalsoconsiderableuncertaintyaboutwhether
the expansionarymonetary policy stancewill be
maintained.


bycontrast, developing countriescontinueto
bethemaindriversofgrowth,contributingtoabout
twothirdsofglobalgrowthin2013.inmanyofthem,
growthhasbeendrivenmorebydomesticdemand
than by exports, as external demand, particularly
from developed economies, has remainedweak.
Developing countries are expected to grow at the
rateof4.5–5percentin2013,similarto2012.This
wouldresultfromtwodistinctivepatterns.ontheone
hand,growthinsomelargedevelopingeconomies,
suchasArgentina,brazil,indiaandTurkey,which
wassubduedin2012,isforecasttoaccelerate.onthe
otherhand,severalotherdevelopingeconomiesseem
unlikelytobeabletomaintaintheirpreviousyear’s
growth rates.Their expected growth deceleration


partlyreflectstheaccumulatedeffectofcontinuing
sluggishness in developed economies and lower
pricesforprimarycommodityexports,butalsothe
decreasingpolicystimuliwhichwererelativelyweak
anyhow.Thecombinationofthesefactorsmayalso
affectChina’sgrowthrate,whichisexpectedtoslow
downmoderatelyfrom7.8percentin2012toabout
7.6in2013.eventhoughthiswouldbeonlyamild
deceleration,itislikelytodisappointmanyofChina’s
tradingpartners.


Among the developing regions,East, South
andSouth-East Asiaareexpectedtoexperiencethe
highestgrowthratesin2013,of6.1percent,4.3per
centand4.7percent,respectively.inmostofthese
countries, growth is being driven essentially by
domesticdemand.inChina,thecontributionofnet
exportstoGDPgrowthwasnegligible,whilefixed
investment and private consumption, as a result
of fasterwage growth, continued to drive output
expansion.encouragedbyvarious incomespolicy
measures,domesticprivatedemandisalsosupport-
ingoutputgrowthinanumberofothercountriesin
theregion,suchasindia,indonesia,thePhilippines
andThailand(eSCAP,2013).inaddition,alongwith
GDPgrowth,credittotheprivatesectorhastended
torise,furthersupportingdemand.


economicgrowth inWest Asia sloweddown
dramatically, from7.1percent in2011 to3.2per
cent in 2012, a level that is expected to bemain-
tainedin2013.Weakerexternaldemand,especially
fromeurope, affected the entire region, butmost
prominentlyTurkey,whichsawitsgrowthratefall
sharplyfromaround9percentin2010and2011to
2.2percentin2012,butitisexpectedtoaccelerate
towards3.3percentin2013.TheGulfCooperation
Council (GCC) countriesmaintained large public
spendingprogrammestobolsterdomesticdemand
andgrowth,despitescalingbacktheiroilproduction
duringthelastquarterof2012tosupportoilprices.
Finally,thecivilwarintheSyrianArabRepublicnot
onlygreatlyaffectedthatcountrybutcontinuedto
heightenperceptionsofriskwithregardtoneighbour-
ingcountries,whichresultedinsubduedinvestment,
tourismandtradeinJordanandlebanon.


Growth inAfrica is expected to slow down
in 2013, owing toweaker performance inNorth
Africa,wherepoliticalinstabilityinsomecountries
hasbeenmirroredinrecentyearsbystrongfluctua-
tions in growth. in sub-SaharanAfrica (excluding




Trade and Development Report, 20134


SouthAfrica),GDPgrowth is expected to remain
stablein2013,atabove5percent.Themaingrowth
drivers includehighearnings fromexportsofpri-
marycommoditiesandenergyaswell as tourism,
and relativelystronggrowthofpublicandprivate
investmentinsomecountries.Angola,Côted’ivoire,
theDemocraticRepublic of theCongo,ethiopia,
Gambia,Ghana, liberia, Rwanda, Sierra leone
and theUnitedRepublicofTanzaniaare likely to
see rapidgrowthbolsteredby strong investments,
especially in infrastructure, telecommunications,
energy and the extractive industries.on theother
hand,growthinseveralmiddle-incomecountriesof
Africa is forecast todecelerate further in2013, in
particularincountriesthathaveclosetradetieswith
europe,includingSouthAfrica.Moreover,several
least developed countries (lDCs) ofWestAfrica
which depend on exports of single commodities
remainvulnerabletodrasticswingsindemandfor
thosecommodities.


GrowthissettoremainrelativelystableinLatin
America and the Caribbean,ataround3percent,on
average,asaslowdowninsomecountries,includ-
ingMexico,islikelytobeoffsetbyfastergrowthin
Argentinaandbrazil.in2012andthefirstmonths
of2013,regionalgrowthhasbeendrivenmostlyby
domesticdemandbasedonmoderatebutconsistent
increases in public and private consumption and
investment (eClAC, 2013).Governments gener-
allyturnedtomoresupportivefiscalandmonetary
policies inacontextof lowfiscaldeficitsandlow
inflationfortheregionasawhole.Growthofexports
andimportsfellsharplyin2012,whichresultedina
slightincreaseintheregion’scurrentaccountdeficit.
Domesticdemandwillcontinuetosupportgrowthin
2013basedonrisingrealwagesandemployment,as
wellasanexpansionofbankcredit.inaddition,a
recoveryofagricultureandinvestmentshouldcon-
tributetobettereconomicperformancesinArgentina
andbrazilafterweakgrowthin2012.ontheother
hand,owing to sluggish internationaldemandand
lower export prices of oil andmining products
(althoughtheyremainathistoricallyhighlevels)a
slowdownisexpectedinthebolivarianRepublicof
Venezuela,Chile,ecuador,MexicoandPeru.


Therehasbeenadownwardtrendintheeco-
nomicperformanceofthetransition economiessince
2012.Theimpactofthecontinuingcrisisinmuch
ofWesterneuropecausedtheeconomiesofSouth-
easterneuropetofallintorecessionin2012,andthey


willbarelyremainafloatin2013.Themembersof
theCommonwealthofindependentState(CiS)main-
tainedagrowthrateofover3percentin2012based
onsustaineddomesticdemand,butthisisexpectedto
slowdownslightlyin2013.Theregion’seconomic
prospectsremaincloselylinkedtotheperformance
of the economyof theRussianFederation and to
commoditypricedevelopments,particularly inoil
andnaturalgas.


Thecontinuingexpansionofdevelopingecono-
miesasagroup(inparticularthelargesteconomy
amongthem,China)hasledtotheirgainingincreas-
ingweight in theworld economy,which suggests
thepossibleemergenceofanewpatternofglobal
growth.Whiledevelopedcountriesremainthemain
exportmarketsfordevelopingcountriesasagroup,
theshareofthelatter’scontributiontogrowthinthe
world economyhas risen from28per cent in the
1990stoabout40percentintheperiod2003–2007,
andcloseto75percentsince2008.However,more
recently,growthintheseeconomieshasdecelerated.
Theymaycontinuetogrowatarelativelyfastpace
iftheyareabletostrengthendomesticdemandandif
theycanrelymoreoneachotherfortheexpansionof
aggregatedemandthroughgreaterSouth-Southtrade.
However,eveniftheyachievemorerapidgrowthby
adoptingsuchastrategy,andincreasetheirimports
fromdevelopedcountries,thiswillnotbesufficient
toliftdevelopedcountriesoutoftheirgrowthslump.


2. International trade


(a) Goods


internationaltradeingoodshasnotreturnedto
therapidgrowthrateoftheyearsprecedingthecrisis.
onthecontrary,itdeceleratedfurtherin2012,and
whiletheoutlookforworldtraderemainsuncertain,
thefirstsignsin2013donotpointtoanexpansion.
Afterasharpfallin2008–2009andaquickrecovery
in2010,thevolumeoftradeingoodsgrewbyonly
5.3per cent in2011andby1.7per cent in2012.
Thisslowerrateofexpansionoccurredindeveloped,
developingandtransitioneconomiesalike(table1.2).


Sluggisheconomicactivityindevelopedcoun-
tries,particularlyineurope,accountedformostof
thisverysignificantslowdown.in2012,eUimports




Current Trends and Challenges in the World Economy 5


ofgoodsshrankby2.8percentinvolumeandby
5percentinvalue.extremelyweakintra-eUtrade
wasresponsibleforalmost90percentofthedecline
ineurope’sexportsin2012.However,tradeperfor-
mancewasalsoweakinotherdevelopedcountries.
inJapan,exportshavenotyetrecoveredfromtheir
sharpfallcausedbytheearthquakeof2011,1while
thevolumeofitsimportshascontinuedtogrowat
amoderatepace.Amongtheothermajordeveloped
countries,onlytheUnitedStatesmaintainedaposi-
tivegrowthrateofbothexportsandimports,although
thatofitsexportsappearstobedeceleratingfurther
in2013.Thissignalsamountingheadwindforthe
world’s largest economy,where exports initially
appearedtospurarecovery.


Tradegrowthalsodeceleratedconsiderablyin
developingandtransitioneconomiesin2012,though
thefiguresremainedpositiveformostcountries.in
thetransitioneconomies,therateofgrowthofthe
volumeof exportswas 1 per cent in 2012, down
from4.2percentin2011,andthatofimportswas


3.9percentin2012,downfrom15.7percentin2011.
likewise,indevelopingcountriestherateofgrowth
ofexportsfellfrom6percentin2011to3.6percent
in2011,andthatofimportsfrom7.4percentin2011
to4.5percentin2012.


Atthesubregionallevel,twonotableexceptions
standout from thisgeneralpatternofdeveloping-
country trade.Thefirst is the recoveryof trade in
someNorthAfricaneconomiesfromlowlevelsin
2011,whichcontributed tohigher tradegrowth in
Africaasawhole.Thesecondistheabsolutedecline
inthevolumeofexportsfromSouthAsia,explained
mainlybyareductionofoilexportsfromtheislamic
Republic of iran,2 though india’s export volumes
alsofell,by2.5percent.Thiswaslargelyduetothe
economicslowdownineurope,whichaccountsfor
almostonefifthofindia’stotalexports,aswellas
weakexportstoChina.


Anexaminationoflongertimeperiodsputsinto
perspectivethestructuralchangesassociatedwiththe


Table 1.2


ExPORT AND IMPORT VOLUMES OF GOODS, SELECTED REGIONS AND COUNTRIES, 2009–2012
(Annual percentage change)


Volume of exports Volume of imports


Region/country 2009 2010 2011 2012 2009 2010 2011 2012


world -13.3 13.9 5.2 1.8 -13.6 13.8 5.3 1.6
Developed countries -15.5 13.0 4.9 0.4 -14.6 10.8 3.4 -0.5
of which:


Japan -24.8 27.5 -0.6 -1.0 -12.2 10.1 4.2 3.7
United States -14.0 15.4 7.2 4.1 -16.4 14.8 3.8 2.8
European Union -14.9 11.6 5.5 -0.2 -14.5 9.6 2.8 -2.8


Transition economies -14.4 11.3 4.2 1.0 -28.2 15.9 15.7 3.9
of which:


CIS -13.9 11.4 4.2 1.3 -29.1 19.7 17.4 5.0


Developing countries -9.7 16.0 6.0 3.6 -10.2 18.8 7.4 4.5
Africa -9.5 8.8 -8.3 5.7 -6.2 8.4 2.8 8.0


Sub-Saharan Africa -7.8 9.6 -0.7 0.1 -9.0 9.7 7.9 4.2
Latin America and the Caribbean -7.4 8.3 4.6 2.2 -17.9 22.5 10.8 2.5
East Asia -10.9 24.1 10.4 5.2 -5.3 22.7 7.4 4.3
of which:


China -14.1 29.1 13.0 7.2 -1.1 25.4 10.3 5.9
South Asia -6.1 10.0 8.8 -10.2 -5.5 14.0 6.0 2.0
of which:


India -6.8 14.0 14.2 -2.5 -0.9 13.8 9.1 5.8
South-East Asia -10.0 18.6 4.4 2.2 -15.8 22.0 6.7 6.0
West Asia -4.8 5.7 6.5 6.9 -14.2 8.4 8.1 5.8


Source: UNCTAD secretariat calculations, based on UNCTADstat.




Trade and Development Report, 20136


slowdownoftrade.bytheendof2012,thevolume
ofglobaltradewasonly7.5percentaboveits2007
level.Theaverageannualgrowthrateduringtheperiod
2008–2012wasabout1.4percent–wellbelowthe
7.4percentregisteredduringtheperiod2003–2007.


WithregardtoChina,thepowerhouseofglobal
trade in recent years, the slowdown is evenmore
striking.Theworld’s largest exporter experienced
asharpdecelerationofitsexportsasaconsequence
ofthe2008–2009economiccrisis,largelyduetoits
relianceondemandfromdevelopedcountries.The
rateofgrowthofChina’sexports(byvolume)decel-
eratedto13percentin2011andto7.2percentin
2012,insharpcontrasttotheirmassivegrowthrate
of27percentduringtheperiod2002–2007following
China’saccessiontotheWorldTradeorganization
(WTo).ThiswasthefirsttimesincetheeastAsian
crisis in thelate1990sthatChina’sexportgrowth
wasslowerthanthatofitsGDP.Concomitantly,in
2012, thegrowthofChina’s importsdeceleratedto
5.9percentbyvolumeandto4.3percentbyvalue,
from19percentand26percent,respectively,between
2002and2007.Asaresult,onlyregionsexportinga
largeproportionofprimarycommodities(i.e.Africa,
WestAsia and, to a lesser extent,latinAmerica)
sawasignificantincreaseintheirexportstoChina
in2012,bothbyvolumeandvalue.


SeveralexportersofmanufacturesinAsiaregis-
teredasizeableslowdownofgrowthintheirexternal
trade. For example, between 2002 and 2007, the
volumeofexportsoftheRepublicofKorea,Thailand
andMalaysia increased by an annual average of
14percent,10percentand9percent,respectively;
in2012,thoseratesfellto1.5percentintheRepublic
ofKorea,2.5percentinThailandand0.5percentin
Malaysia.Thiswastheresultnotonlyoflowerimport
demandfromeurope,butalsoofslowergrowthin
somedevelopingregions,inparticulareastAsia.


Thecrisisof2008–2009alteredtradepatterns
inbothdevelopedanddevelopingcountries.onthe
onehand,importsandexports(byvolume)ofdevel-
opedregionshave remainedbelow theirpre-crisis
levels,withtheexceptionoftheUnitedStateswhere
exportshaveexceededtheirpreviouspeakofAugust
2008.ontheotherhand,exportsfromthegroupof
emergingmarketeconomieswere22percentabove
theirpre-crisispeaks,whilethecorrespondingfigure
fortheirimportswas26percenthigher.However,
thepaceofgrowthoftradeoftheseeconomieshas


slowed down significantly: during the pre-crisis
years,between2002and2007,theirexportvolume
grewatanaverageannualrateof11.3percent,but
felltoonly3.5percentbetweenJanuary2011and
April2013.Growthinthevolumeoftheirimports
alsosloweddown,from12.4percentto5.5percent
overthesameperiod(chart1.1).


Availabledataforthefirsthalfof2013tendto
confirmthattherecentslowdownpersists.Datafrom
theCPbNetherlandsbureauforeconomicPolicy
Analysis(CPb)showthatthevolumeofinternational
tradegrewbyayear-on-year averageof less than
2percentinthefirstfivemonthsof2013.Among
thedevelopedcountriesexportsandimportsvirtually
stagnatedintheUnitedStatesandfellintheeUand
Japan.exportsfromemergingeconomiesdecelerated
duringthesameperiod,withtheexceptionofthose
fromtheemergingAsianeconomies,whichincreased
by6.2percentinthefirstmonthsof2013.3


overall,thisgeneraldownwardtrendininterna-
tionaltradehighlightsthevulnerabilitiesdeveloping
countries continue to face at a time of lacklustre
growthindevelopedcountries.itisalsoindicativeof
aprobablylessfavourableexternaltradeenvironment
overthenextfewyears,whichpointstotheneedfor
agradualshiftfromtherelianceonexternalsources
ofgrowthtowardsagreateremphasisondomestic
sources.


(b) Services


Similar tomerchandise trade,world trade in
commercialservicesgrewby1–2percentin2012,
according to preliminary estimates byUNCTAD/
WTo.Within this broad category, international
tourismgrewby4percentin2012,bothinterms
ofreceiptsinrealterms(i.e.adjustingforexchange
ratefluctuations and inflation) and the number of
arrivals.Tourismroughlyaccountsfor30percentof
worldexportsofservicesandfor6percentofoverall
exportsofgoodsandservices.italsoranksfifthas
aworldwideexportcategoryafterfuels,chemicals,
foodandautomotiveproducts,andevenfirstinmany
developing countries.TheAmericas recorded the
largestincreaseinreceiptsfromtourism(7percent),
followedbyAsiaandthePacific(6percent),Africa
(5percent)andeurope (2percent).bycontrast,
receiptsinWestAsiawereagaindownby2percent
(WorldTourismorganization,2013).Touristreceipts




Current Trends and Challenges in the World Economy 7


ofthetop10destinations,whichinclude7developed
economiestogetherwithChina,HongKong(China)
andMacao(China),remainedvirtuallyunchangedin
2012,whereasseveralemergingmarketdestinations,
includingindia,SouthAfrica,Thailand,Ukraineand
VietNamregistereddouble-digitgrowthfigures.


Thegrowthofinternationaltransportservices–
thesecondlargestcategoryofcommercialservices–
whilepositive,washinderedbyanumberofdown-
sidefactors,includingthecontinuedrecessioninthe
euroarea,fragilerecoveryintheUnitedStates,and
therelativedecelerationandrebalancingofgrowth
oftheChineseeconomy.Preliminarydataindicate
thatworld seaborne trade– ameasureofdemand
forshipping,portand logisticsservices–climbed
by4.3percentin2012.


inparticular,drybulktradeexpandedby6.7per
centin2012,inlinewiththelong-termtrend,driven
mainlybytwomaincommodities–ironoreandcoal.
Tradeinironoreroseby5.4percent,thoughthis
wasconsideredtheslowestincreaseinmorethana
decade.A strong increase inChina’s demandwas
metbyexportsfromAustraliaand,toalesserextent,
by long-haul shipments frombrazil.Meanwhile,


importsfromindia,previouslyChina’sthirdlargest
supplier,droppedbyover50percentasaresultof
risingexporttaxesonironoreaswellasminingand
exportbans.Coalshipmentsincreasedsignificantly
(12.3percent)drivenbystrongdemandforsteam
coal(14.2percent)stemmingfromtherecoveryin
europeanimportsandrapidlygrowingimportsby
China.intheUnitedStates,greateruseofdomesti-
callyproducedshalegasresultedinanincreaseinits
coalexports,whichinturnloweredinternationalcoal
pricesanddroveupglobaldemandforcoal.


Developmentsintankertrade,whichaccounts
foronethirdofglobalseabornetrade,mirroredthe
behaviourofglobaloildemand. in2012,demand
forcrudeoil increasedmarginallyby1.5percent
involume.Meanwhile,thegrowthofcontainerized
tradedeceleratedto3.2percent,from7.1percent
in 2011.The volumes of such trade continued to
beaffectedbyweakperformanceonthemain-lane
east-WestrouteslinkingAsiatoeuropeandNorth
America.Growthwasmainlydrivenbyanincrease
in that trade on secondary routes, in particular,
South-South,North-Southandintraregionalroutes.
Containerizedtradeaccountsforabout16percentof
globalmerchandisetradebyvolumeandover50per


Chart 1.1


wORLD TRADE by VOLUME, JANUARy 2004–APRIL 2013
(Index numbers, 2005 = 100)


Source: UNCTAD secretariat calculations, based on CPB Netherlands Bureau of Economic Policy Analysis, World Trade database.
Note: Emerging market economies excludes Central and Eastern Europe.


80


100


120


140


160


180


2004 2005 2006 2007 2008 2009 2010 2011 2012 2013


Volume of exports


80


100


120


140


160


180


2004 2005 2006 2007 2008 2009 2010 2011 2012 2013


Volume of imports


World Developed countries Emerging market economies




Trade and Development Report, 20138


centbyvalue,butitremainsunderseverepressure.
Theindustrycontinuestofacetheproblemofhow
toabsorbexcessshippingsupplycapacity,aswellas
howtoemploytherapidlygrowingcapacityofvery
largeshipswhenmostofthegrowthisbeinggener-
atedbyregionaltradewhichrequiresmedium-sized
orsmallercontainerships(UNCTAD,2013).


3. Recent trends in commodity prices


During2012andthefirstfivemonthsof2013,
the prices ofmost commodity groups continued
to retreat from their peaks reached in early 2011
(chart1.2).Majorexceptionswerethepricesoffood
andoil,whichhavebeenfluctuatingwithinaband
over thepast twoyears.Themain reasons for the
declineinmanycommoditypricesoverthisperiod
wereweakdemandgrowthandanuncertainoutlook
forglobaleconomicactivity,togetherwithimproved
supplyprospects.However,mostcommodityprices
still remain at substantially higher levels than the
averagepricesrecordedduringthecommodityprice
boomof2003–2008(table1.3).


Pricesoffoodandvegetableoilseedsandoils
surgedinmid-2012asaresultofreducedsupplies
causedbyweather-relatedevents,mostnotablythe
worstdroughtintheUnitedStatesinhalfacentury.
Food cropswere also adversely affected byunfa-
vourableclimaticconditionsintheblackSeaarea
andinAustralia.Whiletheincreaseinthepricesof
foodcommoditiessuchascorn,wheatandsoybeans
was alarming, a food crisiswas avoidedmainly
becauserice,whichiscriticalforfoodsecurity,was
notaffected,andcountriesrefrainedfromimposing
traderestrictions.Foodpricesfellinthesecondpart
oftheyearowingtobettersupplyprospects.Afterthe
tightmarketsandhighpricesof2012/2013,forecasts
for2013/14pointtoabetterworldcerealsupplyand
demandbalance(FAo,2013).Withgoodprospects
forproductionandreplenishmentofstocks,prices
shouldease.Thisisnotthecase,however,forsoy-
beans,which,inmid-2013,recordedariseinprices
resulting from tight supplies and low inventories,
particularlyintheUnitedStates.


Thepriceofoilhasbeenhighand relatively
stable over the past year.between July 2012 and
June2013 theaveragepriceforbrent/Dubai/West


Chart 1.2


MONThLy COMMODITy PRICE INDICES
by COMMODITy GROUP, JAN. 2002–MAy 2013


(Index numbers, 2002 = 100)


Source: UNCTAD secretariat calculations, based on UNCTAD,
Commodity Price Statistics Online database.


Note: Crude petroleum price is the average of Dubai/Brent/
West Texas Intermediate, equally weighted. Index
numbers are based on prices in current dollars, unless
otherwise specified.


0


100


200


300


400


500


600


2002 2004 2006 2008 2010 2012


All commodities
All commodities (in euros)
Minerals, ores and metals
Crude petroleum


0


100


200


300


400


2002 2004 2006 2008 2010 2012


Food
Tropical beverages
Vegetable oilseeds and oils
Agricultural raw materials


2013


2013




Current Trends and Challenges in the World Economy 9


Table 1.3


wORLD PRIMARy COMMODITy PRICES, 2007–2013
(Percentage change over previous year, unless otherwise indicated)


Commodity groups 2007 2008 2009 2010 2011 2012 2013a


2011–2013
versus


2003–2008b


All commoditiesc 13.0 24.0 -16.9 20.4 17.9 -8.4 -3.3 68.6
All commodities (in SDRs)c 8.6 19.5 -14.5 21.7 14.1 -5.5 -2.2 63.9
All food 13.3 39.2 -8.5 7.4 17.8 -1.4 -4.3 77.0


Food and tropical beverages 8.6 40.4 -5.4 5.6 16.5 -0.4 -3.3 78.1
Tropical beverages 10.4 20.2 1.9 17.5 26.8 -21.5 -13.5 77.9


Coffee 12.5 15.4 -6.9 27.3 42.9 -25.7 -16.2 96.9
Cocoa 22.6 32.2 11.9 8.5 -4.9 -19.7 -5.8 42.9
Tea -12.3 27.2 16.5 -1.0 11.4 0.8 -14.2 52.8


Food 8.5 42.5 -6.0 4.4 15.4 2.0 -2.4 78.2
Sugar -31.7 26.9 41.8 17.3 22.2 -17.1 -15.5 121.5
Beef 1.9 2.6 -1.2 27.5 20.0 2.6 1.4 63.4
Maize 38.2 34.0 -24.4 13.2 50.1 2.6 -0.5 112.5
Wheat 34.3 27.5 -31.4 3.3 35.1 -0.1 0.8 53.9
Rice 9.5 110.7 -15.8 -11.5 5.9 5.1 -2.9 64.0
Bananas -0.9 24.6 0.7 3.7 10.8 0.9 -6.2 58.2


Vegetable oilseeds and oils 52.9 31.9 -28.4 22.7 27.2 -7.6 -11.4 69.5
Soybeans 43.0 36.1 -16.6 3.1 20.2 9.4 -6.4 67.4


Agricultural raw materials 12.0 20.5 -17.5 38.3 28.1 -23.0 -5.3 70.3
Hides and skins 4.5 -11.3 -30.0 60.5 14.0 1.4 3.4 22.8
Cotton 10.2 12.8 -12.2 65.3 47.5 -41.8 2.2 87.2
Tobacco 11.6 8.3 18.0 1.8 3.8 -3.9 2.0 45.9
Rubber 9.5 16.9 -27.0 90.3 32.0 -30.5 -8.4 119.4
Tropical logs 19.5 39.3 -20.6 1.8 13.8 -7.4 1.0 28.6


Minerals, ores and metals 12.8 6.2 -30.3 41.3 14.7 -14.1 -0.8 54.9
Aluminium 2.7 -2.5 -35.3 30.5 10.4 -15.8 -4.0 1.1
Phosphate rock 60.5 387.2 -64.8 1.1 50.3 0.5 -8.2 88.6
Iron ore 77.4 26.8 -48.7 82.4 15.0 -23.4 10.1 26.6
Tin 65.6 27.3 -26.7 50.4 28.0 -19.2 8.7 125.2
Copper 5.9 -2.3 -26.3 47.0 17.1 -9.9 -3.9 70.2
Nickel 53.5 -43.3 -30.6 48.9 5.0 -23.4 -5.9 -2.8
Lead 100.2 -19.0 -17.7 25.0 11.8 -14.2 6.3 60.1
Zinc -1.0 -42.2 -11.7 30.5 1.5 -11.2 0.4 5.6
Gold 15.3 25.1 11.6 26.1 27.8 6.4 -6.6 184.6


Crude petroleumd 10.7 36.4 -36.3 28.0 31.4 1.0 -2.2 77.3


Memo item:
Manufacturese 7.5 4.9 -5.6 1.9 10.3 -2.2 .. ..


Source: UNCTAD secretariat calculations, based on UNCTAD, Commodity Price Statistics Online; and United Nations Statistics
Division (UNSD), Monthly Bulletin of Statistics, various issues.


Note: In current dollars unless otherwise specified.
a Percentage change between the average for the period January to May 2013 and the average for 2012.
b Percentage change between the 2003–2008 average and the 2011–2013 average.
c Excluding crude petroleum. SDRs = special drawing rights.
d Average of Brent, Dubai and West Texas Intermediate, equally weighted.
e Unit value of exports of manufactured goods of developed countries.




Trade and Development Report, 201310


Texasintermediate(WTi)was$105.5perbarrel,with
pricesfluctuatingbetween$99and$111perbarrel.
Upwardpressureonoilpriceshasbeenrelatedtoa
declineinproductionbymembersoftheorganization
ofthePetroleumexportingCountries(oPeC)inthe
lastquarterof2012,andtogeopoliticaltensionsin
WestAsiawhichaffectedoilsupplies.bycontrast,
downsidepressuresonoilpricesin2013havebeen
mostly linked to increased production,mainly in
NorthAmerica,aswellassluggishglobaldemand
growth,particularlyinmembersoftheorganisation
for economic Co-operation and Development
(oeCD).indeed,itisexpectedthatallofthegrowth
indemandforoilin2013willcomefromnon-oeCD
countries,whiledemandmayactuallyfallinoeCD
countries.overall,itappearsthatnewsupplieswill
provide a buffer against supply shocks stemming
fromgeopoliticaltensions.However,someobserv-
ersseeatightermarketwhenthedifferentoilgrades
areconsidered:therecouldbeanabundantsupplyof
lightandsweetcrudeoil,butnotofmediumandsour
crude.Pricesofoilandmetalsalsoincreasedinearly
2013basedonexpectationsofimprovedglobaleco-
nomicconditions.However,subsequently,metalprices
declinedoncemoredue to slowgrowthof demand
andincreasingsupplies,aswellasrisinginventories.


Commodity prices also continue to be influ-
encedby the activities offinancial investors.The


rebound in oil andmetal prices observed in the
secondhalfof2012mayhavebeenpartlyrelatedto
thethirdroundofquantitativeeasingintheUnited
States,withsomeoftheincreasedliquidityprobably
beingusedtoinvestincommodityfuturesmarkets.
bymid-2013,indicationsthatthismonetarystimulus
couldbescaledback,togetherwithacreditsqueeze
inChina, fuelled awave of sell-offs in commod-
ityderivatives.Thus, inthesamewayasfinancial
investorscontributedtoamplifyingtheincreasesin
commoditypricesbybuyingcommodityderivatives
over the past decade, the commodity sell-offs by
financial investorsmaywellhavehadsome influ-
enceon thedecline in commodityprices in2013.
Forexample,datafrombarclays(2013)showthat
commodityassetsundermanagementfellby$27bil-
lion inApril 2013.Moreover, according tomedia
reports,banksareexpectedtodownsizeorwithdraw
from their commodity investment business due to
increasedregulatoryandcapitalcosts.


Thecommoditypricecorrectionsin2012and
2013mightpointtoareversaloftherisingtrendin
priceswitnessedduringthefirstdecadeofthemil-
lennium.ontheotherhand,theycouldmerelybea
pauseinthattrend.Sectionbofchapteriiprovides
amoredetailedassessmentofthelikelyevolutionof
commoditypricesoveralongerterm.


b. The structural nature of the latest crisis


Therecurrenceofeconomiccrisesisoneofthe
bestestablishedfactsineconomichistory.However,
notallcrisesaresimilar,nordotheyrequiresimilar
policyresponses.Anaccurateassessmentofacrisis
mustdeterminewhetheritistheresultoftemporary
problems,whichmaybe resolvedmainlyby self-
correctingmechanisms,ormoresystemicproblems.
inthefirstcase,thestatus quo antecanbeexpectedto
berestoredafteracertainperiodoftime.inthecase
ofastructural(orsystemic)crisis,however,changes
to the prevailing economic and social framework
becomenecessary.


Theanalysisintheprevioussectionhasrevealed
thatneitherthedevelopedeconomies,northedevel-
oping and transition economieshavebeen able to
return to the rapid growth pace they experienced
beforetheonsetofthelatestcrisis.Manypraisedthe
“greenshoots”ofrenascentgrowthin2010,but,soon
after,theprospectofarapidreturntoa“normal”state
faded.Thenotionofwhatis“normal”itselfischang-
ing,andseveralobserversarespeakingofa“new
normal”withregardtoeconomicperformancesthat
canbeexpectedindifferentcountriesandregions.
Thisrefers,ingeneral,tolowergrowthrates,butalso,




Current Trends and Challenges in the World Economy 11


andmorefundamentally,tothechangingconditions
and driving forces behind that growth. Since, as
thisReportargues,thefactorsthatunderpinnedthe
pre-crisiseconomicexpansionwereunsustainable,
endogenous adjustmentmechanisms or automatic
stabilizersarenotlikelytorestorethem.Moreover,
relyingonsuchastrategywillnotsucceedinreturn-
ingeconomiestotheirpreviousgrowthpattern,nor
isitdesirable.


Thereisincreasingrecognitionofthestructural
nature of the present crisis, as evidenced by the
widespread calls for structural reforms.However,
identifying the kinds of reforms needed depends
critically on a correct diagnosis of the nature of
thestructuralproblems.Manyproponentsofstruc-
turalreformsbelievetheirmaingoalsshouldbeto
improve competitiveness and restore the strength
and confidence of financialmarkets.These goals
aresupposedtobeachievedbyshort-termmeasures
suchas thecompressionof labourcostsandfiscal
austerity.However,sofar,thisapproachhasdelivered
disappointingresults.otherproposalsincluderadical
measures,suchasmoreflexiblelabourmarkets,lower
social security coverage and a smaller economic
rolefortheState.However,noneoftheseproposed
reformsarelikelytosolvethestructuralproblems,
andmayevenaggravatethem,becausetheyappear
tobebasedonaflaweddiagnosis.


1. An impossible return to the pre-crisis
growth pattern


(a) Persistent employment problems


Fiveyearsaftertheonsetoftheglobalcrisis,
employmentconditions remainprecarious inmost
developed countries.Unemployment rates grew
persistentlyintheeU,from7.2percentin2007to
11percentinMay2013.intheUnitedStates,the
openunemploymentratedeclinedfromitspeakof
10percentinlate2009/early2010to7.6percent
inmid-2013,which is still historically high com-
paredwithlessthan5percent in2007.However,
openunemploymentrates,onlypartiallydepictthe
employmentsituation;iftheseratesareconsidered
alongwith discouragedworkers, thosemarginally
attachedtothelabourforceandthoseemployedpart
timeforeconomicreasons,thetotalrateoflabour


underutilizationwas14.3percentinJune2013.4in
Japan,employmentindicatorshaveimprovedsignifi-
cantly:unemploymentisdownto4.1percentinMay
2013,afterexceeding5.5percentinmid-2009,andis
thusheadingtowardsitspre-crisislowof3.5percent.5


inthedevelopedcountriesasawhole,thetotal
numberofemployeddeclined from510million in
2007 to500million in2012; theemployment rate
(definedasapercentageoftheworkingagepopula-
tion) in these countries fell from68.8 per cent to
66.6percent.6Hadthatratenotfallen,totalemploy-
mentwould have reached 517million persons in
2012,whichmeans that the employment deficit
causedbythecrisis(i.e.feweremployedpeoplethan
expected based on pre-crisis trends) amounted to
17millionpersons.Thisjobsgapordeficitresulting
fromthecrisishasbeenlargerandlongerlastingthan
inanypreviouscrisisaffectingdevelopedcountries
overthepastthreedecades(chart1.3).


openunemployment in developing countries
hasbeenquitedifferentsincetheonsetofthecrisis
comparedwiththepre-crisisperiod.Amongthelarg-
estdevelopingandtransitioneconomies(thosethat
aremembersoftheG-20),onlyMexicoandSouth
Africahadhigherunemploymentratesattheendof
2012 thanbefore thecrisis;all theothercountries
managed to reduce that rate.between 2007 and
2012,130millionjobswerecreatedinthedeveloping
countries(excludingChinaandindia),sufficientto
preventanincreaseintheirjobsdeficit(chart1.3).
Mostdevelopingcountries,however,continuetoface
hugelong-standingemploymentproblems,including
lowparticipationratesinformalactivities,particu-
larlyamongwomen,highyouthunemploymentand
alargeproportionoflow-qualityjobs.


The discrepancies between developed and
developingcountrieswithregardtoemploymentgen-
erationreflecttheirdifferentgrowthperformances.in
developedcountries,thestrategyofcreatingjobsby
reducing(orallowingareductionof)realwageshas
notdeliveredtheexpectedresultsinthepresenceof
slow,orinsomecasesnegative,outputgrowth.Such
wagepolicieshaveanadverseimpactonaggregate
demand,whichmakesprivatefirmslesswillingto
investandtohirenewworkers.Reducingtheprice
of labour does not lead to the expected outcome
of equilibratingdemand and supplyon the labour
market, because lowering the price of labour (the
realwage)notonlyreducesthecostsofproducing




Trade and Development Report, 201312


goodsandservices,butalso thedemandfor those
goodsandservices.Attemptstoovercomeemploy-
mentproblemsbyloweringwagesandintroducing
greaterflexibilitytothelabourmarketareboundto
failbecausetheyignorethismacroeconomicinter-
dependenceofdemandandsupply thatcauses the
labourmarkettofunctiondifferentlyfromatypical
goodsmarket.Totheextentthatlowerunitlabour
costsinonecountrygiveproducersinthatcountrya
competitiveadvantageoninternationalmarkets,any
increaseinemploymentasaresultofhigherexports
willbeattheexpenseofproductionandemployment
intheimportingcountries.


(b) Adjustments that do not adjust


in the current policy debate, there is broad
agreementabout thegoalsbutnotabouthowbest
toachievethem,andsometimesthemeansappear
to be confusedwith ends.Restoring growth and
employment levels, reducing public debt ratios,
repairingbankingsystemsandre-establishingcredit
flows are generally shared objectives.However,


disagreementonpriorities,ontheappropriatepolicy
tools,aswellasonthetimingandsequencing,leads
to quite different, and sometimesopposite, policy
recommendations.Forinstance,thedominantviewin
mostdevelopedcountriesandinseveralinternational
organizations,atleastsince2010,hasbeenthatfiscal
consolidationisaprerequisiteforsustainedgrowth
because itwill bolster the confidence offinancial
marketsandpreventsovereigndefaults.indeed,this
was adopted as amajor commitment at theG-20
summitinTorontoinJune2010.Thoseopposedto
thisshifttowardsfiscalausterityseefiscalconsoli-
dationasalong-termgoalwhichwouldbeachieved
throughsustainedgrowth,andnotasaprecondition
forgrowth.inthisview,prematurefiscaltightening
willnotonlybeverycostlyineconomicandsocial
terms;itwillalsobecounterproductive,because,with
slowergrowth,fiscalrevenueswillbelower,andthe
public-debt-to-GDPratio isunlikely todecline,or
mayevenrisefurther(see,forinstance,TDR 2011,
chap.iii;Krugman,2012;Calcagno,2012).


Theimpactofachangeinpublicrevenueandin
spendingonGDP(i.e.thevalueoffiscalmultipliers)


Chart 1.3


ChANGES IN TOTAL EMPLOyMENT AND EMPLOyMENT RATES IN
developed And developing CounTRies, 2008–2012


Source: UNCTAD secretariat calculations, based on ILO, Key Indicators of the Labour Market (KILM) database; and UN-DESA, World
Population Prospects: The 2012 Revision database.


Note: China and India are excluded because small variations in their estimates would significantly alter global outcomes.


-20


0


20


40


60


80


100


120


140


2008 2009 2010 2011 2012


A. Changes in total employment
(Millions of persons)


Developing countries, excl. China and IndiaDeveloped countries


-3.0


-2.5


-2.0


-1.5


-1.0


-0.5


0.0


0.5


2008 2009 2010 2011 2012


B. Changes in employment rates
(Per cent of the working age population)




Current Trends and Challenges in the World Economy 13


hasbeenstudiedextensively.Manyofthesestudies,
includingbytheinternationalMonetaryFund(iMF,
2010),suggest thatfiscalmultipliersarerelatively
low.Forexample,theeCbestimatesshort-termfis-
calmultiplierstobegenerallylowerthan1,which
meansthatthenegativeimpactonGDPgrowthof
areductionofgovernmentspendingoranincrease
oftaxesoverthefirsttwoyearsissmallerthanthe
amount of that fiscal change.on the other hand,
the long-termmultiplier of a spending cutwould
bepositive,meaningthattheleveloftheGDPthat
wouldbeobtainedafteratransitoryperiodofmore
than10yearsfollowingafiscaltighteningwouldbe
higherthanthelevelexpectedwithoutit.Thiswould
resultfromthereductionoflabourtaxesthatwould
bemadepossiblebyan improvedbudgetposition
resultingfromfiscalausterity;gainswouldbelarger
if,inaddition,fiscalconsolidationalsoledtolower
sovereign risk premiums (eCb,2012).7However,
arecentstudybytheiMF(2012)foundthatfiscal
multipliers in times of economic depressionwere
muchhigherthanthevaluesithadestimatedinprevi-
ousreports.Thereasonisthatinaneconomywitha
hugeamountofidleresources,anincreaseinpublic
spendingdoes not involve any “crowdingout” of
privateexpenditure.Thismeans thatexpansionary
fiscalpolicies are an important instrument to spur
growthandactuallyreducethepublic-debt-to-GDP
ratio.However,theiMFrecommendationdoesnot
gosofarastorecommendsuchpolicies;itmerely
recommends undertaking fiscal adjustment over
a longer time span. it suggests that policymakers
shoulddeterminethepaceoffiscaladjustmenttak-
ing intoaccountnotonly thevaluesofshort-term
fiscalmultipliersanddebt-to-GDPratios,butalsothe
strengthofprivatedemandandthecredibilityoffiscal
consolidationplans(blanchardandleigh,2013).


A set of estimates of fiscalmultipliers are
presentedintable1.4basedontheUnitedNations
GlobalPolicyModel.evenifonlytheeffectsofan
increaseinfiscalexpenditureduringthefirstyearare
considered,theresultsstronglysupportthehypoth-
esisofhighmultipliers,whichsignificantlyexceed1
inallthecases,andarefrequentlygreaterthan1.5.on
theotherhand,multipliersassociatedwithchanges
intaxationaremuchlower,inallcasesbelow0.5in
absolutevalues.8Thismeans that the composition
ofafiscalpackagemaybeatleastasimportantas
itssize.inparticular,itwouldbepossibletodesign
fiscal packages comprising both higher taxes and
expenditure,whichwouldthereforehaveaneutral


ex-anteeffectonthefiscalbalance,butstillapositive
impactongrowth.Thisinturnwouldenlargethetax
baseandwouldeventuallydeliverapositiveex-post
effectonthefiscalbalanceandthepublic-debt-to-
GDPratio.butgiventhehighvaluesofgovernment
spendingmultipliers,itislikelythatadebt-financed
increaseinfiscalexpenditurewouldgenerateenough
growthandsupplementaryfiscalrevenuestoreduce
thatratio.9Asshownintheannextothischapter,this
effectwouldbe even stronger if several countries
pursuedexpansionarypoliciessimultaneously.


Despite growing evidence that fiscal auster-
ity hampersGDPgrowth,many governments are
unwillingtochangethisstrategyastheybelievethey
donothaveenoughpolicyspaceforreversingtheir
fiscal policy stance;10 instead, they are relying on
monetarypolicyforsupportinggrowthandemploy-
ment.However, there is little scope formonetary


Table 1.4


ShORT-TERM FISCAL MULTIPLIERS


Government
spending on
goods and
services


Government
taxes net of


transfers and
subsidies


Argentina 1.66 -0.36
Brazil 1.84 -0.37
Canada 1.51 -0.27
China 1.76 -0.42
CIS 1.54 -0.33
France 1.48 -0.27
Germany 1.38 -0.29
India 1.65 -0.41
Indonesia 1.64 -0.41
Italy 1.48 -0.31
Japan 1.35 -0.29
Mexico 1.59 -0.36
South Africa 1.68 -0.31
Turkey 1.71 -0.39
United Kingdom 1.32 -0.26
United States 1.58 -0.36


Source: UNCTAD secretariat estimates, based on United Nations
Global Policy Model (see the annex to this chapter).


Note: Multiplier values represent first-year impact on GDP of
one-unit ex-ante increases in government spending or
government revenues (i.e. taxes net of transfers and
subsidies).




Trade and Development Report, 201314


policytofurtherreduceinterestratesindeveloped
economies,as thesearealreadyextremely low. in
addition, so far,unconventionalmonetarypolicies
(i.e.quantitativemonetaryexpansion)havefailedto
revivecredittotheprivatesector.banksandother
financial institutions that have access to liquidity
willnotautomaticallyincreasetheirsupplyofcredit
commensurately,astheymaystillhavetoconsoli-
datetheirbalancesheets.Moreover,eveniftheydid
expandtheircreditsupply,manyprivatefirmswould
beunlikelytoborrowmoreaslongastheyhaveto
consolidate their ownbalance sheetswithout any
prospect of expandingproductionwhen they face
stagnant,orevenfalling,demand.Thisiswhyusing
monetary policy for pulling an economyout of a
depressiontriggeredbyafinancialcrisismaybelike
“pushingintoastring”.


ontheotherhand,centralbankinterventions
(orannouncementsoftheirintentions)haveproved
remarkablyeffectiveinloweringriskpremiumson
sovereigndebt.Thus,monetaryandfiscalpolicies
maybeusedfordifferentpurposesfortacklingthe
crisis.Fiscalpolicy,givenitsstrongpotentialimpact
on aggregate demand, could be used to support
growthandemploymentinsteadoftryingtorestore
the confidence offinancialmarkets throughfiscal
austerity.Meanwhile, central banks could enlarge
theirroleaslendersoflastresort(llR)togenerate
thatconfidenceandmaintaininterestratesatlowlev-
els.Moreover,thesecentralbankactionstosupport
creditandgrowtharemorelikelytosucceedifthey
areaccompaniedbyanexpansionaryfiscalpolicy.


2. Roots of the crisis: the build-up of
structural problems


Sincethelate1970sandearly1980spolicies
basedonsupply-sideeconomics,neoliberalismand
finance-ledglobalizationhaveinvolvedaredefinition
oftheroleoftheStateintheeconomyanditsregula-
torytasks;anextraordinaryexpansionoftheroleof
financeat thenationaland international levels;an
openingupofeconomies,includingareductionof
tradetariffs;andageneralincreaseininequalityof
incomedistribution.Theresultingnewrolesofthe
public,privateandexternalsectors, theexpansion
offinanceandtheincreasingincomeconcentration
alteredthestructureanddynamicsofglobaldemand
inawaythatheightenedvulnerabilities,eventually


leadingtothecrisis.inotherwords,thepresentcrisis
wasnot theunfortunate result of somemisguided
financialdecisions;rather,itwastheculminationof
anumberofstructuralproblemsthathavebeenbuild-
ingupoverthepastthreedecades,whichcreatedthe
conditionsforgreatereconomicinstability.


(a) Income inequality


inordertoachievesustainedglobalgrowthand
development, therehas tobeconsistentgrowthof
householdincome,thelargestcomponentofwhich
is labour incomeobtained from theproductionof
goodsandservices.11However,overthepastthree
decades, labourincomeintheworldeconomyhas
beengrowingataslowerpace than thegrowthof
worldoutput(chart1.4),withsomedivergingtrends
overthepastdecade.12


Theobserveddecliningtrendsintheshareof
labour income–orwageshare–haveoftenbeen
justifiedasbeingnecessaryinordertoreducecosts
and induce investment. However, wage income


Chart 1.4


ShARE OF wORLD LAbOUR INCOME IN
woRld gRoss ouTpuT, 1980–2011


(Weighted averages, per cent)


Source: UNCTAD secretariat calculations, using UN Global Policy
Model, based on UN-DESA, National Accounts Main
Aggregates database; and ILO, Global Wage database.


Note: Mixed income, typically from self-employment, is included
in the labour share.


52


54


56


58


60


62


64


1980 1985 1990 1995 2000 2005 2011




Current Trends and Challenges in the World Economy 15


constitutesalargeproportionoftotalincome(about
twothirdsindevelopedcountries),andistherefore
themostimportantsourceofdemandforgoodsand
services.Thus,sizeablereductionsofsuchincome
relative to productivity gainswill have tangible
negativeeffectsontherateofhouseholdconsump-
tion.And,totheextentthatproductiveinvestmentis
drivenbyexpectationsofexpandingdemand,second-
roundeffectsoflowerconsumptiononinvestment
wouldseemunavoidable.


Thedeclineintheshareoflabourincomehas
ledtoarisingtrendofprofitmark-upsintheworld
asawhole.Thetendencyofcompaniestoseekprofit
gainsfromexploitingwagedifferentials,ratherthan
through innovation and investment, has produced
limiteddynamicbenefitsfor therestofsociety.in
otherwords, the presumed transmission of higher
profits to higher grossfixed capital formationhas
notmaterialized.13


inadditiontothesenegativeeffectsonlong-term
growth,greaterincomeinequalityalsocontributed
tothefinancialcrisis.Thelinksbetweenexpanding
financeandrisinginequalityoperatedintwoways.
Thelargersizeandroleplayedbythefinancialsec-
tor ledtoagreaterconcentrationof incomeinthe
handsofrentiers (bothequityholdersand interest
earners)andafewhigh-wageearners,especiallyin
thefinancialsector.Concomitantly,greaterinequality
ledtorisingdemandforcredit,bothfromhouseholds
whosecurrentincomewasinsufficienttocovertheir
consumptionandhousingneedsandfromfirmsthat
distributedadisproportionateshareoftheirprofitsto
theirshareholders(TDR 2012,chap.ii).Thisledtoa
financialbubblethateventuallyburst,leavingmany
households,firmsandbanksinfinancialdistress.


(b) Smaller role for the State


Another long-running trend since the early
1980s has been the diminishing economic role of
theStateinmanycountriesbywayofprivatization,
deregulationand lowerpublicexpenditure (on the
latter,seesectionCofthischapterandtable1.7).This
servedtoincreaseeconomicfragilityindifferentways.


Whenthepublicsector’sshareofGDPshrinks,
economic vulnerability increases because of that
sector’sdiminishedcapacitytocompensateforthe
usualfluctuationsinthebusinesscycleandtocope


withsignificantcrises.14butevenmorerelevantthan
governments’abilitytointervene,istheirwillingness
toconductcountercyclicalpoliciesatatimewhenthe
desirabilityforbalancedfiscalbudgetshasbecome
dogma(Galbraith,2008).


Callsforbalancingbudgetsfrequentlyoverlook
thefactthatoneeconomicsector’sdeficitisneces-
sarilyanothersector’ssurplus.Therefore,areduction
(orincrease)inthepublicsectordeficitshowsupas
eitherareduction(orincrease)intheprivatesector
surplus,orareduction(orincrease)inthesurplusof
therestoftheworld,oracombinationofthesetwo.
Fortheworldasawhole,wheretheexternalsector
is,bydefinition,inbalance,publicandprivatesectors
mirroreachother.Thiscanbeillustratedbytheevolu-
tionofpublicandprivatesectorbalancesattheglobal
levelbetween1971and2011(chart1.5).Asthischart
showsaggregatevalues,itmainlyreflectswhathap-
penedinthelargestcountries.itappearsthatbetween
themid-1970sand1990,therewasapersistentand
rather stablepublicdeficit (andprivate surplus)at
around3.5percentofglobaloutput.Thisinitselfdid
notposeaproblem:itisnormalfortheprivatesector
torunsurpluses,sinceitsassumedobjectiveiswealth
accumulation.Andthatlevelofpublicdeficitwould
notleadtoanyexplosiveaccumulationofpublicdebt
stocks;onthecontrary,itwouldbeconsistentwitha
stabledebt-outputratioif,atthesametime,nominal
outputweretogrowsufficiently.15


This contrastswith the considerable instabil-
ityobservedsincethebeginningofthe1990s.itis
noteworthythatperiodsofshrinkingpublicdeficits
actually precededmajor crises in 2001 and2008.
itwas possible to cut public deficits because the
private sectorwas reducing its savings andmany
privateagentsbecamehighlyindebtedinthewakeof
unsustainablefinancialbubbles.Pressurestoreduce
fiscaldeficitscanbedestabilizingtotheextentthat
thosedeficitsaremirroredbyshrinkingprivatesector
surpluses.indeed,theyarepartlyresponsibleforthe
greaterfrequencyoffinancialcrises.


Anotherfactorcontributingtothosecrisessince
the1980shasbeenwidespreadfinancialliberaliza-
tion,whichisanothermajoraspectofthereduced
economic roleof theState.Financialderegulation,
coupledwiththeextraordinaryexpansionoffinancial
assets,allowedmacroeconomicpolicieslimitedroom
formanoeuvre,andtheireffectscametobeincreas-
ingly swayed by reactions on financialmarkets.




Trade and Development Report, 201316


Moreover,astheaccessofgovernmentstocentral
bank financingwas limited, the financial sector
gainedgreaterinfluenceoverpolicymakers.


Thisinteractionbetweendevelopmentsinthe
financialsector,togetherwiththeweakeningofgov-
ernmentandcentralbankinfluenceontheeconomy,
generates a particular problemwhen a recession
doesnotresultfromcyclesintherealsectorofthe
economy,butinsteadfromoverindebtednessofthe
privatesectorasawhole.Koo(2013a)describesthis
typeofrecessionasfollows:“Whenadebt-financed
assetpricebubblebursts,theprivatesectorisleftwith
ahugedebtoverhang,andtoclimboutofthisstateof
negativeequityitmustpaydowndebtorincreasesav-
ings,evenifinterestratesarezero.Whentheprivate
sectorasawholeisminimizingdebt,theeconomy
continuouslylosesaggregatedemandequivalentto


thesavedbutunborrowedamount.Thissituationhas
cometobeknownasabalancesheetrecession.”in
suchasituation,thechoiceisbetweenaprolonged
recessionandapublic-deficit-financedrecovery.As
theprivatesectortakesalongtimetoreduceitsdebt,
additionalborrowingbythepublicsectorwouldbe
theonlyrecourse.AsnotedbyKoo(2013b),“theonly
waytokeepboththeGDPandmoneysupplyfrom
shrinkingisforthegovernment–thelastborrower
standing–tostepinandborrowtheunborrowedsav-
ingsandspendthemintheprivatesector.”16


At the same time,however,governments are
reluctanttoincreasetheirdebtforfearofnegative
reactionsfromthefinancialmarketsandfrompublic
opinion,muchofwhichhasbeengiventounderstand
thatfinancialmarkets “knowbetter” thangovern-
ments(Koo,2013a).


Chart 1.5


FINANCIAL POSITIONS OF PUbLIC AND PRIVATE SECTORS
IN ThE wORLD ECONOMy, 1971–2011


(Per cent of world domestic product)


Source: UNCTAD secretariat calculations, using UN Global Policy Model, based on UN-DESA, National Accounts Main Aggregates
database; IMF, Government Financial Statistics; Eurostat; and national sources.


Note: Figures above zero denote a surplus and below zero a deficit. Surpluses indicate additions to the net stock of financial
wealth, and deficits indicate additions to the stock of debt. Except for small errors of measurement and aggregation of large
numbers, the surpluses and deficits mirror each other.


-6


-4


-2


0


2


4


6


1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011


Public sector


Private sector




Current Trends and Challenges in the World Economy 17


(c) The prominent role of a poorly regulated
financial sector


Thevalueofglobalfinancialassetsgrewfrom
$14 trillion in 1980 to $56 trillion in 1990 and
$206trillionin2007;andincurrentGDPtermsittri-
pled,from120percentofGDPin1980to365percent
in2007(lundetal.,2013:14).Thisexpansionwas
accompanied(andencouraged)byextensivederegula-
tionofnationalfinancialmarketsandtheprogressive
liberalization of international capitalmovements.
Asaresult,cross-bordercapitalflowsjumpedfrom
$500billionin1980toapeakof$12trillionin2007.
Thiswouldexplainwhyanincreasingproportionof
financialassetsareownedbynon-residents.between
1980and1995, the stockof foreign-ownedfinan-
cialassetsrepresentedaround25percentofglobal
financialassets.Thisshareincreasedto28percent
in2000,38percentin2005andalmost50percent
in2007–2010,whenforeign-ownedassetsexceeded
$100trillion,or150percentofworldoutput.


Thismore prominent role of financialmar-
ketscarriestheriskofgreatereconomicinstability,
becausethesemarketsareintrinsicallypronetoboom-
and-bust processes, especially if they are loosely
regulated.Atypicalprocessbeginswithrisingprices
offinancial andnon-financial assets,whichboost
wealthtemporarilyandserveascollateralfornew
creditsorequitywithdrawals.Thisinturnfinances
private spending and also new asset acquisitions,
whichpushupassetpricesfurther.Thisprocesscan
continueforarelativelylongtime,whichsustains
economicgrowthand thushelpsenhance investor
confidence.However,eventuallytheassetpricebub-
blethathadsustainedacredit-boomexpansionwill
burst,leadingtoadrasticandlong-lastingcontraction
ofeconomicactivity.


This portraysmany historical episodes of
“manias,panicsandcrashes”(Kindleberger,1978),
includingthebubblethattriggeredthepresentcrisis.
itisindeedsurprisingthat,asthebubblegrew,some
worryingsignalsweredismissedbypolicymakersas
wellasratingagenciesandfinancialagentsbecause,
although household debtwas rising, the value of
householdassetswasalsorising(bernanke,2005).17
Duetoanexclusivefocusonmonetarystabilitythe
earlysignalsoffinancialinstabilitywentunheeded.


According to someobservers,monetary pol-
icy that focuses exclusivelyon low inflation rates


contributestothecreditcycle(Godley,1999;Shin,
2010).Usually, lowor falling interest rates reflect
lowcurrent or expected inflation.Thismay allow
theburdenofthedebtservicetofallorremainlow
despitearisingstockofdebt.butassoonaspercep-
tionsofriskchange,interestratepremiumsrise.The
burdenof servicing debts thatwere contracted at
flexibleinterestratesorthecostsofrevolvingdebt
thatisreachingmaturityrise,sometimesdrastically.
inaddition,adrasticreversalofcreditdemandand,
byimplication,ofspending,maytriggeraneconomic
downturn thatwouldmakedebt repaymentsmore
difficult.


The extraordinary expansion of thefinancial
sectorovertheyearshasalsobeenaccompaniedby
changesinitspatternsofoperation,whichcontributed
toanincreaseinfinancialfragility.Theseincluded
a high level offinancial leveraging, an increasing
relianceonshort-termborrowingforbankfunding,
theextensionofapoorlycapitalizedandunregulated
shadowfinancial system, perverse incentives that
encouragedexcessiverisk-takingbyfinancialtraders,
arelianceonflawedpricingmodelsandthe“lendand
distribute”behaviourthatweakenedtheroleofbanks
indiscriminatingbetweengoodandbadborrowers.
Theprocyclicalbiasofbankcreditwasexacerbated
byvalue-at-riskmodelsandthebaselrulesonbank
capital,whichallowedbankstoexpandcreditduring
booms,whenrisksseemedlowandthepriceofcol-
lateralsrose,andobligedthemtocutlendingduring
downturns.Thevulnerabilityofthefinancialsystem
alsoincreasedasaresultofitsgrowingconcentration
andlossofdiversity.Muchofitsoperationstoday
arehandledby“too-big-to-fail” institutionswhich
tendtotakeonfargreaterrisksthanwouldbetaken
bysmallerinstitutions.Asthesametypeofbusiness
strategiestendedtobereplicatedacrossthefinancial
sector,thesystembecamemorevulnerabletomacro-
economicshocks(suchasthecollapseofrealestate
markets)thataffectedalltheagentsatthesametime
(seeTDR 2011,chap.iV).


Thesearchforrapidgainsledtolargeflowsof
credit–includingloansthatwereinsufficientlycollat-
eralized–thatwereusedforconsumption,ratherthan
forfinancingproductiveinvestmentandinnovative
enterprise.Thiskindofcredit-fuelledspendingby
theprivatesectorhadthepotentialtooffsetthesub-
dueddemandthatwascausedbylaggingwagesand
worseningincomedistribution.However,debt-driven
consumptionisnotaviableoptioninthelongrun.




Trade and Development Report, 201318


itispossiblethatsomeofthecharacteristicsof
thecreditboomindevelopedcountriesarebeingrep-
licatedindevelopingcountries,withsomevariations.
Assetappreciationsandprivatespendingthatexceeds
incomeareoftensupportedbycapitalinflows,usually
channelled throughdomesticfinancial institutions.
in such cases, currencymismatches betweendebt
andrevenuetendtogenerateorreinforcethecredit
boom-and-bustcycle.


Throughthesedifferentchannels,thegrowing
sizeand roleof thefinancial sector, togetherwith
itspresentstructureandmodesoffunctioning,have
becomeamajorsourceofeconomicinstabilityand
misallocationofresourcesinmanycountries.ithas
alsofacilitatedtheriseofinternationalimbalances,
anotherkeystructuralproblemthatisexaminedin
thenextsubsection.


(d) International imbalances with asymmetric
adjustments and a recessionary bias


increasing current account imbalances and
the expansion of international finance are closely
intertwined.intheimmediatepost-warera,thereare
unlikely tohavebeenanycountries thathadlarge
externaldeficits forextendedperiodsof time.but
suchdeficitshavebecomemoreandmorecommon
intheeraoffinancializationthatstartedinthe1980s
anddeepenedfromthe1990sonwards.


large surplus and deficit imbalances in the
world economy from themid-1970s to the early
1980sweremostly due to oil shocks (chart 1.6).
Theseshockscontributedtotheexpansionofinter-
nationalfinancialmarketsthroughtherecyclingof
petrodollars.However,theimbalanceswereconsid-
ered temporary, as itwas assumed that oil-deficit
countrieswoulddevisestrategiestoreducetheiroil-
importbills.bycontrast,inthemiddleofthe1980s
theUnitedStates had an external deficit of about
3percentofGDPwhichwasunrelatedtooil.This
wasmatchedbysurplusesinJapanandafewWestern
europeancountries,whichtookconcertedcorrective
action in1985.The smoothcorrectionof external
imbalances that followed could be considered the
lasttimetherewasproactiveinternationalcoordina-
tioninthemanagementoftradeandexchangerates.
butitmayalsoserveasalessonaboutthelimitsof
a framework for policy coordination that focuses


exclusivelyonexchangerateswhiledisregardingthe
growinginstabilityoftheglobalfinancialsystemas
awholeinviewofsubsequentdevelopments.


bytheendofthe1990s,atendencytowardsris-
ingglobalimbalancesre-emerged,owinglargelyto
currentaccountdeficitsinafewdevelopedcountries
wherecredit-drivenexpansionbecameprevalent,as
describedintheprevioussubsection.Thistendency
wasreinforcedbytheadoptionofexport-ledstrate-
giesbydeveloped-countryexportersofmanufactures,
suchasJapanandafewNortheuropeancountries,
followedbyGermany.Duringthe1990s,andmore
clearlyaftertheAsianfinancialcrisis,anumberof
developing countries that emerged as suppliers of
low-costmanufactures generated growing exter-
nal surpluses.others that also sustained surpluses
includednetexportersofenergyandrawmaterials,
especiallyduringthe2000swhencommodityprices
turned favourable.These factors together caused
globalcurrentaccountimbalancestopeakin2006
atnearly3percentofworldincome.Thereversal
thatfollowedfrom2007onwardscoincidedwiththe
first signsoffinancial turmoil in themajordeficit
country,theUnitedStates,andculminatedwiththe
financial and economic crisis in 2008–2009.This
highlightedthelimitationsoftheasset-appreciation,
credit-drivenmodeldiscussedabove.Globalimbal-
anceshaveremainedatabout2percentsince2009
–alevelthatisstillhistoricallyhigh.Furthermore,
globalimbalanceshavebeenontherisesince2009.


export-ledgrowthstrategies,totheextentthat
theyhavefrequentlyledtotradesurpluses,areonly
sustainableifothercountriesmaintaintradedeficits
overalongperiod.inshort,thesuccessofsuchstrate-
giesinsomecountriesreliesonexternaldeficitsin
othercountries,andthewillingnessandcapacityof
thedeficitcountriestopileupexternaldebt.butsince
thecrisis,developedcountrieswithdeficitsseemto
be lesswillingandable toplay the roleofglobal
consumeroflastresortduetotheirever-increasing
indebtedness.Despite this, policymakers in some
countriesaretryingtorespondtoweakerdomestic
demandby gaining exportmarket shares through
improvedinternationalcompetitiveness.Thisispar-
ticularlythecasewiththosecrisis-hitcountriesthat
wererunninglargecurrentaccountdeficitsbeforethe
crisisandhaveundertakenrecessionaryadjustments
programmes.Themostcommonmeasureadopted,at
leastintheshortrun,hasbeeninternaldevaluation,
particularly throughwage compression.However,




Current Trends and Challenges in the World Economy 19


thissimultaneouslyactionbyseveraltradepartners
contributestoaglobalcompressionofincomeand
reinforcesa race to thebottom.Thisnotonlyhas
negativeeffectsonglobalaggregatedemand,since
a country’s lowerwage bill constitutes a demand
constraintthataffectsothercountriesaswell,butit
alsounderminestheireffortstogaincompetitiveness
(Capaldoandizurieta,2013).


Aglobalmechanismtohelprebalanceexternal
demandwillnotbeeffectiveifitplacestheentireor
mostoftheburdenofadjustmentondeficitcountries.
Suchanasymmetricadjustmentisdeflationary,since
debtor countries are forced to cut spendingwhile
thereisnoobligationonthepartofcreditorcountries
to increasespending,which leads toashortfallof
demandatthegloballevel.itwouldbepreferable,
fromaneconomicandsocialpointofview,ifsurplus
countriesassumedagreaterroleintherebalancing
processbyexpandingtheirdomesticdemand.ideally,
anasymmetricexpansionaryapproachwouldbethe


mosteffectivewaytorestartglobaloutputgrowthon
asustainablebasis.insuchanapproach,theadjust-
ment burdenwould be taken on primarily by the
surpluscountriesbywayofstrongerwageincreases
andfiscalexpansion.


inordertoexploretheglobalconsequencesof
thesealternativeapproaches,theannextothischapter
presentsthreesimulationsshowingtheoutcomesof
alternative policy strategies.They are quantitative
exercisesbasedontheUnitedNationsGlobalPolicy
Model.Theseexercisesshowtheperformanceofthe
worldeconomydividedinto25countriesorgroups
ofcountriesatthehorizon2030basedontwoalter-
nativescenariosinadditiontothebaselinescenario.
The baseline scenario is an economic projection
assumingthattherewillbeneitherpolicychanges
norshocksahead.bothalternativescenariosinvolve
the followingpolicychangesaimedat stimulating
the economy: expansionary fiscal policies,with
higherpublicconsumptionandinvestmentspending;


Chart 1.6


CONTRIbUTIONS TO GLObAL IMbALANCES OF SELECTED GROUPS OF COUNTRIES, 1970–2011
(Current account balance as a percentage of world gross product)


Source: UNCTAD secretariat calculations, based on UN-DESA, National Accounts Main Aggregates database; IMF, World Economic
Outlook (WEO) database.


Note: Deficit and surplus classification was based on the average current account (CA) position between 2004 and 2007. CIS
includes Georgia.


-3


-2


-1


0


1


2


3


1970 1975 1980 1985 1990 1995 2000 2005 2010


Oil-exporting economies


CA deficit developing economiesCA surplus developing economies, excl. China
CA deficit developed economiesCA surplus developed economies China


CIS


2011




Trade and Development Report, 201320


progressive income redistribution through awage
policy,taxationandpublictransfers;andasupportive
monetarypolicyin termsof lowinterestratesand
greateraccesstocredit,whileavoidingthecreation
offinancialbubbles.Surpluscountriesareassumedto
applyastrongerstimulusthandeficitcountries,butno
countryissupposedtoadoptacontractionarypolicy
stance.Thedifferencebetweenthesetwoalternative
scenariosisthatinscenarioA,all countriesimple-
mentpolicychangesthataremoreorlessambitious
dependingontheirstartingposition,whereasinsce-
nariob,only developing and transition economies
adopt suchpolicychanges. inaddition, thepolicy
stimulusinscenariobissmallerduetobalance-of-
paymentsconstraintsresultingfromnon-actionon
thepartofdevelopedcountries.


ScenarioA, which includes a generalized
stimulus,achievesnotonlyasubstantialreductionof
globalimbalances,butalsothebestresultsinterms
ofeconomicgrowth,employmentcreationandfiscal
balancesinallthecountries.Thisisinlinewiththe
viewthatthebestapproachtoresolvingthepresent
economicproblems,includingonthefiscalside,isif
allcountriessimultaneouslyadoptexpansionarypoli-
cies,takingintoaccounttheirrespectivecapacities,
ratherthanadoptinggeneralizedausterity.


Scenariob,inwhichonlydevelopingandtran-
sitioneconomiesapplymoreexpansionarypolicies,
yieldsinferioreconomicresults,thoughstillclearly
betterresultsthanthoseofthebaseline.Thisisespe-
ciallytruefordevelopingandtransitioneconomies.
expansionarypoliciespursuedbythemmaycom-
pensateforprotractedslowgrowthofexportstothe
developedcountries.Alsodevelopedcountriesobtain
somebenefits in this scenario comparedwith the
baselinescenario,eveniftheseareminor.butthese


mostlystemfromthefactthat,insteadofcoordinat-
ingeffortstowardsagenuineglobalrebalancingand
accelerationofgrowth,thedevelopedcountrieswill
pressaheadwithindividualpoliciestowardsachiev-
ing external competitiveness by squeezing labour
income.Theirgainsthereforeresultfromenlarging
their share in global demand.What ismore, such
gainswillnotbeevenlydistributedbetweenwage-
earnersandprofit-earnersinthesecountries.Finally,
suchpracticeswillnothelptorebalancetheworld
economy.


These exercises are not forecasts, since their
hypothesis of extensivepolicy changes arehighly
unlikelytooccur.Rather,theyarequantitativeexer-
cisesthatareintendedtoevaluatetheconsistencyand
economicfeasibilityofcoordinatedpoliciesaimedat
spurringgrowthandemploymentbyaddressingthe
structuralcausesofthecrisis,suchasincomeinequal-
ity, thediminishing roleof theStateandfinancial
systemsthatdonotsupporttherealeconomy,andat
correctingthepresentasymmetricanddeflationary
approachtoglobalimbalances.


Thesimulationsalsoshowthatageneralshift
towardsexpansionarypoliciesiseconomicallyfea-
sible,andwoulddeliverbetterresultsinallrespects
thanthebaselinescenario.Thissupportstheviewthat
allcountriesshouldengageinacoordinatedeffort
aimedatasustainedexpansionofglobaldemand.
This exercise also shows that even if developed
countriesperseverewiththeircurrentpolicies,there
is,nevertheless,scopefordevelopingandtransition
economiestoimprovetheireconomicperformances
by providing a coordinated economic stimulus.
Hence,encouragingregionalcooperationandSouth-
Southtradewouldneedtobeanimportantcomponent
oftheirdevelopmentstrategies.




Current Trends and Challenges in the World Economy 21


Theshapeoftheworldeconomyhaschanged
significantlyoverthepastthreedecades.Theshare
ofdevelopingcountriesinglobalGDPhasincreased,
andseveraldevelopingcountriesandregionshave
assumedagreaterroleasadditionaldriversofglobal
economicgrowth.otherelementsofthisriseofthe
Southincludethegrowingimportanceofdevelop-
ingcountriesininternationaltradeandcapitalflows.
This section startswith an account of developing
countries’growthrecordoverthepastthreedecades,
andgoesontodiscusssomeissuesrelatedtotheir
increased tradeandfinancial integration. it argues
that,whilegreaterintegrationsupportedtheirrapid
growthwhenthegeneralexternaleconomicenviron-
mentwas favourable,with that environment now
turning less favourable, it has also increased their
vulnerability.


1. Growth performance since
the early 1990s


The1990sandthebeginningofthenewmillen-
niumsawaseriesofpaymentsandfinancialcrisesin
developingcountries,includinginMexicoin1994,in
somepartsofAsiain1997–1998–withspilloversto
brazilandtheRussianFederationin2008–inTurkey
in2000–2001andinArgentinain2001–2002.inspite
of thesecrises, developingcountries registeredan
averageannualGDPgrowthof4.7percentduring
theperiod1991–2002,exceedingthatofdeveloped
countriesbyovertwopercentagepoints(table1.5).
Meanwhile,averageannualGDPgrowthofthetran-
sitioneconomiesdeclinedby2.6percent, largely
as a resultof their economiccollapse in theearly
1990s.Developing countries’ growthperformance


duringtheperiod1991–2002wassuperiortothatof
developedcountriesforanumberofreasons.onewas
theirreboundfromeconomicdownturnsrelatedto
debtcrisesthatmanyofthemhadexperiencedinthe
1980salongwithsharpdeclinesincommodityprices.
Anotherwas themixedperformanceofdeveloped
countries,withaprotractedperiodofslowgrowthin
Japan,unevengrowthineurope,andasharpgrowth
decelerationintheUnitedStates,whichwasassoci-
atedwiththeburstingofthedot-combubblein2001.


During theperiod2003–2007,outputgrowth
indevelopingandtransitioneconomiesaccelerated,
evenasdevelopedcountriescontinuedtoexperience
relatively slow growth, on average.The average
annualGDPgrowthofbothdevelopingandtransi-
tioneconomiesexceededthatofdevelopedcountries
by 4.5–5 percentage points (table 1.5).The onset
oftheglobaleconomicandfinancialcrisisinitially
reinforcedthistrend,asthedownturnin2008–2009
waslessdramaticandthesubsequentrecoverymore
rapidindevelopingthanindevelopedcountries.This
growthdifferentialinfavourofdevelopingcountries
wasunprecedented (Akyüz,2012), even though it
subsequentlyshrankovertheperiod2010–2012.


Growth accelerationduring2003–2007 com-
paredwith the period 1991–2002 has diverged
considerably across developing countries. itwas
particularlypronouncedinsomeofthelargedevel-
opingandtransitioneconomies,suchasArgentina,
india, theRussian Federation, SouthAfrica and
Turkey, butmuch less so in brazil, China and
Mexico.TheRepublicofKoreaevenrecordedlower
averageannualgrowthrates.Thesharpincreasein
those rates inArgentina, theRussian Federation
andTurkeywaspartlyduetothesecountries’swift
recoveryfromseverecrisesatthebeginningofthe


C. Developing and transition economies are continuing
to grow, but remain vulnerable




Trade and Development Report, 201322


millennium,whichhadcausedlargeoutputlosses.in
2011–2012growthperformancegraduallyworsened
inalldevelopingregions,aswellasinmostcountries
individually(table1.5),especiallyinbrazil,indiaand
Turkey.Nevertheless,evenintheselattercountries,
per capita income continues to exceed pre-crisis
levelsbyasignificantmargin.Thisindicatesthatthe
adoptionofcountercyclicalmacroeconomicpolicies
enabledmanydevelopingcountriestomitigatethe
impactoftheGreatRecessionontheireconomiesfor
acertainperiodoftime.However,themorerecent
worseningoftheirgrowthperformancesuggeststhat
the growth stimulus effects of their expansionary
policiesmaybepeteringout.


Despitethehealthygrowthindevelopingand
transitioneconomies,developedcountriesremained
themaindriversofglobalgrowthuntiltheonsetof
thecurrentcrisis.Duringtheperiod1990–2005,these
lattercountriesaccountedforaboutthreequartersof
globalGDP(table1.6),andtheshareoftheircontri-
butiontoglobaleconomicgrowthexceeded50per
cent.bycontrast,duringtheperiod2008–2012,as
agrouptheycontributedverylittletoglobalgrowth
(table 1.5). Since 2010, global growth has been
drivenmainlybydevelopingcountries,whichhave
accountedforabouttwothirdsofsuchgrowth,while
the contribution of transition economies has been
negligible.


Table 1.5


COMPARATIVE OUTPUT GROwTh PERFORMANCE, SELECTED
COUNTRIES AND COUNTRy GROUPS, 1991–2013


(Per cent)


1991–2002 2003–2007 2008–2012 2010 2011 2012 2013


Output
growth
(annual


average)


Contribu-
tion to
global
growth


Output
growth
(annual


average)


Contribu-
tion to
global
growth


Output
growth
(annual


average)


Contribu-
tion to
global
growth Output growth


World 2.9 2.9 3.7 3.7 1.7 1.7 4.1 2.8 2.2 2.1


Developed economies 2.6 2.0 2.6 2.0 0.3 0.2 2.6 1.5 1.2 1.0


Transition economies -2.6 -0.1 7.6 0.2 1.8 0.0 4.5 4.5 3.0 2.7


Developing economies 4.7 0.8 7.0 1.5 5.3 1.4 7.9 5.9 4.6 4.7
Africa 2.9 0.1 5.8 0.1 3.6 0.1 4.9 1.0 5.4 4.0
East, South-East and
South Asia 6.5 0.5 8.3 0.9 6.8 1.0 9.3 7.0 5.3 5.5
West Asia 3.7 0.1 6.9 0.2 4.0 0.1 7.0 7.1 3.2 3.5
Latin America and
the Caribbean 2.9 0.2 4.8 0.3 3.0 0.2 5.9 4.3 3.0 3.1
Oceania 2.2 0.0 3.1 0.0 3.4 0.0 3.6 4.3 4.1 2.7


Memo items:
Argentina 2.6 0.0 8.9 0.0 5.8 0.0 9.2 8.9 1.9 4.8
Brazil 2.6 0.1 4.0 0.1 3.3 0.1 7.5 2.7 0.9 2.5
China 10.1 0.2 11.6 0.5 9.4 0.6 10.4 9.3 7.8 7.6
India 5.9 0.1 8.6 0.1 7.2 0.1 11.2 7.7 3.8 5.2
Indonesia 3.6 0.0 5.5 0.0 5.9 0.0 6.2 6.5 6.2 5.7
Mexico 3.1 0.1 3.6 0.1 1.6 0.0 5.5 4.0 3.9 2.8
Republic of Korea 6.1 0.1 4.4 0.1 3.1 0.1 6.3 3.7 2.0 1.6
Russian Federation -2.7 -0.1 7.4 0.1 1.5 0.0 4.5 4.3 3.4 2.5
Saudi Arabia 2.0 0.0 4.7 0.0 4.4 0.0 5.1 7.1 5.9 4.0
South Africa 2.3 0.0 4.9 0.0 2.1 0.0 3.1 3.5 2.5 1.7
Turkey 3.3 0.0 7.3 0.1 3.5 0.0 9.2 8.8 2.2 3.3


Source: UNCTAD secretariat calculations, based on table 1.1.
Note: Data for 2013 are forecasts.




Current Trends and Challenges in the World Economy 23


Theshareofdevelopedcountriesintheglobal
economywasabout70percentin1970andreached
almost 80 per cent during the 1990s, following a
declineintheshareofthetransitioneconomiesdur-
ingthatdecade(table1.6).Sincethebeginningofthe
millennium,andespeciallyasaresultoftheGreat
Recession, theshareofdevelopedcountriesinthe
globaleconomyfellsharplytoabout60percentin
2012.Theshareofdevelopingcountriesincreased
by7percentagepointsbetween1970and2005,and
rapidlyrosebyanother12percentagepointsduring
thesubsequentsevenyearstoreachover35percent
ofglobalGDPin2012.


Measuredintermsofpurchasingpowerparity
(PPP), theshareofdevelopingcountries inglobal
outputreached47.3percentin2012,andthusalmost


matchedthatofdevelopedcountries(table1.6).This
doesnotmeanthatdevelopingcountrieshavebecome
as important as developed countries as drivers of
globalgrowth,becauseacountry’scontributionto
globalsupplyanddemand,aswellastheexpansion-
aryordeflationaryimpulsesittransmitstotheother
countries,isdeterminedbythemarketvaluesofits
goodsandservices,ratherthanbyPPPequivalents.
However,itiswellknownthateconomicdevelop-
ment is associatedwithan increase inacountry’s
pricelevels,asalsoreflectedinanappreciationofits
realexchangerateandanensuinggradualclosingof
thegapinitsPPPrelativetodevelopedcountries.18
Thismeansthattheincreaseintheweightofdevelop-
ingcountriesintheglobaleconomytoalmost50per
cent,asmeasuredinPPPterms,couldbetakento
indicatethefutureevolutionoftheirweightmeasured


Table 1.6


ShARES IN GLObAL GDP, SELECTED COUNTRIES AND COUNTRy GROUPS, 1970–2012


Market pricesa Purchasing power parityb


1970 1980 1990 1995 2000 2005 2007 2010 2012 1990 1995 2000 2005 2007 2010 2012


Developed economies 69.5 69.9 78.8 78.3 77.0 73.8 69.6 63.7 60.4 63.4 62.3 60.9 56.7 54.2 50.0 48.1


Transition economies 13.7 8.5 3.9 1.9 1.2 2.4 3.3 3.3 3.9 7.9 4.3 3.9 4.5 4.7 4.6 4.6


Developing economies 16.8 21.6 17.3 19.8 21.7 23.8 27.1 33.0 35.8 28.7 33.4 35.2 38.8 41.1 45.4 47.3
Africa 2.7 3.6 2.2 1.8 1.9 2.2 2.4 2.7 2.9 3.5 3.3 3.4 3.7 3.8 4.0 4.0
East, South-East and
South Asia 7.5 8.3 8.1 10.1 11.0 12.8 14.8 18.9 21.3 13.6 17.8 19.7 23.2 25.3 29.0 30.7
West Asia 1.3 3.2 2.0 1.8 2.2 2.8 3.1 3.3 3.6 2.9 3.0 3.2 3.4 3.5 3.7 3.9
Latin America and
the Caribbean 5.3 6.4 4.9 6.1 6.6 5.9 6.7 8.0 8.0 8.6 9.2 8.9 8.4 8.5 8.6 8.7
Oceania 0.1 0.1 0.1 0.1 0.0 0.0 0.0 0.1 0.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0


Memo items:
Argentina 1.0 0.6 0.6 0.9 0.9 0.4 0.5 0.6 0.7 0.7 0.8 0.8 0.7 0.8 0.9 0.9
Brazil 1.1 1.6 1.7 2.6 2.0 1.9 2.4 3.4 3.2 3.0 3.2 2.9 2.8 2.8 2.9 2.8
China 2.8 2.6 1.8 2.5 3.7 5.0 6.2 9.4 11.3 3.5 5.6 7.1 9.4 11.0 13.6 14.9
India 1.9 1.6 1.5 1.2 1.4 1.8 2.2 2.6 2.6 2.9 3.3 3.7 4.3 4.6 5.4 5.6
Indonesia 0.3 0.7 0.6 0.7 0.5 0.6 0.8 1.1 1.2 1.1 1.4 1.2 1.2 1.3 1.4 1.5
Mexico 1.3 1.9 1.3 1.0 2.0 1.8 1.8 1.6 1.6 2.4 2.3 2.5 2.3 2.2 2.1 2.1
Republic of Korea 0.3 0.5 1.2 1.8 1.6 1.8 1.9 1.6 1.6 1.3 1.7 1.8 1.9 1.9 2.0 1.9
Russian Federation n.a. n.a. n.a. 1.3 0.8 1.7 2.3 2.3 2.8 5.3 2.9 2.6 3.0 3.2 3.0 3.0
Saudi Arabia 0.2 1.4 0.5 0.5 0.6 0.7 0.7 0.7 0.9 0.8 0.9 0.9 0.9 0.9 1.0 1.1
South Africa 0.5 0.7 0.5 0.5 0.4 0.5 0.5 0.6 0.5 0.8 0.7 0.7 0.7 0.7 0.7 0.7
Turkey 0.7 0.8 0.9 0.8 0.8 1.1 1.2 1.1 1.1 1.1 1.2 1.2 1.3 1.3 1.3 1.4


Source: UNCTAD secretariat calculations, based on IMF, World Economic Outlook, April 2013; Economist Intelligence Unit, EIU
CountryData database; table 1.1; and UNCTADstat.


a Calculated using dollars at current prices and current exchange rates.
b Estimated on the basis of current GDP using 2005 PPP values.




Trade and Development Report, 201324


Table 1.7


gdp by Type oF expendiTuRe, seleCTed CounTRies And CounTRy gRoups, 1981–2011


Percentage of GDP Average annual growth Percentage of GDP Average annual growth


1981–
1990


1991–
2002


2003–
2007


2008–
2011


1981–
1990


1991–
2002


2003–
2007


2008–
2011


1981–
1990


1991–
2002


2003–
2007


2008–
2011


1981–
1990


1991–
2002


2003–
2007


2008–
2011


Developed economies Developing economies, excl.China
GDP 100.0 100.0 100.0 100.0 3.2 2.6 2.6 -0.1 100.0 100.0 100.0 100.0 3.1 3.8 5.9 3.8
HH 60.7 61.1 62.1 62.7 3.2 2.8 2.5 0.3 58.7 59.5 58.8 58.8 3.1 3.8 5.5 3.6
Gov 20.7 19.0 18.3 19.0 2.6 1.7 1.6 1.5 16.3 14.3 13.3 13.7 3.1 2.6 4.8 5.0
Inv 18.9 20.0 20.7 18.5 4.2 3.2 4.1 -4.0 23.0 23.4 23.6 25.3 0.7 3.4 9.1 3.9
Exp 13.3 19.3 24.3 26.5 4.9 6.5 6.5 0.8 23.4 32.1 41.5 42.8 3.1 7.2 10.3 3.6
Imp 13.2 19.2 25.5 26.8 5.7 6.9 6.6 0.1 20.5 28.9 37.4 41.1 2.8 6.9 12.0 4.1


Developing economies Latin America and the Caribbean
GDP 100.0 100.0 100.0 100.0 3.6 4.7 7.0 5.3 100.0 100.0 100.0 100.0 1.7 2.9 4.9 2.8
HH 58.3 57.3 54.6 52.9 3.7 4.4 5.9 4.5 59.9 62.5 63.2 64.7 1.6 3.0 5.2 3.3
Gov 16.1 14.4 13.5 13.6 3.7 3.6 5.9 5.7 17.5 15.5 14.5 14.5 1.8 1.9 3.4 3.7
Inv 24.3 25.7 27.5 30.8 1.6 4.8 10.4 7.4 21.2 21.3 20.9 22.5 -2.1 3.9 7.7 2.3
Exp 22.2 30.3 40.4 42.0 3.5 8.2 12.0 5.9 11.9 18.8 24.5 23.9 4.7 7.6 7.8 1.7
Imp 19.6 27.2 35.9 39.6 3.2 7.7 13.1 7.0 10.3 18.1 23.2 26.7 0.1 8.4 11.2 4.4


Transition economies Africa
GDP … 100.0 100.0 100.0 … -3.0 7.6 1.2 100.0 100.0 100.0 100.0 1.9 2.9 5.8 3.5
HH … 47.0 53.2 60.8 … -1.3 10.7 3.3 61.7 62.4 62.1 62.8 1.9 3.2 5.1 4.3
Gov … 20.2 16.7 15.2 … -1.8 2.7 0.8 16.0 15.6 14.7 16.0 2.7 1.6 6.5 5.9
Inv … 27.1 23.1 24.0 … -12.2 14.9 -2.1 21.4 18.0 19.6 22.3 -4.5 3.2 9.3 4.5
Exp … 30.8 38.6 37.0 … 1.1 8.4 0.8 29.3 33.7 36.6 35.7 1.8 4.1 8.6 0.5
Imp … 23.3 31.2 35.5 … -2.7 15.5 0.9 27.3 27.1 31.9 36.3 -2.4 4.7 10.6 4.1


United States west Asia
GDP 100.0 100.0 100.0 100.0 3.6 3.5 2.8 0.0 100.0 100.0 100.0 100.0 1.4 3.7 6.9 3.7
HH 66.8 67.7 70.0 70.9 3.8 3.8 3.0 0.3 49.8 51.1 52.7 53.1 3.6 3.5 7.9 2.5
Gov 20.4 17.1 15.8 16.5 3.4 1.2 1.4 1.5 17.1 15.1 15.0 16.0 4.6 2.1 7.0 4.7
Inv 15.4 17.7 19.4 15.7 4.1 6.6 3.7 -5.1 16.5 16.8 20.8 24.2 -0.2 3.9 15.1 4.1
Exp 6.5 10.0 11.1 13.1 6.0 6.0 7.2 2.6 42.5 40.5 45.6 44.7 -3.4 5.3 9.5 2.2
Imp 7.9 12.2 16.3 16.2 7.9 8.9 6.4 -0.5 26.3 23.8 34.1 39.3 1.3 4.1 16.9 2.1


Europe South Asia
GDP 100.0 100.0 100.0 100.0 2.5 2.3 2.6 -0.3 100.0 100.0 100.0 100.0 4.7 5.1 8.1 6.4
HH 57.7 57.8 57.6 57.5 2.5 2.3 2.2 0.0 65.5 61.2 58.3 57.3 4.1 4.7 7.2 5.6
Gov 22.4 21.2 20.4 21.1 1.9 1.6 1.9 1.3 13.6 12.2 10.9 11.3 3.0 4.7 5.9 9.0
Inv 18.9 19.7 20.8 19.6 3.4 2.8 4.7 -4.2 30.3 26.8 32.1 35.8 2.7 4.1 14.2 7.4
Exp 19.4 28.8 37.9 41.0 4.5 6.8 6.5 0.8 11.3 15.9 21.1 23.0 6.0 7.0 13.6 8.6
Imp 18.5 27.4 36.7 39.2 5.0 6.6 6.8 0.1 15.9 16.0 22.5 27.1 0.9 6.0 17.1 9.0


Japan South-East Asia
GDP 100.0 100.0 100.0 100.0 4.6 0.9 1.8 -0.8 100.0 100.0 100.0 100.0 5.1 4.6 6.2 4.5
HH 58.1 57.8 57.6 58.6 4.0 1.3 1.1 0.4 56.5 56.0 56.8 55.9 4.7 5.0 5.4 4.3
Gov 15.4 16.4 18.3 19.0 3.6 3.0 1.0 1.7 11.7 10.0 10.2 10.9 3.7 4.2 5.8 6.4
Inv 27.0 26.6 22.5 19.8 6.1 -1.1 1.2 -4.7 31.4 31.0 24.0 25.0 4.8 0.5 6.9 5.4
Exp 8.1 9.8 14.5 15.7 4.9 3.9 9.6 -1.5 39.2 62.4 82.1 83.7 7.4 8.9 11.3 3.6
Imp 7.6 10.2 12.8 13.0 5.9 4.0 4.8 -0.7 37.5 57.9 73.1 75.3 6.6 7.7 11.7 3.5


China East Asia, excl.China
GDP 100.0 100.0 100.0 100.0 10.3 10.1 11.6 9.6 100.0 100.0 100.0 100.0 8.7 5.4 4.9 3.3
HH 53.5 45.2 38.9 35.9 11.8 8.7 8.0 8.8 57.6 59.1 55.4 53.1 8.0 5.3 3.2 2.3
Gov 14.5 14.7 14.0 13.2 11.8 10.0 9.8 7.9 16.9 14.5 12.8 12.7 6.2 3.6 3.2 3.3
Inv 38.0 38.3 41.7 46.4 7.9 10.6 13.4 13.4 26.8 30.5 26.5 23.1 10.4 3.7 3.8 0.4
Exp 9.7 20.3 36.0 39.9 13.6 18.3 20.0 13.7 31.5 45.5 65.5 74.0 12.7 9.2 11.8 5.3
Imp 9.4 17.5 30.4 35.3 14.3 17.1 18.6 18.0 32.4 49.3 61.0 63.8 12.0 7.8 9.6 3.7


Source: UNCTAD secretariat calculations, based on UNCTADstat.
Note: Averages and growth rates based on constant 2005 prices and 2005 exchange rates. HH=household consumption expenditure;


Gov=government consumption expenditure; Inv=gross capital formation; Exp=exports, Imp=imports. Numbers do not
necessarily add up to 100 due to rounding.




Current Trends and Challenges in the World Economy 25


inmarketvalues,providedthatthesecountriescon-
tinuetheircatch-upprocess.


Thesechangesinthesharesofdifferentcoun-
triesandcountrygroupsinglobaloutputandintheir
contributions to global growth have been accom-
paniedbychangesinthecompositionofaggregate
demandinmanyofthem.Acomparisonoftheevo-
lution of private consumption, public expenditure
(moreprecisely,governmentconsumption,sinceit
excludes public investment), investment, exports
and imports shows that between the 1980s and
2003–2007governmentconsumptionasashareof
GDPfellinthevastmajorityofregions(table1.7).
Governmentconsumptioninconstantpricesrecov-
eredinAfrica,latinAmericaandWestAsiaduring
theperiodof the commoditypriceboombetween
2003and2007,whenmanygovernments in these
regionsusedwindfallgainstoboostsocialspending.
Majorexceptionstothegeneraldeclineintheshare
ofcurrentgovernmentspendinginaggregatedemand
wereJapan,wherespendingincreasedwithaview
tocompensatingforthesharpdeclineintheshareof
privatedemand,andChina,whereitremainedfairly
stable,whiletheshareofdomesticconsumptionfell.


Thiscomparisonalso showsa slight reversal
ofthewidespreadtendencyofadecliningshareof
governmentconsumptioninGDPduringtheperiod
2008–2011.Thisreversalresultedfromarapidexpan-
sionofcountercyclicalfiscalspendinginallcountry
groups(Griffith-Jonesandocampo,2009),19except
intransitioneconomiesandChina.Thisexceptionis
partlyduetothefactthatmostofthecountercyclical
fiscal stimulus in that country consistedof higher
public investment rather than current expenditure.
Theshareofinvestment(publicandprivate)roseby
8percentagepoints,averaging46percentofGDP
intheperiod2008–2011.Thiswasaccompaniedby
asignificantfallintheshareofhouseholdconsump-
tioninGDPfromanaverageofover50percentin
the1980stoanaverageofabout36percentinthe
period2008–2011.


Theevolutionofthecompositionofaggregate
supplyanddemandoverthethreedecadesfrom1981
to2011showsaveryrapidgrowthofexportsand
imports,bothindevelopedanddevelopingcountries
(table1.7).TheirshareinGDP,atconstantprices,
virtuallydoubled:fromaround13percentto27per
cent indevelopedcountries,andfrom20percent
tocloseto40percentindevelopingcountries.At


currentprices,thisgrowthwassomewhatslowerin
thelattergroupofcountries(andhasevenslightly
reversed since2008) owing to a real appreciation
ofmost developing-country currencies during the
period,whichresultedintheirGDPatcurrentprices
growingfasterthanatconstantprices.Theincrease
wasmost notable in east and South-eastAsia,
where the share of exports inGDP rose bymore
than30percentagepointsbetween1981–1990and
2008–2011.Net exports inChina (exportsminus
imports)amountedto6percentofitsGDPbetween
2003and2007.


To sum up, the larger role of international
trade in the composition of aggregate demand in
developingcountries’growthwasaccompaniedby
asmallerroleofgovernmentconsumptioninmost
oftheseeconomies.eastAsia,especiallyChina,also
sawasignificantdeclineintheshareofhousehold
consumptioninGDP.Untiltheearly2000s,increased
participation in international trade had beneficial
effectsinanumberofcountries,especiallyindevel-
opingAsia,althoughmuchlesssoinlatinAmerica
andAfrica.Withthegenerallyfavourableexternal
economic environment from2003 until the onset
ofthelatestcrisis,theirgreateroutwardorientation
contributed to an increase in the growth perfor-
manceofallthesedevelopingregions.However,an
export-orientedgrowthstrategyalsoimpliesgreater
vulnerabilitytoadeteriorationoftheexternalenvi-
ronment,aswitnessedsince2008.


2. Vulnerability to trade shocks


The impactofanexport-oriented strategyon
acountry’seconomicgrowthdependson theevo-
lutionofglobaldemandfor thatcountry’sexports
and/or onprice developments of thosegoods that
constitutealargeproportionofthecountry’sexport
basket.Changinginternationalpriceshavelongbeen
recognizedasamajorexternalsourceofacountry’s
vulnerability.Theyhaveaparticularlystrongeffect
oncountriesthatexportmainlyprimarycommodi-
ties, since prices of commodities have generally
beenmorevolatilethanthoseofmanufacturesand
services. in addition, the global financial crisis
posestheriskofasevereslowdownofdemandfor
manufacturesexportedbydevelopingcountries,and
afurtherdeclineinthepricesofsuchmanufactures,




Trade and Development Report, 201326


Chart 1.7


TRADE ShOCkS, by DEVELOPING REGION AND ExPORT SPECIALIzATION, 2004–2012
(Change relative to GDP in previous year, per cent)


Source: UNCTAD secretariat calculations, based on UN Comtrade; UNCTADstat; United States Bureau of Labor Statistics (BLS);
and CPB Netherlands Bureau for Economic Policy Analysis.


Note: A trade shock is calculated as the gains and losses in national income (measured as a percentage of GDP) resulting from
changes in export volumes and terms of trade. Within each region, countries are classified by export specialization where
energy, minerals or agricultural products account for at least 40 per cent, or manufactures for at least 50 per cent, of a
country’s exports; all other countries are classified as diversified exporters.


-25


-20


-15


-10


-5


0


5


10


15


20


25


30


35


All
countries


Energy
exporters


Mineral
exporters


Agricultural
exporters


Manufactures
exporters


Diversified
exporters


Latin America and the Caribbean


2004–2007 2008 2009 2010 2011 2012


-25


-20


-15


-10


-5


0


5


10


15


20


25


30


35
Africa


-25


-20


-15


-10


-5


0


5


10


15


20


25


30


35
West Asia


-25


-20


-15


-10


-5


0


5


10


15


20


25


30


35
East, South-East and South Asia


All
countries


Energy
exporters


Mineral
exporters


Agricultural
exporters


Manufactures
exporters


Diversified
exporters


All
countries


Energy
exporters


Mineral
exporters


Agricultural
exporters


Manufactures
exporters


Diversified
exporters


All
countries


Energy
exporters


Mineral
exporters


Agricultural
exporters


Manufactures
exporters


Diversified
exporters




Current Trends and Challenges in the World Economy 27


especially low-skill-intensive products (see also
chapteriiofthisReport).


Toexaminecountries’vulnerabilitytointerna-
tionalpriceanddemandshocks,individualcountries
within each geographical regionwere classified
accordingtotheirexportspecialization(chart1.7).
An analysis of this classification shows that both
exportersofprimarycommoditiesandexportersof
manufactures suffered severe trade shocks during
the period 2008–2009.but it also shows that the
beneficial impact of the subsequent reboundwas
bothlargerandmorerapidforcountrieswithahigh
shareofprimarycommoditiesintheirexportsthan
forcountriesexportingmainlymanufactures.


Someobservers have interpreted developing
countries’relativelyrapideconomicgrowthinrecent
yearsasamanifestationoftheir“decoupling”from


theeconomicperformanceofdevelopedcountries.
This has led them to conclude that thewidely
expected protractedweakness of demand growth
in developed countriesmay not cause a sizeable
decline in developing countries’ opportunities to
exportmanufactures.Rather,developingcountries
couldmovetoanewtypeofexport-ledgrowth,with
South-Southtradebecomingthemaindrivingforce
(Canuto,HaddadandHanson,2010).South-South
tradehasindeedgainedinimportance,withitsshare
intotaldeveloping-countryexportsincreasingfrom
lessthan30percentduringthesecondhalfofthe
1990stoalmost45percentin2012.Abouthalfof
thisincreasehasoccurredsince2008(table1.8).


However, as alreadymentioned, the rapid
growthindevelopingcountriesin2010wasmainly
duetotheiradoptionofcountercyclicalmacroeco-
nomicpoliciesandtheirrecoveryfromtheslowdown


Table 1.8


wORLD ExPORTS by ORIGIN AND DESTINATION, SELECTED COUNTRy GROUPS, 1995–2012
(Per cent of world exports)


Destination
Origin


Developing
economies


Transition
economies


Developed
economies Total


1995 Developing economies 11.9 0.3 16.1 28.3
Transition economies 0.3 0.6 1.1 2.1
Developed economies 16.6 1.1 52.1 69.7
Total 28.8 2.0 69.2 100.0


2000 Developing economies 13.1 0.2 18.8 32.1
Transition economies 0.4 0.5 1.4 2.4
Developed economies 15.0 0.8 49.8 65.5
Total 28.5 1.5 70.1 100.0


2005 Developing economies 16.7 0.5 19.1 36.3
Transition economies 0.6 0.7 2.1 3.5
Developed economies 13.6 1.4 45.3 60.3
Total 31.0 2.5 66.5 100.0


2008 Developing economies 19.8 0.8 18.3 38.9
Transition economies 0.9 0.9 2.8 4.6
Developed economies 13.6 1.9 40.9 56.5
Total 34.3 3.7 62.0 100.0


2010 Developing economies 23.2 0.7 18.4 42.3
Transition economies 0.9 0.7 2.1 3.7
Developed economies 15.3 1.5 37.2 54.0
Total 39.4 2.9 57.7 100.0


2012 Developing economies 25.3 0.8 18.5 44.7
Transition economies 0.9 0.8 2.4 4.1
Developed economies 15.0 1.7 34.6 51.2
Total 41.2 3.3 55.5 100.0


Source: UNCTAD secretariat calculations, based on UNCTADstat.
Note: Numbers do not necessarily add up to 100 due to rounding.




Trade and Development Report, 201328


Table 1.9


SOUTh-SOUTh ExPORTS, by REGION AND PRODUCT CATEGORy, 1995–2012
(Per cent of total South-South trade)


Share in total South-South exports of the
respective product category


Average annual
percentage growth


1995 2000 2005 2007 2010 2012
1996–
2002


2003–
2007


2008–
2012


Asia


Asian exports to other developing countries
Total merchandise 7.8 8.1 7.9 9.0 10.2 10.1 5.8 29.1 14.4
Manufactures 9.0 9.4 9.2 11.1 13.3 13.5 5.5 28.6 14.8
Primary commodities 5.2 5.4 5.4 5.6 5.4 5.5 7.2 30.7 12.6


Intraregional exports
Total merchandise 76.5 76.7 77.1 75.3 73.7 74.4 5.4 23.5 12.1
Manufactures 80.8 81.7 82.3 80.5 78.9 78.8 5.4 21.3 10.6
Primary commodities 66.2 66.2 66.4 65.4 63.7 66.2 5.4 29.3 13.5


Intra- East and South-East Asian exports
Total merchandise 58.7 55.9 53.3 49.4 46.5 45.8 4.5 20.6 11.2
Manufactures 68.8 70.0 68.0 64.2 60.9 60.3 5.4 20.0 9.9
Primary commodities 35.4 27.2 25.2 23.1 22.5 23.0 1.4 24.3 14.0


China’s exports to other Asian developing countries
Total merchandise 10.6 10.9 15.9 17.4 17.0 18.2 9.1 30.1 13.1
Manufactures 12.6 13.8 21.5 24.8 25.0 27.8 9.9 31.3 13.1
Primary commodities 5.9 4.9 5.0 4.4 4.0 4.5 5.0 20.8 13.8


Other Asian developing countries’ exports to China
Total merchandise 13.2 14.6 18.9 17.5 17.9 17.5 8.3 24.9 13.3
Manufactures 15.1 17.0 22.8 21.2 21.4 19.6 9.0 23.1 10.1
Primary commodities 9.2 10.0 11.6 11.1 12.5 12.9 5.6 32.3 17.9


Latin America and the Caribbean


Intraregional exports
Total merchandise 7.7 7.7 6.3 6.2 5.2 5.0 2.8 25.2 6.8
Manufactures 6.1 5.9 5.3 5.4 4.8 4.9 1.9 26.8 7.7
Primary commodities 11.6 11.7 8.7 7.9 6.1 5.6 4.0 23.2 5.7


Latin American and Caribbean exports
to other developing countries


Total merchandise 3.2 2.3 3.5 3.8 4.8 5.1 2.7 30.6 19.6
Manufactures 1.4 0.9 1.4 1.3 1.0 1.1 0.1 24.3 5.8
Primary commodities 7.3 5.3 8.0 8.7 11.7 11.7 3.9 32.7 22.4


Latin American and Caribbean exports to China
Total merchandise 0.4 0.5 1.2 1.4 2.2 2.3 11.7 38.0 25.4
Manufactures 0.1 0.1 0.3 0.3 0.3 0.4 20.7 20.7 13.3
Primary commodities 1.3 1.2 3.0 3.6 5.6 5.5 9.8 42.7 26.8


Africa


Intraregional exports
Total merchandise 2.3 1.8 1.7 1.7 1.8 1.6 2.1 18.9 10.2
Manufactures 1.7 1.2 1.0 1.1 1.2 1.0 1.0 13.1 8.7
Primary commodities 3.7 3.0 2.9 2.7 2.6 2.5 3.0 22.7 10.7


African exports to other developing countries
Total merchandise 2.4 3.2 3.4 3.9 4.3 3.8 7.9 32.3 12.6
Manufactures 0.9 0.8 0.8 0.6 0.8 0.8 1.8 18.0 12.3
Primary commodities 5.7 8.0 8.5 9.6 10.3 8.5 9.9 35.3 12.3


African exports to China
Total merchandise 0.2 0.6 1.1 1.4 1.7 1.1 23.2 51.0 8.4
Manufactures 0.1 0.0 0.1 0.1 0.1 0.1 3.8 23.3 21.6
Primary commodities 0.5 1.6 3.3 3.9 4.6 2.6 27.4 53.3 7.8


Source: UNCTAD secretariat calculations, based on UNCTADstat.
Note: Shares of developing Oceania’s exports are negligible and therefore not reported.




Current Trends and Challenges in the World Economy 29


(or recession) of 2009, though their growth has
been losing steam since then.Moreover, a disag-
gregationofdevelopingcountries’totalexportsby
majorproductcategories indicates littlechange in
the twomaincharacteristicsofSouth-South trade,
namelyitsnarrowconcentrationinAsia,relatedto
thesecountries’stronginvolvementininternational
production networks,with developed countries as
finaldestinationmarkets,andthemajorroleofpri-
marycommoditiesintheexpansionofSouth-South
tradeoverthepasttwodecades(seealsoTDR 2005,
chap. iV). Three quarters of South-South trade
takesplacewithinAsia,andAsianexportstoother
developingcountriesaccountforanother10percent
ofsuchtrade(table1.9).Chinaaloneaccountsfor
about40percentofSouth-Southtrade,almosthalf
of intra-Asian totalmerchandise trade and60per
centofintra-Asiantradeinmanufactures,aswellas
foraboutonethirdofalldeveloping-countryimports
fromAfrica andlatinAmerica.This implies that
Chinahasprobablybeenthesinglemostimportant
country in stimulatingSouth-South trade through
itsimportsfromotherdevelopingcountriesoverthe
pasttwodecades.


Moreover, the shareofmanufacturedexports
between countries ineast andSouth-eastAsia in
totalSouth-Southtradeinmanufactureshasdeclined
significantlysince2000,andevenmoresosince2005
(table1.9).Thisdeclineismirroredbyadeclinein
China’simportsofmanufacturesfromotherdevelop-
ingAsiancountriesasashareoftotalSouth-South
tradeinmanufactures.Acontributoryfactorcouldbe
thedeclineinexportsfromAsiansupplychainsto
theirdeveloped-countryendmarkets.20butitcould
alsobedue to the rising shareofprimaryexports
fromlatinAmericaandAfricainSouth-Southtrade.
However,onacautionarynote,itshouldbeborne
inmindthatthelargeamountoftradebetweengeo-
graphicallyclosecountriesinvolvedininternational
production chains results in considerable double-
countingofSouth-Southtradeinmanufactures,since
theexportsofcountriesparticipatinginthosechains
generally have a high import content, and those
chainsplayanimportantroleinSouth-Southtrade.


The significant role of primary commodities
in the dynamics of South-South exports reflects,
inter alia,therapidincreaseintheabsolutevalueof
South-Southtradeinmineralfuelsandmetals,which
hasgrownmuchmorerapidlythanthatofanyother
productcategory,especiallysince2008(chart1.8).


on the other hand,while developing-country
exports to developed countries have grown less
rapidly, overall, low-,medium- andhigh-skill and
technologically-intensivemanufactureswerethemost
dynamicproductgroupsinSouth-Northtradeover
theperiod1995–2012,secondonlytomineralfuels.


Takentogether,thereislittleevidencetosup-
porttheviewthatSouth-Southtradehasbecomean
autonomousengineofgrowthfordevelopingcoun-
tries.Rather,thecloselinksbetweenthedynamics
ofSouth-South trade, on the one hand, and trade
in primary commodities and tradewithin interna-
tionalproductionnetworkswhosefinaldestination
isdeveloped-countrymarkets,ontheother,indicates
thatengaginginSouth-Southtradehasprobablydone
little to reducedeveloping countries’ vulnerability
to external trade shocks.However, if developing
countriescouldshifttoagrowthstrategythatgives
agreaterroletodomesticdemandgrowth,agreater
shareoftheirmanufacturedimportswouldbedes-
tinedforfinaluseintheirdomesticmarketsrather
thanbeingre-exportedtodevelopedcountries.Such
ashiftcouldwellincreasethecontributionofSouth-
Southtradetooutputgrowthindevelopingcountries.


This strengthens the argument for a renewed
rolefordomesticdemandasthemotorforasustained
andbalancedgrowthoftheworldeconomy.Another
setofadverseconditionsrelatedtotherelativelymore
subduedgrowthperformanceofdevelopingcountries
arisesfromtheheightenedinstabilityofcapitalflows.
indeed,emergingeconomiessawasuddenreversal
ofthelargecapitalinflowstheyhadreceiveduntil
early2013, following thefirst signsofaprobable
withdrawal of quantitative easing by the Federal
Reserveof theUnitedStates in June2013,which
exacerbated uncertainty in the financialmarkets,
withpossiblerepercussionsforthemacroeconomic
policiesofmanydevelopingcountries.


3. Vulnerabilitytofinancialinstability


Thestrongrise incross-bordercapitalmove-
ments since themid-1970shasbeenaccompanied
byanincreaseintheshareofdevelopingcountries
asrecipientsofinternationalcapitalflows.However,
capital flows to developing countries have rarely
exhibitedacontinuousandsmoothtendency;rather,




Trade and Development Report, 201330


they have frequently been punctuated by sudden
reversals.Theassociatedboom-bustcyclesindomes-
ticcreditandassetpriceshaverecurrentlytriggered
severecrisesinthesecountries.Thesheermagnitude
of capital outflows fromdeveloped to developing
countries, driven by evenminor adjustments in
financialportfolios,tendtodestabilizetheeconomies
ofthelattercountries,asdiscussedinchapteriiiof
thisReport.


Anotherimportantfactorcontributingtodevel-
opingcountries’financialvulnerabilityrelatestothe
price formationmechanisms inmarkets, including
exchangeratesandcommoditymarkets,whichcan
haveastrongimpactondevelopingcountries.The
rapidlygrowingpresenceoffinancialtradersoncom-
moditymarketshasoverriddenmarketmechanisms,
resultinginalooserlinkbetweentheultimatesupply
ordemandof thecommodityandthetreatmentof
commodity futures as afinancial asset.As traders


tendtomakepositionchangesbasedoninformation
related toother assetmarkets, irrespectiveofpre-
vailing conditions in specific commoditymarkets,
theyhavetendedtogenerateapositivecorrelation
betweenthepricesofdifferentassetclasses(equity
shares,currenciesusuallyusedas targets incarry-
tradeoperationsandcommodityprices)(TDR 2009,
chap.ii).Chart1.9showshowthepricesofdifferent
kindsof assets,whichwereuncorrelateduntil the
early 2000, have become highly correlated since
2002,andespeciallysince2008.Themoresynchro-
nizedpricemovementsacrossthoseassetsindicate
aweakeroperationoffundamentalsinpriceforma-
tionineachoftheirmarkets.Forinstance,currency
appreciationordepreciationgenerallydidnotreflect
current account conditions in several developing
economies: thebrazileanrealappreciated,both in
nominal and real terms, between 2006 and 2008,
and again between2009 andmid-2011, despite a
persistentdeteriorationinitscurrentaccountbalance;


Chart 1.8


EVOLUTION OF DEVELOPING-COUNTRy ExPORTS by bROAD PRODUCT CATEGORy, 1995–2012
(Index numbers, 1995 = 100)


Source: UNCTAD secretariat calculations, based on UNCTADstat, Merchandise trade matrix.


0


100


200


300


400


500


600


700


1995 2000 2005 2010


Exports of developing to developed countries


0


200


400


600


800


1 000


1 200


1 400


1 600


1995 2000 2005 2010


South-South trade


Agricultural products
Mineral fuels, lubricants and related materials
Electronic excluding parts and components
Parts and components for electrical and electronic goods
Ores, metals, precious stones and non-monetary gold


Labour-intensive and resource-intensive manufactures
Low-skill and technology-intensive manufactures
Medium-skill and technology-intensive manufactures
High-skill and technology-intensive manufactures


20122012




Current Trends and Challenges in the World Economy 31


similarly,between2003andmid-2008,Turkey’sreal
effective exchange rate (ReeR)21 appreciated by
almost50percent,inparallelwithagradualincrease
ofitscurrentaccountdeficit.


This development has been exacerbated by
theproliferationof informationsystemsandmod-
elswhicharedrivenbythesamedataandtrading
principles(suchasso-called“momentumtrading”,
“risk-on/risk-off”behavioural responsesor,gener-
ally,“algorithmictrading”).Tradingbasedonthese
modelsisoftendoneveryrapidly(oftenreferredto
ashigh-frequencytrading)andtendstoresultinherd
behaviour,wherebymarketparticipantsmimiceach
others’tradingbehaviour,followthepricetrendfor
sometimeandtrytodisinvestjustbeforetheother
marketparticipantsselltheirassets(UNCTAD,2011;
bicchettiandMaystre,2012;andUNCTAD,2012).


Taken together, the above evidence indicates
that key prices for the economies of developing
countriesmaymove inways unrelated tomarket
fundamentals,andintandemwiththoseofotherasset
classessuchasequities.Theconsequenthighdegree
ofcross-marketcorrelationandherdbehaviourrisks
making global financialmarkets “thinner”, in the
sensethatvirtuallyallmarketparticipantstakebets
onthesamesideofthemarket,whichmakesitmore
difficulttofindamatchingcounterpart.Thecorollary
tothisisthatrelativelyminoreventscantriggera
drasticchangeofdirectioninfinancialorfinancial-
izedmarkets.inaddition,suchpricechangesmaybe
moresensitivetochangesinthemonetarypolicies
ofdevelopedcountries,orinthegeneralriskpercep-
tionprevailinginthosecountries,thanonsupplyand
demandconditions inspecificcommoditymarkets
anddevelopingcountries.


Chart 1.9


pRiCe TRends in globAl AsseT MARkeTs, 1980–2012


(Price index)


Source: UNCTAD secretariat calculations, based on Bloomberg.
Note: World equity index refers to the MSCI world index. World commodity index refers to the S&P GSCI index. Currency index


refers to an equally weighted index, which includes the Australian dollar, the Brazilian real and the South African rand spot
rates (average 1995 = 1,000).


World equity index World commodity index Currency index


0


200


400


600


800


1 000


1 200


1 400


1 600


1 800


1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012




Trade and Development Report, 201332


1 Despite the reconstruction and rehabilitation of
machineproductionfacilitiesintheareasofnorth-
easternJapanthatwerehitby theearthquakeand
tsunamiand the robustgrowthof Japan’sexports
towardsmanydevelopingcountriesinAfrica,latin
AmericaandWestAsia, itsoverallexportsfell in
2012forthesecondyearinarow.


2 ThedeclineinexportsfromtheislamicRepublicof
iranwasprimarilyduetoatighteningoftradesanc-
tionsbytheUnitedStatesandtheeU.Asaresult,
itsexportsofcrudeoilandleasecondensateshrank
byabout40percent,toapproximately1.5million
barrels per day (bbl/d) in 2012, comparedwith
2.5millionbbl/din2011.


3 Atfirstsight,thisevolutionofexportsofthegroup
ofemergingAsianeconomiesslightlycontrastswith
thepatternsofotherdevelopingregions.However,
thisrelativelyhighfigureof6.2percentneedstobe
viewedwithsomecaution.First,itresultspartlyfrom
relativelylowlevelsinearly2012,whichtosome
extentcouldreflectdistortionsassociatedwiththe
ChineseNewYear.Second,CPbrobusttradedata
forJanuarytoApril2013contrastwithmorenegative
signalsemanatingfromChina’scustomsfiguresfor
MayandJune2013.Accordingtothelattersource,
thevalueofChina’sexportsshrankby3.1percent
inJuneyearonyear,downfromameagre1percent
inMay.Meanwhile,importsfellby0.7percentin
June,yearonyear,havingslippedby0.3percent
inMay.Third,theyear-on-yearriseof17.4percent
ofthevalueofexportsfortheJanuary–April2013
periodpresumablypartlyreflectoverinvoicingprac-
ticesbyexporters speculatingon theappreciation
oftherenminbi(Financial Times,“Chinatocrack
downonfakedexportdeals”,6May2013).These
practiceswouldalsoaffectCPb’sdataontradevol-
umes.Foratleastthesereasons,itremainsdifficult
tofullygraspthemagnitudeoftheslowdowninthis
region.inaddition,inalllikelihood,thesqueezein
theChinesemoneymarketandanunexpectedrise
in inventories,whichareextremelydependenton
changesinthegrowthoftheeconomy,alsoplayed
aroleintheserecentlowtradefigures.Nevertheless,


recentanecdotalevidenceofamarkeddeterioration
inindustrialactivity,suchasafallinoutputandin
neworders,suggest thatChina’sslowdowncould
continue in the comingmonths (Financial Times,
“Anaemicmanufacturingdata raiseChinagrowth
fears”,1July2013).


4 SeeUnited StatesDepartment oflabor,bureau
oflabor Statistics, at: http://www.bls.gov/news.
release/empsit.t15.htm.


5 SeeStatisticsbureauofJapan,at:http://www.stat.
go.jp/english/data/roudou/lngindex.htm.


6 Thisdeclineinabsolutetermswasquitegeneral:the
eUlost5millionjobsbetweenthelastquarterof2007
andthatof2012;theUnitedStateslost3.5million
jobsbetweenDecember2007andDecember2012;
andinJapanemploymentfellby1.5millionbetween
December2007andMay2013,thoughthismaybe
partlydue todemographic trends, as theworking
agepopulationdiminishedby5.2millionpersons
between1998and2012.SeeeuropeanCommission
eurostat,at:http://epp.eurostat.ec.europa.eu/portal/
page/portal/employment_unemployment_lfs/data/
database;UnitedStatesDepartmentoflabor,bureau
oflabor Statistics, at: http://www.bls.gov/news.
release/empsit.t15.htm; and Statisticsbureau of
Japan,at:http://www.stat.go.jp/english/data/roudou/
lngindex.htm.


7 Multipliersdiffer,dependingonwhichexpenditure
isreducedorwhichtaxisraised,andthemostcostly
are cuts in investment spending.Multipliers are
muchlower(generallybelow0.6)iffiscalconsoli-
dationpoliciesarecredible(i.e.ifmarketsarecon-
vincedthatannouncedconsolidationmeasureswill
befullyimplementedandenduring).basedonthese
considerations, theeCb states that “While there
maybeatemporarydeteriorationingrowthresult-
ingfromfiscalconsolidation,well-designedfiscal
adjustmentleadstoapermanentimprovementinthe
structuralbalanceandthushasafavourableimpact
onthepathofthedebt-to-GDPratio.Consequently,
postponing thenecessarybudgetaryadjustment is
notacrediblealternativetoatimelycorrectionof
fiscalimbalances”(eCb,2012:81).


Notes




Current Trends and Challenges in the World Economy 33


8 Additionalmodellingexercisesalsoshowthatthe
fiscalmultiplierscanhaveagreaterimpactonGDP
dependingmostlyon:(i)thecompositionoftheini-
tialpolicyshock,and(ii)whethertheexpansionary
shockisaccompaniedbyincomeredistributionpoli-
cies.essentially,ifprogressiveincomedistribution
effectsareincludedinthedesignoffiscalmeasures,
thepositiveresponsetolargergovernmentspending
ishigher.Meanwhile,thenegativeeffectonGDPof
increasedtaxation,netoftransfersandsubsidies,is
smallerifitconsistsofhigherdirecttaxation,and
largerifitconsistsoflowersocialtransfers.


9 Arithmetically, the overall effect on the public-
debt-to-GDP ratio of a debt-financed increase in
publicspendingdependsonthevaluesofthefiscal
multiplier, thepublic revenuesasapercentageof
GDPand the initialdebtstockasapercentageof
GDP.Forinstance,assumingamultiplierof1.3,an
initialdebt-to-GDPratioof60percentandpublic
revenues-to-GDPratioof35percent,anincreaseof
5percentofGDPinpublicspendingwouldreduce
thedebt-to-GDPratioto59percent.Theempirical
debate,however,isbasicallyeconomic,andrevolves
around the “crowding-out” debate.As stated in
TDR 2011:“forthosewhobelieveincrowdingout
effects, increases in government spending reduce
privateexpenditure.inthiscase,eithersupplemen-
taryspendingisfinancedwithborrowingandleads
toahigher interest rate,which lowers investment
andconsumption,or thegovernmentopts toraise
taxestobridgethefiscalgap,whichreducesprivate
disposable income and demand.Hence, public
stimuluswillbeirrelevantatbest,andmayevenbe
counterproductiveifitraisesconcernsamongprivate
investors.Theoreticalmodelssupportingthisview
have been criticized for their unrealistic assump-
tions–suchasperfectforesight, infiniteplanning
horizons, perfect capitalmarkets, and an absence
of distribution effects through taxation –which
make themunsuitable for policy decisions in the
realworld.inparticular,theirstartingpointusually
assumes full employment,when thediscussion is
preciselyhowtorecoverfromaneconomicslump.
eveninmorenormaltimes,however,theempirical
evidenceforcrowdingoutisweakatbest.”


10 “Fiscal space”mayhavedifferentmeanings.The
mostcomprehensiveandusefulfromaneconomics
pointofviewisthecapabilityofgeneratingafiscal
stimulus thatwould improve economic andfiscal
conditionsinthemediumtolongterm.Hence,even
ifacountryhashighfiscaldeficitsandahighpublic-
debt-to-GDPratio,agovernmenthasfiscalspace,
fromadynamicperspective,ifitcanaccesslow-cost
financingandprofitfromtheveryhighfiscalmulti-
pliersthatexistduringeconomicrecessions.Astatic
viewoffiscalspaceonlycomparesthecurrentlevel
ofpublicdebtordeficitwithagiventarget(which


maybeself-imposedoragreedwiththeiMForthe
europeanCommission).


11 This primary income is supplementedby income
redistribution(orsecondaryincome)implemented
by theState throughdirect taxation andpersonal
transfers.


12 The falling trends in the share of labour income
areevidentinbothabsoluteandrelativeterms.in
absoluteterms,thegrowthofrealwagesofthepopu-
lationinthelowersegmentsofincomedistribution
hasremainedsubdued,orevennegative,inseveral
developedcountriesoverthepastfewdecades(see,
forexample,TDR 2010).indevelopingcountries,
therewas significantwage growthbetween2000
and2007,butthishassloweddown,andinmany
caseshalted,sincethestartoftherecentfinancial
crisis(Ashenfelter,2012).inrelativeterms,available
empiricalanalysesofthefunctionaldistributionof
income,whichcovervariouscountries,alsopointto
growinginequalityinthedistributionofvalueadded.
labourincomeasashareoftotalincomehasbeen
fallinginalmostalldevelopedcountries(Stormand
Naastepad,2012;TDR 2012).indevelopingcoun-
tries,eventhoughempiricalevidenceisscarcerand
moreheterogeneous,theseshareshavealsodeclined,
onaverage,althoughareversalhastakenplaceinthe
2000sinanumberoflatinAmericanandSouth-east
Asiancountries(Stockhammer,2012;TDR 2012).


13 lookingattheworldeconomyasawhole,onaran
andGalanis (2012)showthatasimultaneousand
continuing decline in thewage share leads to a
slowdown of global growth. Furthermore, in a
moredetailedinvestigationof16individualcountry
membersoftheG-20,theauthorsfindthat9ofthese
countriesshowapositivecorrelationbetweenwage
growthandGDPgrowth.oftheremaining7econo-
mieswhich show negative correlations between
wage growth andGDPgrowthwhen considered
individually, 4 of them effectively register lower
growthwhen facing a simultaneous reduction in
thewageshare.Moreover,theyfindthatwhenthe
wagesharesofalleconomies fall simultaneously,
these four economies contract aswell.Galbraith
(2012) reaches a similar conclusion based on a
largeempiricalinvestigationacrossmanycountries
and over time. in this case, however, a negative
impactongrowthfrommoreunequaldistribution
isshowntobestronglyinfluencedbythenatureof
thechangesinincomedistribution,aswellasbythe
socio-economiccontext and the levelofdevelop-
ment.Forexample,theeffectofchangesinincome
distributiononconsumptionintheUnitedStatesover
thepast threedecades isshapedbydevelopments
inthefinancialsector.ontheonehand,thegrowth
of thefinancialsector isakeydeterminantof the
rapiddeteriorationofincomedistribution.(Thevast
datasampleconfirmsthatcountriesandcitiesthat




Trade and Development Report, 201334


predominantlyhostfinancialactivitiesalsodisplay
ahighdegreeofinequalityofincomedistribution.)
ontheotherhand,theimpactonhouseholdspend-
ingismediatedbytheabilityofthefinancialsector
toextendcredittoenableconsumption,whichcan
lastuntilacrisisemerges.indevelopingcountries,
Galbraith (2012) confirms a pattern of inequality
overthelongrunsimilartowhatKuznetsposited,
namely that rising inequality in early stages of
developmentisfollowedbyimprovementsinincome
distributionasdevelopmentprogresses.However,at
somestagesandinspecificways,developmentsin
thefinancialsectoralsoexertaninfluenceonhow
risinginequalityistransmittedtospending.evidence
fromChina,forexample,showsthatagreatershare
of the rising national income is contributing to
financial speculation and real estate bubbles, and
thushouseholdconsumptionisnotrisingasfastas
nationalincome.


14 AccordingtoMinsky(1982),oneofthereasonswhy
recovery from theGreatDepressionof the1930s
was so difficultwas the small amount of public
expenditure around1930,whichwasonly10per
centofGDPintheUnitedStates.


15 Forinstance,adeficitof3.6percentofGDPiscon-
sistentwithadebtratiothatisstabilizedat60percent
ofGDP,withanannualrealGDPgrowthof3percent
andanincreaseintheGDPdeflatorof3percent.


16 Theseconsiderationsmainlyconcernthedegreeof
effectiveness of themultiplier, depending on the
level, or lack, of aggregate demand and towhat
extentprivateagentsarepreoccupiedwiththeirown
balancesheets.Anotherconsiderationinassessing
thegovernment’seffectivenessinsustainingdemand
andemploymentrelatestothedegreeofconfidence
ofprivateagentsingovernmentactions(berglund
andVernengo,2004).Withasimilarconsiderationin
mind,basedonanempiricalstudyof140countries
over theperiod1972–2005,Carrère anddeMelo
(2012), suggest that fiscal stimulus is effective
providedtherestoftheeconomyisstableandthe
fiscaldeficitiscontained.insum,theeffectiveness


ofpublicspendingtogeneratedemandandemploy-
mentdependsnotonlyoneconomicprocesses,but
alsoonpoliticalones(Kalecki,1943).


17 As stated bybernanke, “Some observers have
expressedconcernaboutrisinglevelsofhousehold
debt, andwe at theFederalReserve follow these
developmentsclosely.However,concernsaboutdebt
growthshouldbeallayedbythefactthathousehold
assets(particularlyhousingwealth)haveriseneven
more quickly than household liabilities.”Similar
remarksweremadebyhispredecessorasChairman
oftheFederalReserveboard,AlanGreenspan,in
his testimonybefore theCommittee onbanking,
Housing, andUrbanAffairs of theUnitedStates
SenateinFebruary2005(availableat:http://www.
federalreserve.gov/boarddocs/hh/2005/february/
testimony.htm).


18 Thisisexplainedbytheso-calledbalassa-Samuelson
effect (i.e. price levels inwealthier countries are
systematicallyhigherthaninpoorerones).


19 TheUnitedNations(2010:tablei.4)recordedthe
fiscalmeasuresmadepublicbymanygovernments
atthetimeofthecrisis.ofthe55countriescovered,
the10countriesthatappliedthestrongeststimulus
measures,allbutoneweredevelopingandtransition
economies.ineightofthesecountries,themeasures
amountedtomorethan10percentofGDPspread
over two to three years.However, following the
implementationofsuchhighlevelsofstimulussince
2012,theremayhavebeenaturnaroundinthepace
ofgovernmentspending.ortizandCummins(2013),
onreviewinggovernmentprojectionsupto2016,as
recordedbytheiMF,notethattherehasbeenashift
towardsfiscalausterityby119countriesin2013,and
thisislikelytoincreaseto132countriesby2015.


20 TDR 2002 (Part2,chap.iii)providesanearlydiscus-
sionoftheroleofinternationalproductionnetworks
in the export dynamism and industrialization of
developingcountries.


21 TheReeRcorrespondstothenominalexchangerate
ofacurrencyvis-à-visthecurrenciesofalltrading
partners,adjustedfortheinflationdifferentials.




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Alternative Scenarios for the World Economy 37


Thisannexpresentsaquantificationofglobal
economicscenariosthrough2030.itisintendedto
illustrate alternative scenarios for a balanced and
sustainedpro-growthglobaloutcomebasedonthe
UnitedNationsGlobalPolicyModel.1


Threesimulationsarepresented:abaselineand
two alternative scenarios.Thebaselineisaprojection
assumingthattherewillbeneitherpolicychanges
norshocksahead.2inthetwoalternative scenarios,
a reorientation ofmacroeconomic policy towards
theadoptionofmeasuresthatprovidestrongersup-
portforanexpansionofaggregatedomesticdemand
is assumed.Thesealternative scenarios assume a
continuingpathofeconomicconvergencebetween
countries, and incorporate the currentmacroeco-
nomic constraints and potential of each economy
or groupof economies. in otherwords, they take
intoaccounttheirparticularstructuralconditions,as
wellas the interactionsbetweencountries through
tradeandfinance.Themaindistinctionbetweenthe
twoalternativescenariosisthatinonescenarioall


countrieswould be involved in a demand-driven
policyeffort(scenarioA),whileintheotherscenario,
only developing and emergingmarket economies
would embark on this alternativemacroeconomic
policystance(scenariob).


Thealternativescenariosaregroundedinmacro-
economicreasoning,notpoliticalfeasibility.Therefore,
theydonotdiscussthepolicycoordinationprocesses
thatwouldbeneededattheregionalorgloballevels,
nordotheyattachanyprobabilitytotheoccurrenceof
suchprocesses.However,eventhoughthepolitical
processesarenotdiscussed,thesesimulationsserve
toillustratetheadvantagesthatwouldresultfroma
coordinated effort aimed at a sustained expansion
ofglobaldemand.lefttotheoperationofmarkets
alone,therewouldbenoself-adjustingmechanisms
fortheworldasawholetoensurecoherencebetween
thepoliciesofindividualcountriesandavoidnega-
tivetrade-offsandwelfarelosses.Thequantifications
shownheremayprovidepolicymakerswithacon-
cretetemplatetodebatepolicychoices.


Annex to chapter I


ALTERNATIVE SCENARIOS FOR
ThE wORLD ECONOMy




Trade and Development Report, 201338


Thenatureoftheassumedpolicychangesisthe
sameinbothscenariosAandb,butinscenarioA
allcountries,developed,developingandtransition
economiesalike,areassumedtopursuemoreexpan-
sionarymacroeconomicpoliciestotheextentneeded
toensureagrowth-enhancingenvironmentforeach
country.Themainareasofassumedpolicychanges
arelistedbelow:


• Astrongerroleofthepublicsector,bothinterms
ofspendinganddecisionsontaxation.Thepro-
activefiscalstancewouldaimatcontributingto
astablegrowthofdemandandatstrengthening
productivecapacitythroughphysicalandsocial
infrastructure, the provision of incentives to
private investment and appropriate industrial
andstructuralpolicies.


• Measuresaimedatamoreequaldistributionof
incomethroughsettingaminimumwage,direct
taxation andwelfare-enhancingprogrammes.
Thesemeasures,whichwilleffectivelyleadto
wageincreasesclosertoaverageproductivity
gains,willplayadualrole:theywillhelpsus-
taintheexpansionofaggregatedemand,and,
byvirtueofsuchexpansion,theywilltrigger
improvementsinproductivitythroughdemand-
driventechnicalprogressmechanisms.


• Supportivemonetary and credit policies and
improvedfinancial regulations. interest rates
andcreditavailabilityareassumedtosupport
private and public sector activity, and at the
sametimeavoidexcessiveassetappreciations
or financial fragility of private and public
institutions.


• Taxandspendingpoliciesareassumed tobe
made consistentwith an improvement in the
financial positions of the public sectors in


countrieswheretheyhavebeenstrainedinthe
recentpast.insuchcases,governmentspending
willincreaseataslowerratethanGDPgrowth,
butwillneverthelessprovideasizeableeconomic
stimulusthroughspendingfiscalmultipliersthat
aresignificantlygreaterthan1(asexplainedin
sectionbofthischapter).likewise,itwillbe
assumedthatfiscalpositionswillimprovewith
thehelpofhighertaxesimposedonsectorsthat
arenotemployment-intensive.


• ontheexternalfront,itwouldinvolvereforms
of the internationalmonetary and financial
systems.inthesescenariosit isassumedthat
progressive adjustments of nominal and real
exchangerateswillbeconducivetoreducing
global imbalances and fostering economic
development.Tonarrowbothtradeandfinancial
imbalanceswithout deflationary adjustments
indeficitcountries,itisassumedthatsurplus
countrieswillmake a greater contribution
thandeficitcountriesthroughmeasuresaimed
at bolstering domestic demand. To enable
industrialization and export diversification in
developing countries, it is also assumed that
therewillbenon-discriminatorymarketaccess
forthesecountriesandmechanismstopromote
South-Southcooperation,includinginthearea
of environment-friendly technologies, as dis-
cussedbelow.betterregulationofcommodity
marketsisassumedtoreducetheadverseinflu-
enceoftheir“financialization”onprimaryand
energyprices.


• itisfurtherassumedthatmeasures,including
incentives to private investment, government
spending and taxation,will address environ-
mentalchallengesbyhelpingtomitigatecarbon
emissions and environmental degradation.3
investmentsintechnologicalinnovationsforthe


The policy assumptions in the alternative scenarios




Alternative Scenarios for the World Economy 39


moreefficientproductionanduseofenergyand
primaryinputsareassumedtotakepriority.in
addition,industrialpoliciesinenergyandpri-
marycommodityexporterswillaimatgreater
economic diversification.New technologies
willbecomemoreadvancedandmadeavailable
atthesamepaceasthatofothertechnological
developmentsinrecenthistory.


inscenariob,itisassumedthatthedeveloped
countrieswillmaintain their currently dominant
policystances,andwillthereforeremainonasub-
pargrowthtrajectorydrivenbyfiscalausterityand
pressures to compress labour income.The latter
may contribute to competitiveness gains in exter-
nalmarkets,butalsotoreducedorslowgrowthof
consumption.bycontrast,developingandtransition
economiesareassumedtopressaheadwiththeset
ofpoliciesdescribedabove,butsincetheywouldbe
facing amore adverse external environment, they
wouldfaceharsherconstraints.


inaddition,itisassumedthatthemajordevel-
opedcountrieswillcontinuewiththeirrecentchoices


ofmonetarypolicyandfinancialregulation,which
showedlittleconcernforpotentialspillovereffects
ondevelopingcountries.Developingcountriesare
assumedtoimplementsomelevelofcapitalcontrols,
but,intheabsenceofinternationalcooperation,these
measureswillbeonlypartiallyeffective.likewise,
reducing external imbalances and promoting eco-
nomicdevelopmentwillbecomemorechallenging
if, as assumed, developed countries donot depart
fromtheircurrentpolicystances.Forexample,fac-
ingharsherwagecompetitionfromthelattergroup,
developing countriesmaynot be able to improve
on functional distribution of income to the extent
they could in scenarioA. Similarly, the greater
market access assumed in scenarioA to enhance
exportdiversificationofdevelopingcountrieswill
beappliedonlybyandamongdevelopingcountries.
overall,theseconditionswillshaketheconfidence
andexpectations thatgenerally influenceportfolio
andfixed capital investment, aswell as financial
costs.butevenconsideringtheselimitations,there
remainsconsiderablescopeforcoordinationamong
developingandemergingeconomieswithregardto
theaforementionedpolicyalternatives.


Anillustrativesetofoutcomesresultingfrom
thecombinationofassumptionsinthetwoalternative
scenariosispresentedbelowforthemajorregions
and for theworldasawhole.4Chart1.A.1 shows
thatGDPgrowthissignificantlyhigherinscenario
Athaninbothscenariobandthebaselinescenario
forallregions.itneedstobeborneinmindthatthe
currentglobalconditionsareparticularlyadverse,as
bothdevelopedanddevelopingcountriesstillface
hugechallengesandbottlenecksresultingfromthe
financialcrisis.


Thegrowthtrajectoryoutcomesfromthepolicy
assumptions in scenarioA are consistentwith the


obtainedpatternsofimprovedfunctionaldistribution
ofincome,showninchart1.A.2.Therecentpastwas
markedbyanunequivocaldeteriorationofincome
distributionbetweenlabourandprofitsinpractically
allregions,withpartialexceptionsinlatinAmerica
andsomeAsiancountries.Acatch-upoffunctional
distributioniseconomicallydesirableandfeasible,
butmightproceedatarelativelymoderatepace.Such
animprovementisamajorfactorforthegrowthof
internaldemandineachcountryaswellasforthe
growthofglobaltradeactivity.inturn,economiesof
scaleresultingfromlargerdomesticandforeignmar-
ketsinducetechnicalprogress.buttheseprocesses
wouldtaketimeandneedtobejointlymanaged,since


Outcomes of the scenarios




Trade and Development Report, 201340


Chart 1.A.1


GDP GROwTh: hISTORICAL AND ESTIMATED UNDER ThE TwO SCENARIOS,
by REGION/GROUP, ChINA AND INDIA, 1995–2030


(Per cent)


Source: UNCTAD secretariat calculations, based on United Nations Global Policy Model.
Note: Growth refers to GDP at constant 2005 PPP dollars. CIS includes Georgia.


World Developed economies CIS


Africa
Latin America and


the Caribbean West Asia


East, South and South-East
Asia, excl. China and India China India


-2


0


2


4


6


8


1995 2000 2005 2010 2015 2020 2025 2030
-4


-2


0


2


4


6


8


1995 2000 2005 2010 2015 2020 2025 2030
-8


-6


-4


-2


0


2


4


6


8


10


1995 2000 2005 2010 2015 2020 2025 2030


-4


-2


0


2


4


6


8


10


1995 2000 2005 2010 2015 2020 2025 2030
-4


-2


0


2


4


6


8


1995 2000 2005 2010 2015 2020 2025 2030
-2


0


2


4


6


8


10


1995 2000 2005 2010 2015 2020 2025 2030


-6


-4


-2


0


2


4


6


8


1995 2000 2005 2010 2015 2020 2025 2030
4


6


8


10


12


14


16


1995 2000 2005 2010 2015 2020 2025 2030
2


4


6


8


10


12


1995 2000 2005 2010 2015 2020 2025 2030


Baseline Scenario A Scenario B




Alternative Scenarios for the World Economy 41


Chart 1.A.2


LAbOUR-INCOME ShARE: hISTORICAL AND ESTIMATED UNDER ThE TwO
SCENARIOS, by REGION/GROUP, ChINA AND INDIA, 1995–2030


(Per cent of GDP)


Source: UNCTAD secretariat calculations, based on United Nations Global Policy Model.
Note: CIS includes Georgia.


Baseline Scenario A Scenario B


50


55


60


1995 2000 2005 2010 2015 2020 2025 2030


World


55


60


65


1995 2000 2005 2010 2015 2020 2025 2030


Developed economies


50


55


60


65


1995 2000 2005 2010 2015 2020 2025 2030


CIS


35


40


45


50


1995 2000 2005 2010 2015 2020 2025 2030


Africa


45


50


55


1995 2000 2005 2010 2015 2020 2025 2030


Latin America and
the Caribbean


35


40


45


50


55


1995 2000 2005 2010 2015 2020 2025 2030


West Asia


45


50


55


1995 2000 2005 2010 2015 2020 2025 2030


East, South and South-East
Asia, excl. China and India


45


50


55


60


1995 2000 2005 2010 2015 2020 2025 2030


China


35


40


45


50


1995 2000 2005 2010 2015 2020 2025 2030


India




Trade and Development Report, 201342


very rapidchanges in incomedistributionand the
consequentexpansionofGDPgrowthmaygenerate
unsustainabletradedeficits.


employmentgrowthiscapturedintable1.A.1,
togetherwith the growth of private consumption
and investment.Faster growthof investment, and
hence employment, is expected as a result of the
growth- and development-enhancing assumptions
ofthesimulations,exceptinChinaandindia,where
investmentratesarealreadyveryhighandarebal-
ancing towards greater domestic consumption is
due.employmentcreation isbothaneffectof the
growthpatternsaswellasafactorforfastergrowth
ofconsumption.


Acriticalelementinthesimulationsisthecali-
brationofthefiscalstance.Asshownintable1.A.2,
robustgrowthofgovernmentspendingcanbemade
consistentwithimprovementsinthefiscalandcurrent
accountbalances.Subjecttothelimitationsoutlined
above,GDPgrowthhelps strengthen thefinancial
positionsofalldomesticsectors–privateandpublic.


The global configuration of imbalances pre-
sented in chartA of chart 1.A.3 shows amarked
reductionofexternalimbalancesinthescenarioin
whichall countriesprovideapolicy stimulus (i.e.
scenarioA).This resultsmainly from the greater
emphasisofsurpluscountriesondomesticdemand,
enhancedmarket access for developing countries,
andareformofinternationalfinancewhichreduces
theneedforcountriestoaccumulatelargeexternal
reserves.


Severallessonscanbedrawnfromtheoutcome
ofscenariob,inwhichdevelopedcountriesdonot
adoptmoresupportivepolicies.First,itshowsthat
itisworthwhilefordevelopingandtransitionecono-
miestoembarkoncoordinatedpoliciesthatstimulate
domesticdemand,evenifdevelopedcountriesdonot
pursuesimilarpolicies.


Second,itcanbeobservedthatdevelopedcoun-
triesmanage toachievea fastergrowthrate,even
ifmoremoderately, than in the baseline scenario.
Thisisdespitethefactthatgrowthofpublicspend-
ingisnegligibleandfunctionalincomedistribution
continuestodeteriorate.Theoutcomedoesnotcon-
tradictthepropositionsmadeinthisReport;rather,
itcorroboratesthepropositionthatsuchastrategy
couldyieldsomepartialgainsforsome,thoughnot


all, countries at the same time.Therewill be two
distinctiveapproaches,dependingontheprevailing
institutional structures. Somedeveloped countries
will continue to adopt an export-led strategy by
stressingwage compressionmeasures. in deficit
developedcountries,somedegreeofgrowthcould
besupportedbyreneweddebtaccumulationbythe
domestic sectors.These twosetsof countrieswill
influence the configuration of global imbalances
shown in chartbof chart 1.A.3.Greater external
imbalanceswill also affect developing countries,
thoughthesewillnotbeaslargeasinthebaseline
scenariobecausedevelopingcountriesareassumed
toagreeonregionalmechanismsoftradecooperation
(seetable1.A.2).


Third, as stressed above,more binding con-
straintsarisefordevelopingandemergingeconomies
intheimplementationandoutcomesofthepolicies
they aim to undertake.The new configuration of
external imbalances suggests that therewill be a
build-upofglobalinstabilitysimilartotheoneexpe-
riencedintherun-uptothefinancialcrisis.Moreover,
developedcountriesareassumedtorelymoreheavily
onmonetaryexpansionmechanismswithoutacom-
plementaryfiscalexpansionarystanceandwithout
sufficientlyrobustgrowthofdomesticemployment
(seetables1.A.1and1.A.2).Therisksoffinancial
spilloversonexchangeratesandcommoditymarkets
willhavesomeeffectonthemacro-financialdeci-
sionsofdevelopingcountries.insum,theexternal
environmentthatdevelopingcountrieswillfacewill
bemoreadverseinscenariobthaninthealternative
scenarioA,butwill bebetter than in thebaseline
scenarioowingtoenhancedregionalandSouth-South
cooperation.


in conclusion, a demand-driven coordinated
policyeffort(suchasinscenariosAandb)would
leadtosignificantlybetterglobaleconomicoutcomes
than those resulting from the baseline scenario in
whichcurrentpoliciesaremaintained.Additionally,
agreaterdegreeofinternationalcoordinationwould
deliverhighergrowthratesforGDPandemployment
inallcountriesandwouldreduceglobalimbalances
(scenarioA).butevenifdevelopedcountrieswere
toperseverewiththeircurrentpolicystance,devel-
opingcountriescouldstillimprovetheireconomic
performancebyprovidingacoordinatedeconomic
stimulus.Hence,encouragingregionalcooperation
andSouth-Southtradewouldneedtobeanimportant
componentoftheirdevelopmentstrategies.




Alternative Scenarios for the World Economy 43


Table 1.A.1


PRIVATE CONSUMPTION, PRIVATE INVESTMENT AND EMPLOyMENT GAINS
UNDER ThE TwO SCENARIOS, by REGION/GROUP,


ChINA AND INDIA, 2007–2030


Average annual growth of
private consumption


(Per cent)


Average annual growth of
private investment


(Per cent)


Employment gains
(Millions of jobs


created relative to the
baseline scenario)


2007–
2012


2013–
2018


2019–
2024


2025–
2030


2007–
2012


2013–
2018


2019–
2024


2025–
2030


2013–
2018


2019–
2024


2025–
2030


World Baseline 2.9 3.1 2.9 3.0 3.7 2.6 3.1 3.8 . . .
Scenario A . 4.7 5.8 6.2 . 3.5 5.8 6.4 36.6 85.9 101.8
Scenario B . 3.6 4.1 4.4 . 2.7 4.0 4.9 17.6 42.2 52.5


Developed economies Baseline 1.0 1.7 1.6 1.6 -2.2 1.9 2.4 2.8 . . .
Scenario A . 2.7 3.3 3.6 . 3.2 4.9 4.9 7.2 18.5 19.8
Scenario B . 1.7 2.0 2.3 . 2.1 3.3 4.2 0.5 2.5 3.9


CIS Baseline 4.4 1.8 2.3 2.7 7.4 1.5 1.0 2.6 . . .
Scenario A . 3.8 5.1 5.3 . 2.9 5.5 5.7 0.7 2.2 2.8
Scenario B . 2.5 3.5 3.8 . 2.0 3.1 4.0 0.3 1.0 1.4


Africa Baseline 5.2 3.5 3.0 3.0 7.0 4.4 2.9 3.3 . . .
Scenario A . 6.2 7.1 7.6 . 6.4 7.9 8.0 4.5 14.7 22.5
Scenario B . 4.5 4.8 5.2 . 5.1 5.5 5.9 2.5 8.5 13.2


Latin America and
the Caribbean


Baseline 4.0 3.0 2.7 2.7 5.0 1.7 2.2 3.2 . . .
Scenario A . 4.1 5.4 5.9 . 2.1 5.5 6.2 3.4 6.5 6.9
Scenario B . 3.3 3.7 3.9 . 1.5 3.3 4.2 1.9 3.6 3.4


West Asia Baseline 4.3 3.2 2.6 2.6 6.6 3.0 0.7 2.0 . . .
Scenario A . 5.6 6.1 5.9 . 3.9 5.9 6.3 1.5 4.8 6.3
Scenario B . 4.4 4.3 4.2 . 3.1 3.2 4.2 0.8 2.6 3.5


East, South and
South-East Asia,
excl. China and India


Baseline 5.1 3.9 3.0 2.9 6.5 5.4 1.6 2.4 . . .
Scenario A . 5.3 6.2 6.5 . 4.8 6.8 6.9 6.2 15.4 19.3
Scenario B . 4.3 4.1 4.2 . 5.2 3.5 4.1 3.8 9.7 12.0


China Baseline 8.8 8.9 7.1 6.1 11.8 3.4 5.1 5.3 . . .
Scenario A . 12.3 11.1 9.5 . 3.5 5.7 6.5 8.0 12.1 9.1
Scenario B . 10.8 9.3 7.8 . 3.1 4.9 5.5 4.7 7.3 6.3


India Baseline 7.8 5.2 4.8 4.7 8.4 2.2 2.2 3.7 . . .
Scenario A . 8.1 9.9 10.3 . 4.7 8.9 10.0 5.0 11.8 15.2
Scenario B . 6.5 7.2 7.3 . 2.9 5.1 6.5 3.0 7.2 8.8


Source: UNCTAD secretariat calculations, based on United Nations Global Policy Model.
Note: CIS includes Georgia.




Trade and Development Report, 201344


Table 1.A.2


PUbLIC SPENDING, NET PUbLIC LENDING AND CURRENT ACCOUNT bALANCE
UNDER ThE TwO SCENARIOS, by REGION/GROUP,


ChINA AND INDIA, 2007–2030


Average annual growth
of public spending


(Per cent)


Average annual net
public lending


(Per cent of GDP)
Current account balance


(Per cent of GDP)


2007–
2012


2013–
2018


2019–
2024


2025–
2030


2007–
2012


2013–
2018


2019–
2024


2025–
2030


2007–
2012


2013–
2018


2019–
2024


2025–
2030


World Baseline 3.6 2.1 2.3 2.8 -3.7 -3.6 -3.2 -3.0 - - - -
Scenario A . 4.0 5.7 6.2 . -2.7 -1.7 -1.7 - - - -
Scenario B . 3.1 3.7 4.3 . -3.5 -2.7 -2.4 - - - -


Developed economies Baseline 1.6 0.5 0.7 0.8 -5.6 -4.9 -3.7 -3.0 -0.5 -0.4 -1.3 -2.4
Scenario A . 1.2 3.0 3.5 . -3.7 -2.5 -2.5 . -0.4 -0.5 -0.8
Scenario B . 0.6 0.9 1.3 . -4.8 -3.2 -1.9 . -0.3 -0.5 -0.9


CIS Baseline 3.1 2.0 1.6 1.7 1.2 0.6 0.4 0.9 2.5 0.2 0.7 1.4
Scenario A . 3.0 4.9 5.4 . 1.1 0.9 0.2 . 0.7 0.6 0.5
Scenario B . 2.5 3.5 3.8 . 0.7 0.2 -0.1 . 0.3 0.3 0.5


Africa Baseline 7.2 1.6 1.2 2.2 -2.7 -4.3 -2.5 -1.1 -1.6 -4.3 -6.4 -5.8
Scenario A . 2.9 6.8 7.6 . -2.8 -1.0 -1.1 . -2.3 -1.5 -0.2
Scenario B . 2.2 4.2 5.0 . -3.7 -2.4 -2.0 . -3.6 -4.6 -4.0


Latin America and
the Caribbean


Baseline 5.8 2.2 1.8 2.3 -2.4 -3.6 -3.2 -2.6 -2.7 -3.5 -3.8 -3.4
Scenario A . 4.1 5.5 6.0 . -3.0 -2.4 -2.5 . -2.5 -0.7 0.1
Scenario B . 3.1 3.7 4.0 . -3.5 -3.4 -3.4 . -3.1 -2.6 -2.0


West Asia Baseline 5.0 3.0 1.8 2.8 4.7 0.5 -0.7 -0.1 7.9 2.4 0.8 2.0
Scenario A . 3.8 5.5 5.9 . 0.9 -0.7 -0.7 . 4.3 1.5 0.8
Scenario B . 3.3 3.9 4.5 . 0.5 -1.0 -1.0 . 3.3 0.8 0.8


East, South and
South-East Asia,
excl. China and India


Baseline 5.5 3.3 2.4 2.8 -2.8 -2.9 -3.2 -3.0 -1.6 -4.2 -4.5 -3.3
Scenario A . 8.5 7.1 6.8 . -2.8 -2.8 -2.9 . -2.2 -0.5 0.0
Scenario B . 6.2 4.8 4.7 . -3.0 -3.6 -3.8 . -3.7 -3.6 -2.9


China Baseline 9.0 7.1 7.3 6.6 -1.0 -0.2 -1.3 -2.5 4.8 6.8 8.4 8.3
Scenario A . 12.2 9.9 8.7 . -0.1 -0.0 -0.0 . 3.3 1.6 1.5
Scenario B . 10.4 8.8 7.8 . -0.3 -1.0 -1.5 . 4.6 3.9 3.6


India Baseline 9.7 4.9 4.7 4.9 -8.3 -9.6 -10.0 -10.1 -6.0 -4.8 -2.7 -1.9
Scenario A . 9.4 10.2 10.3 . -6.2 -3.1 -3.0 . -4.5 -1.8 -1.1
Scenario B . 7.4 7.6 7.7 . -7.9 -6.7 -6.9 . -4.7 -2.7 -2.2


Source: UNCTAD secretariat calculations, based on United Nations Global Policy Model.
Note: CIS includes Georgia.




Alternative Scenarios for the World Economy 45


Chart 1.A.3


globAl iMbAlAnCes undeR Two sCenARios, 1980–2030


(Per cent of world output)


Source: UNCTAD secretariat calculations, based on United Nations Global Policy Model.
Note: The shaded area shows the simulation period. Deficit and surplus classification was based on the average current account (CA)


position between 2004 and 2007. CIS includes Georgia.


-3


-2


-1


0


1


2


3


1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030


A. Scenario A


-3


-2


-1


0


1


2


3


1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030


B. Scenario B


Oil-exporting economies


CA deficit developing economiesCA surplus developing economies, excl. China
CA deficit developed economiesCA surplus developed economies China


CIS




Trade and Development Report, 201346


1 TheUNGlobalPolicyModelcanbeaccessedat:
http://www.un.org/en/development/desa/policy/
publications/ungpm/gpm_concepts_2010.pdf.The
versionused in thisReport–number5b– incor-
poratesemploymentandfunctionaldistributionof
incomeandtheirfeedbacksintothemacroandglobal
economy.Thefulltechnicaldescriptionofthemodel,
version 3, can be downloaded from: http://www.
un.org/en/development/desa/policy/publications/
ungpm/gpm_technicaldescription_main_2010.pdf.


2 These assumptions of no policy changes and the
absence of shocks fromnow to 2030 are clearly
unrealistic,butareconvenientinordertonetoutthe
impactofthepolicychangesanalysedintheother
twoscenarios.


3 TheGPMhastheabilitytoquantifyboththeintensity
ofuseofrawmaterialsintheproductionofdomestic
outputanddifferentiatedpatternsintheuseoffossil-
fuelandnon-fossil-fueltechnologies.


4 Theassumptionsdiscussedaboveimplyconsider-
ingtrade-offsandinteractionswithinandbetween
economies.Depending on how these trade-offs
aremanaged, different outcomesmay result. For
example,highergrowthtargetscouldbeachievedin
somedevelopingcountriesifothercountriesagree
towidertradepreferences.Similarly,somecountries
couldgrowfasterorslowerdependingonthelevels
ofexternaldeficitsandsurplusesthatcountriesare
preparedtotolerate.


Notes




Towards More Balanced Growth: A Greater Role for Domestic Demand in Development Strategies 47


Theglobaleconomyisstillstrugglingtorecover
from theGreatRecessionof 2008–2009 resulting
frombustsinthehousingandfinancialmarketsofthe
majordevelopedcountries.Theexaminationofthe
currentchallengesfortheglobaleconomyinchapteri
ofthisReportindicatesthatthesecountriesmayhave
alongwaytogotoachieveaself-sustainingrecovery.
Meanwhile,aprolongedperiodofslowgrowth in
thesecountrieswillmeancontinuedsluggishdemand
andthusslowergrowthintheirimportsfromdevelop-
ingandtransitioneconomiesbeyondtheshortterm.
Countercyclicalmacroeconomicpoliciesmight be
able to compensate for resultinggrowth shortfalls
forsometime,butwilleventuallyresultinfiscalor
balance-of-paymentsconstraintsunlesstheyarefol-
lowedbypoliciesthatadoptamorecomprehensive
andlongertermperspective.Thischapterdiscusses
possiblelongertermpolicyoptionstosupportrapid
andsustainedeconomicgrowthindevelopingand
transitioneconomies,withafocuson thecomple-
mentarityofexternalanddomesticdemand.


Priortotheonsetoftheeconomicandfinancial
crisis,buoyantconsumerdemandinsomedeveloped
economies,especiallytheUnitedStates,enabledthe
rapidgrowthofmanufacturedexportsfromindus-
trializing developing economies.The consequent


boost to these countries’ industrial development
andurbanization,inturn,providedopportunitiesfor
primarycommodityexportsfromotherdeveloping
countries.Theoverallexpansionary–thougheven-
tuallyunsustainable–natureofthesedevelopments
contributedtoaprolongedperiodofoutputgrowth
oftheworldeconomy,andseemedtovindicatemany
developingandtransitioneconomiesintheirdecision
toadoptanexport-orientedgrowthmodel.However,
their continued reliance on such a growthmodel
doesnotseemviableinthecurrentcontextofslow
growthindevelopedeconomies.Accordingly,those
developingandtransitioneconomies,andespecially
thelargeronesamongthem,mayneedtoconsider
apolicyshifttoamoredomestic-demand-oriented
growthmodel.


This chapter examines twomain questions:
(i)Whatdetermineswhetherdevelopingandtran-
sition economies should shift emphasis from an
export-orientedtoamoredomestic-demand-oriented
growth strategy? (ii)What policymeasures could
helpsmoothsuchatransitioningrowthstrategy?


Thechapterfirstdiscusses,insectionb,deter-
minantsofcountries’vulnerabilitytoexternaltrade
shocks. itemphasizes that thedecline inrealfinal


TOwARDS MORE bALANCED GROwTh:
A GREATER ROLE FOR DOMESTIC DEMAND


IN DEVELOPMENT STRATEGIES


Chapter II


A. Introduction




Trade and Development Report, 201348


expenditurewasthemainreasonforthecollapseof
internationaltradein2008–2009.Combinedwiththe
recognitionthatgrowthindevelopedcountries’final
expendituremayremainbelowpre-crisisratesfora
protractedperiodoftime,itarguesthat:(i)theeffects
ofthetradecollapseonmanufacturedexportsfrom
developingandtransitioneconomiesmaybeindica-
tiveofalessfavourableexternaltradeenvironment
forthesecountriesforanumberofyearstocome;
and(ii)possibleensuingslowerdemandgrowthin
thedevelopingandtransitioneconomies thathave
alargeproportionofmanufacturesintheirexports,
combinedwithweakgrowthindevelopedcountries,
mayalsoreducetheexportearningsofeconomies
thatrelymainlyonexportsofprimarycommodities.
in evaluating possible future developments in the
lattercountries’exportearnings,thissectionfurther
suggeststhatthiscoulddependtoalargeextenton
whethercommoditypricesareinaso-called“super-
cycle”,andifso,atwhatpointinthecycletheyare
currentlysituated.Whileeconomicactivityindevel-
opedcountriesclearlyhasadirectimpactonprimary
commodity price developments, its largest impact
maybeindirectandlinkedtoitseffectonthepace
ofindustrializationandurbanizationindeveloping
andtransitioneconomieswhosegrowthtrajectories
havebeensupportedbyexportsofmanufacturesto
developed-countrymarkets. SectionC focuses on
manufactures,andexamineswhichcategoriesmay
beparticularlyaffectedbyweakdemandgrowthin
developedcountries.


SectionD considers economic growth from
a demand-side perspective. it begins from the
main conclusion of the previous section, that the
scopeforaswitchtowardsamorebalancedgrowth
strategyisgreatestfor thosecountrieswhichhave
relied significantly on exports ofmanufactures
to developed countries. it then builds on an
examination(presentedintheannextothischapter)
ofwhatsuchaswitchfromanexport-orientedtoa
more domestic-demand-oriented growth strategy
would entail in economic terms. it discusses the
possible implications for countries’ balance of
paymentsandforproduct-specificdemandpatterns
resulting from an acceleration of expenditure in
the different components of domestic demand
(i.e. household consumption, investment and
governmentspending).Particularattentionisgiven
to household consumption expenditure,which is
byfarthelargestcomponentofdomesticdemand,
generally accounting for between half and three


quartersofaggregatedemand.Therefore,anincrease
inthiscomponentwouldappeartobeindispensable
forsustainedgrowthbasedonastrategythatplaces
greateremphasisondomesticdemand.Thesection
alsounderlinestheimportanceofbothgovernment
spending and, especially, investment for boosting
demandgrowth.This isparticularlytrueformany
countries inlatinAmerica,where,despiteamore
rapidpaceofgrossfixedcapitalformationstarting
intheearly2000s,theshareofinvestmentingross
domesticproduct(GDP)hasremainedrelativelylow
andconstrainstheirpotentialgrowth.butitisalso
true for other developing countries, especially in
eastAsia,whereinvestmentisrequiredinorderto
switchdomesticsupplycapacitiestomeetchanging
demandpatternsthataredrivenbyrisinghousehold
consumptionexpenditure.


The following are themain findings of this
section. First, amore balanced growth strategy
withalargerrolefordomesticdemandneedstobe
basedonthecreationofdomesticpurchasingpower
through additional employment andwage-earning
opportunities. Second, it is necessary tomanage
domesticdemandexpansiontopreventanexcessive
increaseindemandforimportsarisingfromaswitch
in growth strategy, which, coupledwith lower
export growth,might cause a deterioration in the
tradebalance.Third,nurturingtheinterrelationship
between household consumption and investment
will be of crucial importance in a shift towards a
more balancedgrowth strategy. investment needs
to be increased, not only to create the jobs and
incomesnecessaryforsustainedgrowthofhousehold
consumptionexpenditure,butalsotoenablechanges
inthesectoralcompositionofdomesticproduction
sothatitrespondstosalesopportunitiesarisingfrom
newdemandsbydomesticconsumers.Thelatteris
trueespeciallyfor largecountries,while forsmall
countries an increase in regional andSouth-South
tradeislikelytobeofparticularimportance.


Sectionediscussesthepolicyimplicationsof
thesefindingsatboththenationalandinternational
levels to help smoothen the transition from one
growth strategy to another. it emphasizes that the
major policy challenges facing developing and
transitioneconomiesdiffersignificantlyfromthose
facingthedevelopedeconomies.Thelatterstillneed
tofocusonconsolidatingtheirweakenedfinancial
systemsandondemandmanagementinaneffortto
returntoapathofsustainedeconomicgrowth,high




Towards More Balanced Growth: A Greater Role for Domestic Demand in Development Strategies 49


levelsofemploymentand sociallyacceptabledis-
tributionaloutcomes.Succeedinginthistaskwould
alsohaveglobalbenefits.itwouldmaintain,andeven
enlarge,thekindofexportopportunitiesthatunder-
pinnedmuchofthesuccessfulgrowthofdeveloping
andtransitioneconomiesduringthepre-crisisperiod.
However,suchanoutcomeisunlikelytooccurfor
several years to comebecause, to a large extent,
exportsofdevelopingand transitioneconomies to
developed-countrymarketsduringthedecadebefore
theonsetoftheGreatRecessionreliedonunsustain-
ablepolicystancesinthedevelopedcountries.


itisclearthatdevelopingandtransitioneconomies
shouldnotneglectdemandmanagement;rather,they
shouldmaintainpoliciesaimedatbothstrengthening
growth and employment creation and at reducing
domesticandexternalvulnerabilities.Nevertheless,
the policy stance of developing countries needs
to adapt to an external economic environment
characterizedbyslowrecoveryandweakgrowthin
developedeconomies.Suchadaptationimpliesthe
need foragradual shift in the relative importance
of external sources of growth towards a greater
emphasisondomesticsources.


Countriesexportingprimarycommoditiesare
generally believed to be particularly sensitive to
changesintheglobaleconomicenvironmentfortwo
reasons.one reason relates to commodity prices,
whichexperiencefrequentandoftensharpfluctua-
tions.Anotherconcernsvolumes,andthefactthatthe
incomeelasticityofdemandforprimarycommod-
itiesislowerthanthatformanufactures.Thismeans
thatdemandprospectsforexportersofmanufactures
tendtobemorefavourablethanthoseforexporters
ofprimarycommoditiesasworldincomerises.This
sectionexaminesthepriceandvolumeeffectsofthe
collapseofglobaltradein2008–2009andprospects
forthefuturegrowthofdemandforprimarycom-
moditiesandmanufacturesrespectively.


1. Volume and price components
of external trade shocks


Greater trade openness has helped promote
economic growth in a number of countries, but,
increasingly,ithasalsobecomeaprimarychannel
for the transmissionofexternalshocks.economic


downturnsindevelopedcountriescausesharpcon-
tractions in global demand and reduce the export
opportunitiesofdevelopingcountries.Thiscanresult
inanexternaltradeshockfordevelopingcountries,
reflected in a decline in their export volumes and
changesintheirtermsoftrade(i.e.thechangeina
country’saverageexportpricerelativetoitsimport
price).Theimpactofsuchexternaltradeshocksvaries
considerablyacrossregionsandindividualcountries,
dependingontheirpatternofexportspecialization.


The collapse ofworld trade in 2008–2009
caused a deterioration in the terms of trade of
countrieswhose exports are heavily concentrated
inenergy,andcountries thatexportmainlymanu-
facturedgoodsexperiencednegativevolumeeffects
(chart 2.1).1Terms of trade and volume changes
were equally important in countrieswhich export
predominantlymineralsandmetals,asincountries
whoseexportsareeitherdiversifiedorconcentrated
inagriculturalproducts.


Theremainderofthissectionexaminesissues
related to changes in the prices of primary com-
modities before turning to demand prospects for
manufacturedexportsfromdevelopingcountries.


b. Global trade shocks and long-term trends:
terms-of-trade and volume effects




Trade and Development Report, 201350


2. Recent movements in
the terms of trade


Pricemovements of internationally traded
goods affect an individual country’s gains from
internationaltrade,oritstermsoftrade.Theextent
ofgainsorlossesresultingfromchangesintheterms
oftradedependsonthecompositionofthecountry’s
tradebasketandtherelativeimportanceofforeign
tradeinitsgrossdomesticproduct(GDP).Primary
commodity production and exports are generally
believedtoofferlimitedopportunitiesforeconomic
growthanddevelopmentmainlybecauseofalong-
runningdeteriorationinthetermsoftradeofprimary
commoditiesversusmanufactures (i.e.adeclining
trendinthepricesofprimarycommoditiesvis-à-vis
thoseofmanufactures)(chart2.2).otherdimensions
of the “commodity problem” relate to high price
volatilityandtheconcentrationofmarketstructures


that limits the share of thefinal price accruing to
producers.


Sincetheturnofthemillenniumtherehasbeen
asignificantimprovementinthetermsoftradefor
commodityexportersvis-à-visexportersofmanufac-
tures,whichhasalsocontributedtofastereconomic
growth in commodity-exporting countries. The
commoditypriceboomovertheperiod2002–2008
andanotherrapidreboundfollowingasharpprice
declinein2008–2009(seechart1.2andtable1.3in
chapteri)reflectachangeinthecommodityprice
trend,at least temporarily, fromdecliningtowards
risingprices;buttheyalsoreflectadeclineinworld
pricesofcertain,especiallylabour-intensive,manu-
factures.Thisturnaroundisrelatedtotwostructural
changesininternationaltradeinwhichdeveloping
countrieshaveplayedamajorrole:first,anumberof
developingcountries,notablyChina,haveemerged
asmajorconsumersandimportersofcommodities;


Chart 2.1


The globAl TRAde CollApse oF 2008–2009:
MOST AFFECTED ECONOMIES, by ExPORT SPECIALIzATION


(Trade shocks as a percentage of GDP)


Source: UN-DESA, 2009.


-35 -30 -25 -20 -15 -10 -5 0 5


Brunei Darussalam


Bahrain


Iraq


Gabon


Saudi Arabia


Trinidad and Tobago


Kuwait


Oman


Qatar


Algeria


Volume effectPrice effect


Singapore


Hong Kong (China)


Malaysia


Viet Nam


Taiwan Province of China


Cambodia


Thailand


Mexico


China


Tunisia


A. Economies in which energy accounts for
more than 40 per cent of exports


B. Economies in which manufactures account for
more than 40 per cent of exports


-35 -30 -25 -20 -15 -10 -5 0 5




Towards More Balanced Growth: A Greater Role for Domestic Demand in Development Strategies 51


andsecond,manufacturesnowaccountforasizeable
shareofsomedevelopingcountries’exportbaskets.


Terms-of-trade trends for different groups
of developing countries have tended to diverge
(chart2.3),dependingon thecompositionof their
respective exports and imports.Those developing
countrieswhoseoilandmineralandminingprod-
ucts account for a sizeable share of total exports
experiencedthelargestgainsfromhighercommod-
ity prices vis-à-vismanufactures since the early
2000s.oilexporterssawtheirtermsoftrademore
than double in the past decade, implying that the
pricesoftheirexportsgrewmorethantwiceasfast
asthepricesoftheirimports.Mirroringthesetrends
bygeographicalarea, thecountrygroups that saw
thelargestterms-of-tradegainswerethetransition
economies,AfricaandWestAsia.Similarly,latin
Americaregisteredsignificantterms-of-tradegains,
althoughmoremoderate because of a relatively
morediversifiedtradestructure.Thetermsoftrade


ofexportersofagriculturalcommoditiesshoweda
slightlyrisingtrend,reflectingbothdissimilarprice
developments for different agricultural products
(i.e. tropical beverages, food and agricultural raw
materials)andthedifferentweightsoffoodandfuel
importsintheirimportbaskets.ontheotherhand,
developing countries that aremajor exporters of
manufactures,mainlythoseineastandSouthAsia,
haveexperiencedterms-of-tradelossessince2000.2


in2010and2011,thetermsoftradeofcommod-
ityexporters recovered from thecommodityprice
slumpof2009inwhatappearedtobeacontinuation
oftherisingtrendsincetheearly2000s(chart2.3A).
However, in2012 their termsof tradestalledasa
resultofadeclineofcommoditypricesfromtheir
peaks in 2011 (see discussion about recent com-
moditypricedevelopments inchapter i).Whether
thisrepresentsjustapauseorareversaloftherising
trendintheirtermsoftradeduringthe2000sisthe
focusofthenextsection.


Chart 2.2


TRENDS IN ThE TERMS OF TRADE, SELECTED PRIMARy COMMODITy GROUPS
veRsus MAnuFACTuRes, 1865–2009


(Index numbers, 1970–1979 = 100)


Source: Ocampo and Parra, 2010.


0


50


100


150


200


250


300


1865 1890 1915 1940 1965 1990


Tropical agricultural


Non-tropical agricultural


2009
0


50


100


150


200


250


300


1865 1890 1915 1940 1965 1990 2009


A. Agricultural commodities versus manufactures B. Metals versus manufactures




Trade and Development Report, 201352


3. Factors affecting commodity prices:
is a supercycle petering out?


Commoditypricesareinfluencedbyacomplex
interactionofmultiplefactors,whichcanspandif-
ferenttimeperiodsandcanaffectthevolatilityand/
orthetrendlevelofthoseprices.Commodityprice
developmentsaredeterminedbythefundamentalsof
physicalsupplyanddemandofcommodities,aswell
asbythegreaterparticipationoffinancialinvestorsin
primarycommoditymarkets,becausecommodities
areincreasinglyconsideredafinancialasset.Another
factorinfluencingcommodityprices,whicharenor-
mallydenominated inUnitedStatesdollars, is the
evolutionoftheexchangerateofthedollar.Thereare
alsosomefactorsspecifictoaparticularcommodity
market,whileothersaffectallprimarycommodities.
Furthermore, it is not onlymarket-related factors,
butalsoeconomicpolicyandpoliticalaspectsthat
matter. For example, geopolitics can have a very
significantinfluenceontheevolutionofoilprices.
While a precisemeasurement of the influence of
eachindividualfactoronthedynamicsofcommodity


pricesisfraughtwithdifficulties,especiallyforprice
forecasting,theobjectiveofthissectionistoprovide
abroadassessmentofthelikelytrendofcommodity
pricesoverthenextoneortwodecades.


During the past decade, commoditymarkets
haveexperiencedsubstantialstructuralchanges.one
suchchangeistheincreasingpresenceoffinancial
investorsincommoditymarkets(seealsoTDR 2009,
chap.ii;TDR 2011,chap.V).Financialinvestments
haveasignificantimpactonpricevolatilityandmay
causeextremepricechangesintheshortterm;for
instance, thecommodityprice surges in2007and
thefirsthalfof2008weremostprobablylinkedtoa
speculativebubble,whichburstwiththecollapseof
pricesinthesecondhalfof2008followingtheonset
oftheglobalfinancialcrisis.Asecondmajorstruc-
turalchange,associatedwiththeunderlyingphysical
marketfundamentals,istheincreasingdemandfor
commodities in rapidlygrowingdevelopingcoun-
tries,notablyChina.


The latter factor,which is themain focus of
thissection,hasmoreofaninfluenceonthelonger


Chart 2.3


NET bARTER TERMS OF TRADE, 2000–2012
(Index numbers, 2000 = 100)


Source: UNCTAD secretariat calculations, based on UNCTADstat.
Note: Data for export structure refer to developing and transition economies.


60


80


100


120


140


160


180


200


220


240


2000 2002 2004 2006 2008 2010 2012


A. By export structure


Oil exporters


Exporters of minerals and mining products


Exporters of agricultural products


Exporters of manufactures


60


80


100


120


140


160


180


200


220


240


2000 2002 2004 2006 2008 2010 2012


B. By region and economic group


Africa
Latin America and the Caribbean
East and South Asia
West Asia
Transition economies
Developed economies




Towards More Balanced Growth: A Greater Role for Domestic Demand in Development Strategies 53


term trend of commodity prices.on the demand
side, it has underpinned the sustained increase in
commodityprices since2003 thatwas interrupted
onlyin2008–2009byasharpfallinpricesfollow-
ingtheeruptionoftheglobalfinancialcrisis.onthe
supplyside,thehistoricallylowpricelevelsofthe
1990s led to a longperiodof underinvestment in
productioncapacity.Asaresult,andduetoincreasing
productionconstraints,supplywasslowtoreactto
risingdemand.Consequently,withstocksgenerally
declining, the trendwas forprices to significantly
increase.The tight structural supply and demand
balancesofmanycommoditiesalsopavedtheway
forotherfactorsfromthefinancialsectorandpolicy
sidetoleadtoexcessivepricevolatility.


Someobservershave identifiedthecommod-
itypricesurgebetween2002and2011–2012asthe
expansionary phase of a commodity “supercycle”
–i.e.atrendriseinthepricesofabroadrangeof
commoditieswhichmaylasttwodecadesormore.it
isassociatedwithrisingdemandinamajorcountry
orgroupsofcountriesresultingfromtheirprocess
of industrialization andurbanization (Heap, 2005;
Standard Chartered, 2010; erten andocampo,
2012;Farooki andKaplinsky, 2012).3The current
supercyclehasbeencharacterizedbyrapideconomic
growth,industrializationandurbanizationinarange
of developing countries, amongwhichChina has
playedaparticularlystrongrolebecauseofthelarge
sizeofitseconomy.economicgrowthinChinahas
been extremely natural-resource-intensive, partly
drivenbyhigh levels of investment, especially in
infrastructure and construction, and by the rapid
growthofmanufacturing,whichgenerallydemands
morerawmaterialsandenergythangrowthinthe
services and agricultural sectors. Consequently,
Chinahasbecometheworld’sleadingconsumerof
many primary commodities, accounting formore
than40percentofglobalconsumptionofseveral
commodities(table2.1).Atthesametime,itisalso
amajorproducerofanumberofcommodities.but
whileChinesecommodityproductionincreaseddur-
ingthefirstdecadeofthe2000s,thiswasnotalways
sufficient tomeet the rising demand.As a result,
Chinahasbecomeamajorimporterofsomecom-
modities(eClAC,2012:boxii.3),notablyironore
andsoybeans.indeed,itaccountsforabout60per
centoftotalworldimportsofboththesecommod-
ities.Chinaisalsoamajorimporterofothermetals
suchascopperandnickel,andofagriculturalraw
materialssuchascottonandnaturalrubber.Demand


forcommoditiesstronglyincreasedinotherrapidly
growingdevelopingcountriesaswell,buttoamuch
lesserextent(table2.1).Andindevelopedcountries,
demand for some commodities declined between
2002and2012.


The increasing roleofChinaonglobal com-
moditymarketsisduenotonlytothelargesizeof
itseconomybutalsotothenatureofitsgrowth.itis
forthisreasonthattherecentslowdowninChinese
growthaswellasitsprocessofgrowthrebalancing,
involving less relianceon exports and investment
andgreatereffortstopromotedomesticconsumption,
havereignitedthedebateonwhethertheexpansion-
ary phase of the commodity supercyclemight be
comingtoanend.Theloweraverageannualcom-
moditypricesof2012comparedwiththoseof2011
couldbeconsideredanindicationofsuchapossibil-
ity.Certainly,priceswillstoprisingatsomepoint
assupplyanddemandadjust;eventually theywill
reachanupperlimitwhereupontherewillbedemand
destruction,substitutionandtechnologicaladvances
insearchofgreaterefficiencyofuse,and/orincreases
insupplyasaresponsetohighprices.However,the
questionthatremainsunresolvediswhethersucha
turningpointhasbeenreachedorwhethertheexpan-
sionaryphaseof thesupercyclestillhasanumber
ofyearstorun.ifindeedtheturningpointhasbeen
reached,anadditionalquestioniswhethercommod-
itypriceswillplungeinadescendentphaseofthe
supercycle,orwhethertheywillremainatrelatively
highlevels.inthelatterscenario,theriseincommod-
itypricesshouldbeseenmoreasanupwardshiftthan
astheexpansionaryphaseofthecycle.


Historical evidence shows that price trends
havebeencloselyrelatedtotheevolutionofglobal
economicactivityandaggregatedemand,particularly
formetals(ertenandocampo,2012).episodesof
risingpriceshavenormallyendedinpricecollapses
whendemandhasfallenasaresultofadeceleration
ofglobalgrowthorarecession.Asimilaroutcome
couldbe expected in the current context if global
economicgrowthremainsweakduetoslowgrowth
or stagnation in developed economies.However,
theanalysisofcommodityconsumptionintable2.1
clearlyshowsthattheriseincommoditypricesinthe
2000swasstronglydeterminedbydevelopmentsin
developingcountries.itisthereforethegrowthout-
lookforthesecountriesthatmattersmostforfuture
commoditydemandtrends.inparticular,thisimplies
thatifChinaweretocontinuetodependonitsexports




Trade and Development Report, 201354


Table 2.1


CONSUMPTION OF SELECTED COMMODITIES, by REGION AND ECONOMIC GROUP, 2002–2012
(Per cent)


A. Consumption growth between 2002 and 2012


China


Other Asia
and Oceania,
developing Africa


Latin America
and the


Caribbean
Transition
economies


Developed
economies


World
total


Aluminium 392.7 105.2 101.8 54.6 -13.0 -4.4 78.5
Copper 223.0 12.6 70.2 32.4 88.3 -23.4 35.8
Nickel 894.1 -2.5 -9.1 -14.6 -4.8 -22.0 48.0
Cotton 24.4 31.4 -21.4 3.1 -13.6 -67.6 9.6
Corn 66.4 40.8 50.4 42.7 48.2 24.5 39.6
Meat, swine 26.6 31.3 99.2 38.7 34.4 -0.5 17.8
Rice 6.1 18.0 61.2 9.1 14.2 5.3 15.0
Wheat 16.9 19.4 42.6 14.9 -2.4 4.2 13.0
Soybeans 117.7 60.8 109.8 37.8 272.6 -12.7 36.5
Oil 95.4 33.9 36.3 25.2 18.8 -8.1 13.5


b. Contribution to global consumption growth between 2002 and 2012


China


Other Asia
and Oceania,
developing Africa


Latin America
and the


Caribbean
Transition
economies


Developed
economies


World
total


Aluminium 81.1 18.4 1.8 2.8 -0.7 -3.4 100
Copper 113.4 6.9 1.9 4.8 7.4 -34.5 100
Nickel 132.3 -1.0 -0.6 -0.7 -0.3 -29.7 100
Cotton 74.9 135.4 -6.5 2.5 -5.0 -101.2 100
Corn 33.7 10.4 10.0 14.2 3.2 28.5 100
Meat, swine 69.8 10.3 1.5 11.2 8.3 -1.0 100
Rice 13.6 64.6 17.6 2.5 0.3 1.4 100
Wheat 22.6 40.9 23.4 6.0 -2.4 9.5 100
Soybeans 59.6 13.3 2.3 34.3 4.2 -13.6 100
Oil 48.2 53.1 9.1 16.2 6.9 -33.4 100


C. Share in global consumption


China


Other Asia
and Oceania,
developing Africa


Latin America
and the


Caribbean
Transition
economies


Developed
economies


2002 2012 2002 2012 2002 2012 2002 2012 2002 2012 2002 2012


Aluminium 16.2 44.8 13.7 15.8 1.4 1.6 4.0 3.5 4.4 2.2 60.2 32.3
Copper 18.2 43.3 19.8 16.4 1.0 1.2 5.2 5.1 3.0 4.2 52.7 29.8
Nickel 7.1 47.7 19.8 13.1 3.1 1.9 2.3 1.3 3.0 1.9 64.7 34.1
Cotton 29.7 33.6 41.6 49.8 2.9 2.1 7.8 7.4 3.6 2.8 14.4 4.3
Corn 20.1 23.9 10.1 10.2 7.9 8.5 13.2 13.5 2.6 2.8 46.1 41.1
Meat, swine 46.5 50.0 5.8 6.5 0.3 0.5 5.1 6.0 4.3 4.9 37.9 32.0
Rice 33.4 30.8 53.9 55.3 4.3 6.1 4.2 3.9 0.3 0.3 3.9 3.5
Wheat 17.5 18.0 27.5 29.1 7.2 9.1 5.2 5.3 12.9 11.1 29.7 27.4
Soybeans 18.5 29.5 8.0 9.4 0.7 1.2 33.1 33.4 0.6 1.5 39.1 25.0
Oil 6.8 11.7 21.1 24.9 3.4 4.0 8.7 9.6 4.9 5.1 55.2 44.7


Source: UNCTAD secretariat calculations, based on World Bureau of Metal Statistics Yearbook 2013; BP Statistical Review of World
Energy 2013; and United States Department of Agriculture (USDA), Production, Supply and Distribution online database.




Towards More Balanced Growth: A Greater Role for Domestic Demand in Development Strategies 55


forgrowth,itisverylikelytoexperienceafurther
decelerationofgrowthasaresultoflowerexportsto
developedcountries.Thiscouldinturnhaveastrong
negativeimpactoncommodityprices.However,if
China succeeds in rebalancing its growth through
anincreaseindomesticconsumption,prospectsfor
commoditydemandandpriceswillbebetter.


Favourable demand conditionswould also
dependonthecapacityofotherhighlypopulatedand
rapidlygrowingdevelopingcountriestomovetoa
morecommodity-intensivephaseofeconomicgrowth
and industrialization.This again should be based
on the development of domesticmarkets in large
developing countries such as india and indonesia.
indeed, the share of the economies that are at the
commodity-intensivestageofdevelopmentdoubled
duringthefirstdecadeofthe2000s,andnowrepre-
sentsabout44percentoftotalGDP(bloxham,Keen
andHartigan,2012).Thefollowingsubsectiontakes
acloserlookatthemaindriversofdemandinrapidly
growingdevelopingcountries,thepotentialsupply
responseandtheprospectsforcommodityprices.


(a) Forces driving demand for commodities in
rapidly growing developing countries


(i) Population and income growth and rising
demand for food


Demand for fooddependsonpopulationand
incomegrowth.Theworld’spopulationincreasedby
aboutonebillionbetween1999and2012,toreach
a total ofmore than7 billionpeople.Developing
countriesaccountedfor95percentofthispopulation
increase, ofwhichChina and india alone contrib-
utedaboutonethird.Althoughpopulationgrowthis
expectedtoslowdownoverthenextdecade,globally
itisprojectedtoincreasebyabout600millionupto
2020.Developingcountrieswillcontinuetoaccount
forthebulkoftheincreaseintheglobalpopulation,
thoughthiswillvarybyregion.Thecontributionof
developingcountriesinAsiatopopulationgrowthis
expectedtodecreasefrom58.6percentin1999–2012
to51.2percentin2012–2020.China’scontribution
issettofallfrom11.5percentto5.7percent,while
thatofindiashouldremainstableatabout22percent.
Africa’s contribution is expected to increase from
27.6percentto34.4percentoverthesameperiod,
whilethatoflatinAmericaislikelytoremainstable
ataround8percent(UNCTADstat).4Thegrowing


populationimpliesagreaterdemandforfood,espe-
ciallybecausetheshareoffoodintotalhousehold
expendituresishigherindevelopingcountriesthan
indevelopedcountries.Thiswillrequireanincrease
infoodproduction.


Demand for specific food items is strongly
determined by the evolution of incomes and liv-
ingstandards.At low levelsofpercapita income,
income growthmainly translates into increased
calorie intake,and it isprimarily theconsumption
ofstaplefoodssuchasriceandwheatthatwillrise.
Furtherincomegrowthistypicallyassociatedwith
ashiftindietaryconsumptionpatterns.Consumers
demandfoodwithhighernutrientandproteincontent,
includingmeatanddairyproductsandfruitandveg-
etables(TDR 2005,chap.ii).AccordingtotheFood
andAgricultureorganizationoftheUnitedNations
(FAo,2012a:17),betweentheearly1990sandthe
endofthepastdecade,thesharesofcereals,rootsand
tubersdeclinedsignificantlyworldwide,whereasthe
sharesoffruitandvegetablesandanimalproducts,
includingfish,increased.However,theevolutionof
dietarychangesdivergedamongregions.Theshare
of cereals increased inAfricawhile it declined in
Asia.bycontrasttheshareofmeatwassignificantly
higherinAsiaandlatinAmerica.inChina,during
the period 2000–2010, total expenditure on food
items continued to increase but its share in total
livingexpenditurecontinuedtodecline.Percapita
consumptionofstaplefoods,mainlyriceandwheat,
followedadecliningtrend,whilethatofhighervalue
foods,especiallyfoodsofanimalorigin,increased
(Zhouetal.,2012).


Unlikeforothercommodities,thedirectimpact
ofdemandforcerealsinChinaonglobaldemandand
importsofcerealsislikelytohavebeenmodest,par-
ticularlyforrice(table2.1).Apartfromthedeclinein
percapitacerealconsumption,Chinaandindiahave
beenpursuingapolicyofself-sufficiency.Therefore
theirinfluenceonglobalmarketshasbeenlimited.
However,theincreaseinChinesegrainimportssince
2010, as reported inUNComtrade statistics,may
indicate that the country’s self-sufficiency policy
isreachingits limits.5Themostsignificantimpact
ofChinaonglobalfooddemandisinsoybeans,as
bothChineseconsumptionandimportsofthiscom-
modity have increased significantly over the past
decade.Demandforsoybeansusedasanimalfeed
increasedas a result of highermeat consumption.
Demand formeat inChina increased by 27.3 per




Trade and Development Report, 201356


centbetween2002and2010,sothattwiceasmuch
meatisconsumedinChinaasintheUnitedStates.
overthesameperiod, theconsumptionofmilkin
india increased by 43.7 per cent (brown, 2012).
Higherdemandforanimalproductsexertsincreased
pressureontheproductionoffeedstock.Whilethe
amountofgrainfedtoanimalsdependsonfarming
techniquesandtheefficiencywithwhichvariousani-
malsconvertgrainintoprotein,whichvarieswidely,
ittakesseveralkilosofgraintoproduceonekiloof
meat.Generally,thesetrendsarelikelytocontinue
overthenextdecade.Furthermore,theUnitedStates
DepartmentofAgriculture(USDA,2013)projectsa
steadyriseinChina’simportsofcorn.


(ii) Intensity of commodity use in the
industrialization process


China’sgrowthprocessduringthepastdecade
has been characterized by a high and increasing
intensityofuseofcommodities,particularlymetals
(i.e.agrowingvolumeofmetalsconsumedperunit
ofoutput).Thisistypicalofastageofrapidindustri-
alization,whereinmetalsareincreasinglyrequiredas
inputforgrowingmanufacturingactivities,including
theproductionofconsumerdurablestomeetrising
demand, and for the construction of housing and
physicalinfrastructure.Atacertainpoint,thisinten-
sityofuseshouldstarttodecelerateastheservices
sector grows in importance and contributes to an
increasingshareoftheeconomy.Thus,intensityof
usetendstofollowaninvertedU-shapedpatternas
percapitaincomerises:itfirstrisesastheeconomy
movesfromagriculturaltomanufacturingactivities
andthenfallswithanincreasedparticipationofser-
vices(TDR 2005,chap.ii).


itmaywellbethattheintensityofuseofsome
metalsinChinaisclosetoreaching,orhasalready
reached,itspeak,andthereforeshouldbeexpectedto
slowdowninthenextfewyears,asarguedbysome
observers (e.g.Nomura, 2012).However,China’s
percapitaconsumptionofmetals isrelativelylow
(Farooki andKaplinsky, 2012).This implies that
metal consumption could remain robust, although
itmightgrowataslowerpace.Moreover,although
China’sGDPgrowth isexpected toslowdown, it
could continue to have a considerable impact on
globalmarkets, given the size of this economy.
Givenitshighratesofgrowthoverthepastdecade,
thesizeoftheChineseeconomyin2012wasmuch
largerthanitwasintheearlyyearsofthecommodity


boom.Therefore,evenataGDPgrowthrateof7or
8 per cent,Chinamight have a similar impact on
commoditymarketsasitdidinpreviousyearswhen
itgrewataround10percent(seealsoCbA,2012).


Amajorreasonfortheincreasingintensityof
metaluseinChinaisthatitsrapidindustrialization
andgrowth,alongwithurbanization,havebeensup-
portedbyrisingratesofinvestmentinfixedcapital,
particularlyininfrastructureandconstruction.These
highrateshavegivenrise tosomeconcernsabout
the possibility of reaching overcapacity and the
emergenceofbubbles,forexampleintherealestate
sector.However,itisworthnotingthatitisnotonly
the rate of investment, but also the stockoffixed
capitalpercapita,thatcountsinassessingwhether
investmentmaybeexcessive.Someobserversargue
that thestockofcapital inChina isstill relatively
small(Aglietta,2012).Thus,theintensityofmetal
useislikelytoremainhigh,eventhoughthegrowth
rebalancingprocessmayresultinanadjustmentofthe
investmentrate.Moreover,astherebalancingprocess
willnotbeaccomplishedovernight,eventualchanges
incommoditydemandarelikelytobegradual.


inaddition,onbalance,anypotentialnegative
impactofthegrowthrebalancingprocessinChinaon
globalcommoditydemandwilllargelydependonthe
extenttowhichdemandfromotherrapidlygrowing
developing countries rises.Anumber of countries
which so far have exhibited a lower intensity of
useofmetals thanChinacouldmove toagrowth
phase involving theirmore intensive use. if large
andhighlypopulated countries, suchas india and
indonesia,weretofollowChina’sindustrialization
pathofthelastdecade,prospectsforthedemandfor
metalscouldremainrobust.Asitisunlikelythatthis
demandwillbebasedonexportstodevelopedcoun-
triestothesameextentashasbeenthecaseinChina
overthepasttwodecades,muchwilldependagain
ontheexpansionofdomesticdemandindeveloping
countries.overall,infrastructureneedsremainhigh
inChinaaswellasinotherrapidlygrowingdevelop-
ingcountries,apointthatisbrieflydiscussedinthe
nextsubsection.


(iii) Urbanization and infrastructure needs


Structuralchangeandindustrializationprocesses
runparalleltothatofurbanization,asthelabourforce
moves from the agricultural to themanufacturing
sectorandthusfromruralareastocities.According




Towards More Balanced Growth: A Greater Role for Domestic Demand in Development Strategies 57


to estimates by theUnitedNations (UN-DeSA,
2012),theshareoftheurbanpopulationinthetotal
populationinChinarosefrom35.9percentin2000
to49.2percentin2010,anditisexpectedtoreach
55.6percentin2015and61percentin2020.This
isstillfarbelowtheurbanizationratesindeveloped
countries,which are projected to increase from
about75percentintheperiod2001–2010toaround
80percentin2020.AccordingtoAglietta(2012),
400millionpeoplelivingintheruralareasinChina
areexpectedtomovetothecitiesbetween2012and
2030.Furthermore,200newcitiesofbetween1and
5million inhabitants are expected to be built to
developthecentralandwesternareasofthecountry.
However,thisprocesswillneedstrategicplanning
to be sustainable.The announced speeding up of
reformofthehukou(householdregistration)system
should help advance the urbanization process.6 in
addition to the construction of housing and other
buildings,itinvolvesthedevelopmentoftransport
infrastructure,notonlywithinthecitiesbutalsoto
linkdifferentcities,aswellasothertypesofservices
infrastructure needed for the provision of energy
andcommunications.berkelmansandWang(2012)
expectChinese residential construction to remain
robustforthenextcoupleofdecades.infrastructure
needs are also likely to remain high, extending
beyondtheprojectslaunchedwiththefiscalstimulus
ofSeptember2012.


in other developing countries the process of
urbanizationcanalsobeexpectedtocontinuerapidly.
Therateofurbanizationindevelopingcountriesin
Asiagrewfrom35.5percentin2000to42.6percent
in2010,andisprojectedtoreach49.1in2020.in
Africa,therespectiveratesofurbanizationforthese
yearsare35.5,39.1and43.1percent.Urbanization
ratesinlatinAmericaaremuchhigher,atlevelsclose
tothoseofdevelopedcountries.Thusthereisstrong
potentialforanincreaseindemandforcommodities
bymanydevelopingcountriesinordertomeetthe
development needs associatedwith urbanization,
particularlyforinfrastructuredevelopment(lawson
andDragusanu,2008).


(iv) Increasing demand for energy and
the fuel-food linkage


Asnotedabove,economicgrowthandindus-
trializationinrapidlygrowingdevelopingcountries
areenergyintensive.increasingenergyuseisalso
associatedwith rising living standards.China, for


instance, became the biggest energy consumer in
theworldin2010,withitsshareinglobalprimary
energyconsumptionrisingfrom8percentin1990
to20percentin2010(Coatesandluu,2012).Coal
is itsmainenergysource,but theshareofcoal in
China’s total energy consumption is expected to
declinewithashifttocleanerenergysources.inthe
mediumterm,oilislikelytoremainthemainenergy
sourcefortransportation.indeed,demandforoilfor
transportationwill continue to increase inparallel
with rising demand for automobiles inChina and
otherdevelopingcountries.WhiletheshareofChina
inglobaloilconsumptionandimportsisnotashigh
asforothercommodities,itaccountsforalargeshare
inthegrowthofglobaldemandforoil(table2.1).
Demand fromdeveloping countries, led byChina
andindia,hasdrivenglobalenergymarketsoverthe
lastdecade.Forexample,between2002and2012,
demandforoil increasedby44.4percent innon-
oeCDcountries,whileitdeclinedby6.4percentin
oeCDcountries.Asaresult,theshareofnon-oeCD
countriesinglobaloilconsumptionincreasedfrom
39.1percentto49.8percent(bP,2013).Although
improvementsinenergyefficiencyareexpectedto
contributetoacontinueddeclineinenergyuseper
unitofGDP,therisingdemandforenergyinrapidly
growingdevelopingcountrieswillpersistoverthe
nextfewdecades,thoughatslowerratesthaninthe
pastdecade(bP,2011).


Surgingdemandforenergy,highoilpricesand
thesearchforalternativesourcesofenergytotackle
climatechangehaveboosteddemandforbiofuels.
These include ethanol,which is producedmainly
frommaizeandsugar,andbiodiesel,derivedfrom
oilseeds. indeed, an increasingproportionof food
cropsarenowgrownforbiofuels,leadingtoincreas-
ing competition for different land uses: for food,
feedstockforanimalsandfuel,andforagricultural
rawmaterialssuchascotton.Therapidexpansion
ofbiofuelproductionisconcentratedinafewareas.
According to the FAo (2012b), by 2012 ethanol
productionabsorbedover50percentof thesugar
cane crop inbrazil and37per cent of the coarse
graincropintheUnitedStates.biodieselproduction
accountedforalmost80percentofthecropsgrown
forvegetableoilproductionintheeuropeanUnion
(eU).CornusedforethanolproductionintheUnited
Statesreached44.3percentoftotalcornuse,upfrom
only12.6percent in2002.7Governmentpolicies,
such asmandates and subsidies or other kinds of
support,haveplayedaveryimportantroleinpushing




Trade and Development Report, 201358


thisexpansionofbiofuelproduction.Withoutsuch
support,itisdoubtfulwhethersuchproductionwould
beprofitableinsomeareasliketheeuropeanUnion
and theUnitedStates. it is expected that demand
for feedstock for biofuel productionwill continue
togrowover thenextdecade(oeCD-FAo,2013;
USDA,2013).


(b) Supply response


The rapidly growing demand for commod-
itiesstartingfromtheearly2000spushedupprices,
because,duringthefirstyearsoftheboom,supply
was slow to respond.Theextractive industries, in
particular,whichhadexperiencedalongperiodof
underinvestment,weretakenbysurprise.Themin-
ingandoilindustriesarecapital-intensive,anditis
onlyafterseveralyearsthatreturnsoninvestments
arerealized,asittakesalongtimefromtheinitial
explorationuntil amineoranoildeposit actually
becomes productive.Moreover, increasingly, this
sectorisfacingsupplyconstraintsbecausethemore
easilyaccessibledeposits arebecomingmatureor
exhausted.Consequently, exploration is forced to
movetomoreremoteareasordigdeepertofindand
extracttheresource.Mineraloregradeshavebeen
decreasinganditismoredifficulttoprocessmore
complexores.inaddition,therehasbeenashortage
ofsupplyofspecializedlabourinthissector.Added
tothis,productioncostshaverisenasaresultofthe
needtocomplywithincreasinglystringentenviron-
mentalrequirements.


overall,theseconstraintsonsupplyandtheris-
ingproductioncostshavecontributedtoreducingthe
efficiencyofinvestmentintheextractiveindustries.
Nevertheless,investmentsinexplorationhavebeen
rising significantly over thepast decade, although
therewasasetbackin2010–2011thatreflecteddiffi-
cultiesrelatedtotheglobalfinancialcrisis.According
totheMetalseconomicsGroup(MeG,2013),global
explorationbudgetsincreasedfromabout$2billion
in 2002 to $21.5billion in 2012.This investment
allowedsupplytoincreaseandevenledtosurpluses
insomemetalsmarkets(Smale,2013).eventhecop-
permarket,whichhasbeenparticularlytightoverthe
pastdecade,ismovingintosurplus.However,inthe
currentuncertainmacroeconomicenvironment,itis
unclearwhetherfurtherfinancingforexplorationwill
beforthcoming.Thismaydelayprojects,leadingto
lowerproductionoverthenextfewyears.


overcoming supply constraints in the energy
andminingsectorsdependsstronglyontechnological
innovations.onesuchinnovationisthedevelopment
ofhorizontaldrillingandhydraulicfracturingtech-
niques(knownasfracking)intheoilandgassector.
Such technological advances, achievedmainly in
theUnitedStates,havethepotentialtosignificantly
change the global energy landscape.They have
enabled that country to substantially increase its
production of oil and gas, and could result in it
becomingtheworld’sleadingoilproducerby2020
(ieA, 2012a).Thiswould also reduce theUnited
States’dependenceonenergy imports,whichcur-
rentlymeet around20per cent of its total energy
needs.Consequently,itwouldprovideanadditional
pushtotheongoingeastwardshiftintheinternational
oiltrade.itwouldalsocontributetoreducingglobal
imbalances, as energy imports have been amajor
factorcontributingtotheUnitedStatestradedeficit
overthepastfewyears(TDR 2010:chart2.5).There
are indications that these new developments are
alreadyaffectingtheoilexportstotheUnitedStates
ofsomemajorAfricanoil-producingcountries,such
asAlgeria,Angola andNigeria.8 it is still unclear
whethertheso-called“USshalegasrevolution”can
bereplicatedinsomeothercountries.Moreover,the
applicationofthenewtechnologiesremainscontro-
versialonenvironmentalgrounds,mainlywithregard
towaterpollution.9


Agriculturealsofacessignificantsupplycon-
straints.Thetwomainwaystoincreaseagricultural
productionarebyexpandingthecultivatedareaand
increasing crop yields.However, the potential to
increase arable land is limited (FAo, 2011) as is
theavailabilityofwaterforagriculture.Andthese
resourcesareparticularlyscarceinthosecountries
thataremostinneedofincreasingtheirfoodpro-
duction.Therefore, theotheroption is to improve
agriculturalyields.However,thepaceofgrowthof
agriculturalproductivityhasbeenslowinginrecent
decades.Theaverageannualrateofgrowthofgrain
yieldsdeclinedfrom2.2percentduringtheperiod
1950–1990to1.3percentduringtheperiod1990–
2011 (brown, 2012).This decline partly reflects
thefailureofdevelopmentpolicyreformsadopted
duringthe1990s,whichledtoaneglectoftheagri-
culturalsectorsuchasexpressedbyreducedofficial
developmentassistance(oDA)tothissectorandless
government involvement in developing countries,
followingstructuraladjustmentprogrammesagreed
withtheinternationalfinancialinstitutions.Amajor




Towards More Balanced Growth: A Greater Role for Domestic Demand in Development Strategies 59


areaofneglectrelatedtoinvestmentinresearchand
development.indeed,agriculturalproductivitycould
beincreasedbyreducingproductivitygapsindevel-
opingcountries(oeCD-FAo,2013)throughgreater
investmentinagriculture.inaddition,higherprices
ofenergyandother inputcosts,suchasfertilizers
andpesticides,haveactedasadditionalconstraints
onagriculturalproduction.


Thesupplyoffoodandotheragriculturalprod-
uctsisalsohighlydependentonweatherconditions,
whichcontributetoshort-termpricevolatility.For
example, a severedrought in theUnitedStates in
thesummerof2012adverselyaffectedtheproduc-
tionofgrainsandsoybeansleadingtoathirdprice
spike since the global food crisis in 2008.There
are also increasing concerns about the impact of
climate change on agricultural production. Some
of theweather-related disruptions in food supply,
their higher frequency, and the slower growth of
agriculturalyieldsmightpartlybeassociatedwith
climate change. indeed, some observers suggest
thatclimatechangemayposethegreatestthreatto
agriculturalproductionandfoodpricesinthefuture
(oxfam,2012).10


4. Commodity prices: prospects


Projectionsabouttheevolutionofcommodity
prices are particularly challenging given the high
levelofuncertaintyinthecurrentglobaleconomic
environment.Themineralsandmetalssectorfaces
thegreatestdownsiderisksduetonewsupplycom-
ingonstreamjustwhendemandgrowthfromChina
appearstobedecelerating.However,asupplycrunch
may reappear in a fewyears time.Regarding the
oil sector, specializedenergyagenciessuchas the
internationalenergyAgency(ieA)andtheenergy
informationAdministrationoftheUnitedStatessee
oilpricesfallingtoslightlylowerlevelsthanthoseof
2011–2012,butneverthelessremaininghistorically
high.inspiteofstillrisingdemandfromsomeofthe
rapidlygrowingdevelopingcountries(althoughata
slowerpace),marketconditionsshouldeasesome-
whatduetorisingsuppliesofnon-conventionaloil.
However,theproductioncostsofthesenewsupplies
make themprofitableonlyat relativelyhighprice
levels.inaddition,theorganizationofthePetroleum


exportingCountries(oPeC)willlikelycontinueto
beakeyforceininfluencingoilprices.Non-oeCD
countriesareexpectedtoremainthemajorsources
ofanyincreaseinoildemand.indeed,oildemand
fromthesecountriesisexpectedtoovertakethatof
oeCDcountriesby2014(ieA,2012b).


Theoutlookfortheagriculturalsectorpointsto
elevatedprices.According tooeCD-FAo(2013),
agriculturalcommoditypriceshavebecomestruc-
turallyhigher,andareprojectedtoremainfirmover
thenextdecade.Thiswouldbeduetoacombination
ofslowerproductiongrowthandstrongerdemand,
including for biofuels, as well as a supportive
macroeconomic environment.ethanol production
isexpectedtoincreaseby67percentandbiodiesel
productionbyevenmore,butfromalowerbase.by
2022,biofuelswillaccountforagrowingshareof
theglobalproductionof sugarcane (28percent),
vegetableoils(15percent),andcoarsegrains(12per
cent).on the supply side, growth of agricultural
productionisexpectedtoslowdownfromanaver-
agerateof2.1percentin2003–2012to1.5percent
in2013–2022.GlobalprojectionsbyUSDA(2013)
similarlysuggestthat,followingnear-termdeclines,
pricesforcorn,wheat,oilseedsandmanyothercrops
aresettoremainathistoricallyhighlevels.


bearing inmind that forecasting commodity
pricesisadifficulttask,particularlyinthecurrent
globaleconomiccontext,apossiblescenariothatcan
bederivedfromtheabovediscussionisthat,owing
toslowinggrowthwhichcouldsomewhatdampen
thestrongdemandinChina,commoditypricesmay
notriseasfastastheyhavedoneinthepastdecade.
Allowingforsomedownwardadjustmentsintheshort
term,commoditypricesshouldstabilizeatahighplat-
eauincomparisonwiththepricesoftheearly2000s.


Therearethreemainviewpointsaboutthepros-
pectsforthecommoditysupercycle:


• Themost optimistic observers hold that the
expansionaryphaseofthesupercyclestillhas
manyyearstorun,asChinawillcontinuealong
an intensive growth trajectory (Farooki and
Kaplinsky,2012;Coatesandluu,2012).This
willcausecommoditypricestoremainfirm.


• othersarguethatcommoditypriceshaveentered
a calmer andmore stable phase of growth,
butwillneverthelessremainatrelativelyhigh




Trade and Development Report, 201360


levelsora“newnormal”(bloxham,Keenand
Hartigan,2012;GoldmanSachs,2012).


• Yetothersbelievethattheexpansionaryphase
of thesupercyclehascometoanend(Credit
Suisse,2013;Citi,2013).


However,thereseemstobeoverallagreement
thattherewillnotbeapermanentcollapseofcom-
modity prices or a quick return to a long-running


deteriorating trendover the next fewyears.Thus,
exporters of primary commoditiesmay be less
adverselyaffectedbysystemicchangesintheworld
economythanexportersofmanufactures.Aslongas
commoditypricesremainatrelativelyhighlevelsand
commodityproducersareabletoappropriateafair
shareoftheresourcerents,themainchallengefor
policymakerswillbetoensurethatrevenuesaccruing
fromnaturalresourceexploitationspurproduction
andexportdiversification.


Severalstudieshaveexaminedproduct-specific
patternsrelatingtothesharpfallinworldtradethat
occurredbetweenthethirdquarterof2008andthe
first quarter of 2009 (e.g.bems, Johnson andYi,
2010;levchenko,lewisandTesar,2010;Gopinath,
itskhokiandNeiman,2012).Thesestudiesindicate
that:(i)tradeingoodsfellmorethantradeinservices
andthattradeindurablegoods(suchasautomotive
productsandindustrialsupplies)fellmorethantrade
innon-durablegoods;(ii)thesharpfallinconsumer
durables and other differentiated goods (branded
manufactures)was entirely in terms of volume,
withnoprice reductions; and (iii)declines in real
finalexpenditurewere responsible formostof the
collapse of international trade in 2008–2009 (e.g.
bems, Johnson andYi, 2013).The latter finding
suggeststhatchangesinthepatternofinternational
tradeofmanufactures in2008–2009maybemore
thanashort-termphenomenon.Thehighprobability
of continued slowgrowth in developed countries’
finalexpenditureinthecomingyears,duetoapro-
longedslowdownintheirgrowthrates,islikelyto
haveanegativeimpactontheexportopportunities
ofdevelopingcountries.11


Thesepotentialadverseeffectsmaybeassessed
byexaminingtheimpactofdecliningimportsbythe
UnitedStates.Thisisbecausethesizeablecontribu-
tion to global growth of rapidly rising consumer
demandintheUnitedStateswasamainfeatureof
thepre-crisisglobaleconomy.Asdiscussedinsome


detail inTDR 2010,chap. ii,prior to theonsetof
the current economic andfinancial crisis,United
States personal consumption, amounting to about
$10trillion,representedaround70percentofthat
country’sGDPandabout16percentofglobalGDP;
consumerspendingalsoaccountedforover70per
centofUnitedStatesGDPgrowthduringtheperiod
2000–2007.Mostimportantly,importsofconsumer
goods,includingautomobiles,accountedforabout
85percentoftheincreaseintheUnitedStates’non-
energytradedeficitbetween1997and2007.overthe
sameperiod,importsofnon-foodconsumergoods,
excludingautomobiles,increasedbyabout150per
cent,boostingaggregatedemandintherestof the
worldbyalmost$300billioninabsoluteterms.


United States imports of consumer goods,
especiallythenon-foodcategories(excludingauto-
mobiles), became sluggish in 2008 (chart 2.4).
betweenthefirstquarterof1999andthethirdquarter
of2008,theseimportsgrew,onaverage,byalmost
2 per cent per quarter, before declining sharply.
Theythenexperiencedarebound,startinginthefirst
quarterof2009,buthavestagnatedattheirpre-crisis
leveloverthepasttwoyears.


if imports of non-food consumer goods by
theUnited States are disaggregated into durable
(excluding automobiles), semi-durable and non-
durablegoods,12thereisaclearindicationthatthe
lossofimportdynamismintheUnitedStatesmatters


C. Volume effects on exporters of manufactures




Towards More Balanced Growth: A Greater Role for Domestic Demand in Development Strategies 61


for developing countries’ export opportunities
(chart2.5).Thedurableconsumergoodscategory,
wasthemostdynamicofthethreeproductgroups,
withUnitedStates imports tripling between1997
and2007.GiventhatChinaandMexicocombined
accountedfor60percentofUnitedStatesimports
ofsuchgoodsin2012,astagnationofdemandinthe
UnitedStatesatbelowpre-crisislevelscouldhave
amajor impact on these two exporting countries.
ChinaaccountsformorethanhalfofUnitedStates
imports of semi-durable consumer goods,which
continuestobethelargestamongthethreeproduct
categories inspiteof thedeclineof itssharefrom
over60percentin1995toabout45percentin2012.
Non-durableconsumergoods(amajorcomponentof
whichispharmaceuticals)istheonlycategorythat
hasmovedrapidlybacktoitspre-crisisdynamism.
However,developingcountriesaccount foronlya
smallshareofUnitedStatesimportsofthisproduct
category.13Taken together, this evidence suggests
thattransmissionoftheeconomicslowdownthrough
thetradechannelhasadverselyaffecteddeveloping
countries’ exports of products such as apparel


and household equipment to developed countries.
Those exports had boosted growth in developing
countriespriortothecrisisandsupportedproductive
transformation.


Anexaminationofdatafromtheeurozonesup-
portsthisfinding.Followingadeclinein2008–2009,
euro-zoneimports(excludingintra-euro-zonetrade)
ofdurable(excludingautomobiles),semi-durableand
non-durableconsumergoodsreboundedrapidly,and
by2010–2011theyhadbeguntoexceedpre-2008
levels.However, thegrowth rate of these imports
remains considerably lower than in the pre-crisis
period: imports of semi-durable consumer goods,
which representmore than two thirds of the euro
zone’s total imports of all these product groups,
recordedanaverageannualgrowthrateof12percent
(andagrowthrateof23percentfromChina,whichis
byfarthemostimportantdeveloping-countrysource,
accountingforalmosthalfoftheeurozone’stotal
importsofthisproductcategory)duringtheperiod
2002–2007,butonly10percent (8percent from
China)duringtheperiod2009–2011.


Chart 2.4


UNITED STATES IMPORTS, SELECTED CONSUMER GOODS CATEGORIES,
1st qUARTER 1999–4th qUARTER 2012


(Billions of dollars)


Source: UNCTAD secretariat calculations, based on United States Bureau of Economic Analysis, International Data, table 2a.
Note: Data for 2012 fourth quarter are preliminary estimates. The trend growth rate for imports of automobiles is 0.6 per cent per


quarter, while that of non-food consumer goods is 1.8 per cent per quarter.


0


20


40


60


80


100


120


140


160


1999 2001 2003 2005 2007 2009 2011


Automobiles (vehicles,
parts, and engines)


Non-food consumer goods,
except automobiles


Trend I/1999–II/2008:
automobiles (vehicles,
parts, and engines)


Trend I/1999–II/2008:
non-food consumer goods,
except automobiles


20122000 2002 2004 2006 2008 2010




Trade and Development Report, 201362


The possibility of changing rapidly from an
export-oriented growth strategy towards amore
domestic-demand-orientedonedepends largelyon
whatextentthesectoralstructureofdomesticproduc-
tionisdelinkedfromthatofdomesticdemand.Such
adissociationwillbeparticularlystrongincountries
thatexportalargeproportionofprimarycommod-
ities.However,itwillalsobesubstantialforother
countriesthatproducesophisticatedgoodsforexports
destinedforaffluentconsumersindevelopedcoun-
tries,butwhichfewdomesticconsumerscanafford.


Natural-resource-rich economies have long
attemptedtoweakenthisdissociationbydiversifying


their sectoral structure of production through an
increase inmanufactures. in thosedevelopingand
transitioneconomieswheremanufacturesconstitute
asizeableshareofproductionandexports,thelink
between the sectoral composition of production
andthatofexportsmaywellbestrengthenedbyan
increasinglyglobalizingeconomyinwhichdomes-
ticdemandindevelopingandtransitioneconomies
willhaveagreaterweightinglobaldemand,output
andtradepatterns.Theensuingchangeintheshape
of the global distribution of consumption,with a
smaller share of consumption by rich consumers
andalargersharebylowerandmiddle-incomecon-
sumers,implieschangesinpreferencesandawider


Chart 2.5


UNITED STATES IMPORTS OF CONSUMER GOODS (ExCL. FOOD AND AUTOMObILES),
by CATEGORy AND SELECTED SOURCE COUNTRIES, 1995–2012


(Billions of dollars)


Source: UNCTAD secretariat calculations, based on UN Comtrade.


0


20


40


60


80


100


120


140


160


180


0


20


40


60


80


100


120


1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012


Durable goods, total
Durable goods, China
Durable goods, Mexico


Non-durable goods, total
Non-durable goods, China


Semi-durable goods, total (right scale)
Semi-durable goods, China (right scale)


D. Towards more domestic-demand-oriented growth strategies




Towards More Balanced Growth: A Greater Role for Domestic Demand in Development Strategies 63


varietyofnewspendingpatterns.This,inturn,will
guideinvestmentdecisionsandleadtochangesinthe
sectoralfocusofinvestment,withensuingchangesin
thecompositionofdomesticproductionandoutput.


Someoftheissuesassociatedwithachangein
growthstrategiestowardsagreaterroleofdomestic
demandmaybeillustratedbytheexperienceoflatin
AmericaneconomiesfollowingtheGreatDepression
(box2.1).Theremainderof thissectionexamines
issuesrelatedtothedivergencebetweenthesectoral
structureofexportsand thatofdomesticdemand,
focusing on the balance-of-payments constraint.
This is followedby an analysis of changes in the
product composition of domestic demand as per
capitaincomesrise.


1. Domestic-demand-oriented growth
and balance of payments


Growthdynamicsinducedonthedemandside
situncomfortablywithmostoftheexistinggrowth
theories, whether neoclassical or endogenous.
These theoriesconcentrateon thesupplysideand
neutralize demand effects on long-term growth
byassuming that theevolutionofconsumptionof
each good is proportional to income growth (i.e.
changesinpercapitaincomehavenoeffectonthe
compositionofproductbaskets).14bycontrast,early
development economists (e.g.Rosenstein-Rodan,
1943)emphasizedthatdemandgrowthforaspecific
good,and theensuinggrowingsizeof themarket
forthatgood,leadtoincreasinginternalreturnsto
scaleinproducingthatgood.largermarketsboost
productivityeitherbecauseofeffectsstemmingfrom
learningbydoing(Matsuyama,2002;Desdoigtsand
Jaramillo,2009)orthroughinnovationsthatallowthe
developmentofnewmethodsofproductiontosatisfy
the risingnewdemands (FoellmiandZweimüller,
2006and2008).


Theresultingscaleeconomiesenablethegoods
tobeproducedatlowercosts,tothebenefitofeither
consumersorotherindustriesthatusethosegoodsas
inputsinproduction.Asthesegoodsbecomeafford-
abletoanincreasinglylargenumberofhouseholds
andindustries,themarketsforthesegoodsexpand.
This,inturn,induces“furtherimprovementinprod-
uctivity, creating a virtuous circle of productivity


gainsandexpandingmarkets” (Matsuyama,2002:
1038).15buttheproductivitygrowthassociatedwith
increasingeconomiesofscalemayalsobeusedfor
payinghigherwages,ratherthanforreducingprices.
Thedemandgrowthstemmingfromhigherwages
enlargesthesizeofthedomesticmarketsforgoods
andservices,whichenablesscaleeconomiestospill
over awide range of industrial sectors.Murphy,
Shleifer andVishny (1989) developed this insight
further, showing that such complementarities of
demandworkvia thebuyingpowerof themiddle
class,which eventually determines the extent of
horizontal complementarities across all industries
oftheeconomy.16Theseconsiderationsbecomeeven
morerelevantforadevelopmentstrategythatgives
greaterimportancetodomesticdemandgrowththan
inthepast.Moreover,forsuchastrategytobesuc-
cessful,itwouldalsoaimatboostingthepurchasing
powerofincomegroupsbelowthemiddleclass,so
thattheremaybescopeforeconomiesofscaleinan
increasingnumberofsectorsandfirmsthatproduce
primarilyforthedomesticmarket.


However,ifagrowingmarketsizefailstotrig-
gerproductivitygains, the two-waycausalitymay
wellcausethedomesticeconomytostagnate.This
mayhappeninanopeneconomywherethemarket-
sizeexternalitieslinkedtoincreasingeconomiesof
scale benefitmainly foreign producers (Murphy,
ShleiferandVishny,1989;DesdoigtsandJaramillo,
2009).inthiscase,thepaceofindustrialmoderniza-
tionmaybeconsiderablyreduced,becausedomestic
producerswillcontinuetoconcentrateonsupposedly
technologically simple goods (such as food) that
satisfy necessities,while the growingmarkets for
morecomplexgoods(suchascarsandaudio-visual
products)willbecapturedbyforeignproducers.


indeed,totheextentthatacceleratedspending
stemmingfromdomesticdemandissatisfiedthrough
imports,withoutacomparableexpansionofexports,
thegrowthprocessof thedomesticeconomymay
wellfaceabalance-of-paymentsconstraintandgrind
toahalt.Accordingtothedynamicanalogueofthe
foreign trademultiplier first presented byHarrod
(1933),therateofdomesticoutputgrowthdependson
therateofgrowthofexports,whichinturndepends
ontheincomeelasticityofdemandforexportsand
thegrowthrateofworldincome,aswellasonthe
country’sincomeelasticityofdemandforimports.17
Prebisch (1950) applied this relationship to the
developmentcontext,arguingthatsustainedgrowth




Trade and Development Report, 201364


Box 2.1


A ShIFT IN DEVELOPMENT STRATEGIES: LESSONS FROM ThE LATIN
AMERICAN ExPERIENCE AFTER ThE CRISIS OF ThE 1930sa


Withthechangingpatternsofinternationaldemand,developingcountriestodayarefacedwiththeissue
ofwhethertoshifttheirdevelopmentstrategiesbygivinggreateremphasistodomesticdemandtodrive
economicgrowth.butitisnotthefirsttimeineconomichistorythatthisimpulsetoshifttodomestic-
demand-orientedgrowthhasarisen:theGreatDepressioninthe1930sevokedasimilarresponsefrom
latinAmericancountries,whichadvancedtheprocessofindustrialization.


beginninginthe1870s,afteralongperiodofpoliticalinstabilityfollowingtheirindependence,mostlatin
Americancountriesbeganaprocessofrapidintegrationintotheglobaleconomyasexportersofprimary
commoditiesandimportersofmanufacturesandforeigncapital.Theyalsoattractedlabourmigration,
whichcontributedtodiversifyingthepatternofdomesticconsumption.Theexpansionofexportsspurred
economicgrowth,whichinturngeneratednewresourcesfortheirgovernments,consolidatednational
Statesandcontributedtogreaterpoliticalstability.However,thisdevelopmentpathdependedheavilyon
acontinuousexpansionofdemandforprimarycommoditiesfromdevelopedcountries.italsocontributed
toworseninglivingconditionsoftheoftenlandlessruralpopulationsandfavouredtheriseofaproletariat
andurbanmiddleclassthatclaimedbettersocialconditionsandgreaterpoliticalparticipationinwhat
wereoligarchicsocialandpoliticalstructures.


Thevulnerabilityofsuchadevelopmentpathbecameevident,initiallywiththeFirstWorldWarwhich
disruptedtradeandcapitalinflows.Thereafter,theGreatDepressionthatbeganin1929ledtoacollapse
ofprimary commodity exports and, as a consequence, to a severe contractionof imports andfiscal
revenues,aswellassovereigndebtdefaultsbymostcountriesintheregion.inthesecircumstances,
which in some countrieswere further complicated by political crises, governments set aside their
formerliberalcredoandadoptedmorepragmaticandinterventionistpolicies.Theyabandonedthegold
standardandestablishedforeignexchangecontrols,andintroducedquotasonimportsandraisedimport
tariffs.Currencydevaluationsandimportrestrictionsimprovedrelativepricesofmanufacturesatatime
whenthecapacitytoimportsuchgoodshaddiminishedsignificantly.Thenewlycreatedcentralbanks,
whichsupportedthedomesticbankingsystem,coveredthefinancialneedsoftheprivateandthepublic
sectors.Thesemeasuresenabledtherapidexpansionofdomesticproductionofmanufactures,which
progressivelyreplacedimports,settinginmotionaprocessthatcametobeknownasimportsubstituting
industrialization(iSi).industrialproductiongrewmostnotablyincountriesthatalreadyhadmanufacturing
capabilitiesandwhosegovernmentssupporteddomesticdemand.between1929and1947,theshareof
manufacturinginGDPincreasedfrom22.8to31.1percentinArgentina,from11.7to17.3percentin
brazil,from7.9to17.3percentinChile,from6.2to11.5percentinColombiaandfrom14.2to19.8per
centinMexico(Furtado,1976:137).


AftertheSecondWorldWar,theiSiperiodcametoanend:industrializationcontinuedtorelyprimarily
ondomesticmarkets, but increases in domestic production ofmanufactured goodswere no longer
basedonthesubstitutionofpreviouslyimportedgoods,whichhadbeenreducedconsiderablybythat
time.instead,arapidexpansionofdomesticdemandbecamethedrivingforcebehindoutputgrowth
anddomesticinvestment.industrializationand,concomitantly,urbanizationincreasedtheinfluenceof
thelocalbourgeoisie,themiddleclassandindustrialworkersintheeconomyandinnationalpolitics.
Theresultingpoliticalchangebroughtwithitadeliberatereorientationofdevelopmentstrategy,which,
by introducing long-termdevelopmentprojects, aimedatmodernizing theproductiveapparatusand
strengtheningeconomicandsocial integration.Domesticdemandwasnurturedbothbyurbanization
andtheprocessofindustrializationitself,whichexpandedemploymentinthemodernsectors.inseveral
countriesmoreequalincomedistributionalsoboosteddemand.Hence,thekeyelementsofthatstrategy
(industrializationandtheexpansionofdomesticmarkets)supportedeachotherinavirtuouscircle(Sainz
andFaletto,1985).




Towards More Balanced Growth: A Greater Role for Domestic Demand in Development Strategies 65


in this context, the economic role of theStatewas greatly expanded. it fostered industrialization,
infrastructurebuilding and thedevelopmentof domesticfirms through severalmeans. inChile, the
ProductionDevelopmentCorporation (CorporacióndeFomentode laProducción),created in1939,
developedbasicindustries;inbrazil,theGovernmentsupportedindustrythroughtradeprotectionand
thecreationofState-ownedfirms(e.g.thesteelproducerVoltaRedonda);Mexiconationalizeditsoil
industryin1938andsupporteditsmanufacturingsectorthroughtheindustrialPromotionAct(1946)and
Stateprocurement;inArgentina,theStatecapturedmostoftherentsfromagriculturethroughitscontrol
offoreigntrade,andnationalizedthetransportsystem,andcommunication,powerandsanitationservices
(previouslyownedbyforeigninvestors),whilethecentralbankandState-ownedbanksextendedcredit
toindustrialactivities;inVenezuela,theStateacquiredmostoftheoilrentandcreatedtheVenezuelan
ProductionCorporation(CorporaciónVenezolanadeFomento)forsupportingthesteelandagro-industrial
sectors;whileboliviaalsonationalizeditsoilsector(1937),andlater its tinproduction(1952),and
implementedagrarianreforms(1953)(Thorp,1997).


Thisreorientationofdevelopmentstrategy,triggeredinitiallybythecrisisofthe1930s,continuedto
promoteeconomicgrowthafter theSecondWorldWar.latinAmericagrewrapidly in thepost-war
years,withitsGDPgrowingatanaverageannualrateof5.4percentbetween1950and1975,ledbythe
manufacturingsector(6.8percent).by1975,theshareofmanufacturesinitsGDPexceeded25percent
(eClAC,1978),whiletheproportionoftheurbanpopulationrosefrom42percentin1950to62per
centin1975.Themanufacturingsectoralsobegantodiversify,withproductionevolvingfromlabour-
intensiveconsumergoods todurableconsumergoods, industrial inputsandcapitalgoods.by1965,
technology-orscale-intensiveindustriesaccountedforaround50percentofmanufacturingproduction
intheregion’slargesteconomies:Argentina,brazil,Chile,Colombia,MexicoandPeru(eClAC,1979).
Theinternationalenvironmentwasalsoconducivetotheregion’seconomicdevelopment,asforeign
marketsregainedmomentumduringthe1960sandforeigndirectinvestment(FDi)inmanufacturing
contributedtothediversificationofindustrialproduction.


However,thereweresomedrawbackstothisdevelopmentstrategy,asevidencedbyrecurrentimbalances
inthebalanceofpaymentsandpersistentinflation.Theseweretheresultofstructuralfactors(e.g.rigidities
onthesupplyside,demandelasticitiesofimportsandexports, leadingtotradedeficitsandfrequent
devaluations;andsocialtensionsrelatedtoincomedistribution)ratherthanflawedmonetarypolicies
(Noyola,1957;bajraj,1977).Retrospectivecomparisonwith theeastAsian industrialdevelopment
experiences suggests that themainproblem inlatinAmericawas related to the fact that therewas
comprehensive, rather than selective andwell-targeted, protectionismof domestic industries, and
governmentsupportwasnotlinkedtoperformancerequirements(includingthoserelatedtoexportsof
manufactures).bythebeginningofthe1970s,anewphaseoftheindustrializationprocessseemedtobe
takingplaceinthemoreadvancedlatinAmericancountries,whichtargetedmorediversifieddomestic
andexternalmarkets.Thisphasewascharacterizedbyhighinvestmentandrapideconomicgrowth.
However,strongfinancialshocksandradicalpolicyreorientations,especiallyafterthedebtcrisisofthe
early1980s,broughtthisdevelopmentpatterntoanabruptend.


Thisexperiencesuggeststhat,whileitispossibletoanchorindustrializationindomesticdemandgrowth,
theprocessofstructuralchangesneedstobecarefullymanagedonboththedemandandthesupplyside.
Moreover,thepursuitofsuchadevelopmentstrategyneedstobeaccompaniedbymacroeconomicand
financialpoliciesaimedatkeepinginflationlowandpreventinglargeexternalimbalancesandfinancial
instability.


a ThisboxdrawsonCalcagno,2008.


Box 2.1 (concluded)




Trade and Development Report, 201366


in developing countries requires industrialization;
otherwise,growthwillbeheldback.Thereasonis
thatanunsustainablecurrent-accountdeficitemerges
whentheincomeelasticityofdemandforprimary
commodityexportsinworldmarketsislowerthan
theincomeelasticityofdemandforimportedgoods
neededbydevelopingcountries.


Although the global economic context has
evolved, themechanisms highlighted byHarrod
(1933)andPrebisch(1950)continuetoapply:ifa
prolongedeconomicslumpindevelopedcountries
leads to a decline in developing countries’ export
earnings,thelatterwillfinditdifficulttosustaina
highrateofgrowthiftheneedtosatisfyaccelerating
expenditure in the various domestic-demand
componentstriggersasurgeofimports.However,if
thereweretobeanexpansionofdemandinseveral
developing-country trade partners simultaneously,
they could constitute amarket for each other,
and therefore reduce their balance-of-payments
constraint.Consequently, regional integrationand,
moregenerally,South-Southtrademaybenecessary
complements to domestic-demand-led growth
strategies.


Theimportintensityofthethreecomponents
of domestic demand (i.e. household consumption,
government expenditure and investment) varies
widely, andgenerallydiffers from the importance
of the three components in aggregate demand.
Household consumption usually accounts for by
farthelargestshareofaggregatedemand,whereas
“importstendtobestronglycorrelatedonaverage
withexportsandinvestmentand,toalesserextent,
privateconsumption,whiletheyappeartobeuncor-
relatedwithgovernmentconsumption”(bussièreet
al., 2011: 10).Moreover, the correlation between
importsandhouseholdconsumptionisparticularly
highduringperiodsofrecession.


Thesefindings, relating to differences in the
import intensity of the different components, are
basedonananalysisofalmostonlydevelopedecono-
mies.However,thereislittlereasontobelievethatthe
patternswilldiffertoanysignificantextentindevel-
opingcountries.Thecorrelationbetweendomestic
demandgrowth and imports of capital goods and
durable consumer goods in developing countries
probablyexceedsthatindevelopedcountries.but,the


importintensityofexportsisprobablyalsohigherin
developingcountries,especiallythosewhoseexport
sectorsarecloselyintegratedintoglobalproduction
chains.indeed,roughcalculationsreveallittledif-
ferencebetweendevelopedanddevelopingcountries
inthepatternofimportintensityacrossthevarious
elementsofaggregatedemand(Akyüz,2011).


if the sectoral composition of domestic pro-
ductionwereadjusted tobettermatch thesectoral
structureofacceleratingdomesticdemand,itwould
reducetheimportcontentofthatgrowingdemand.
itwouldalsoallowdomesticentrepreneurstoben-
efitfromincreasingreturnstoscaleandencourage
themtoengageininnovativeinvestment.Thiswould
alsocreatenewemploymentopportunities.Forthe
domestic economy, itwould imply an increase in
nominal incomes,whichwould induce domestic
consumers to increasingly engage indiscretionary
spending.Globally, this could trigger a cumula-
tiveprocessofincomeandemploymentgrowth,as
growingdemandwouldspurtheoutputofexisting
manufacturingindustriesaswellasthecreationof
newindustries.ideally,thisprocessshouldtakeplace
onaregionalscale,withanumberoftradepartners
encouragingdomesticdemandinacoordinatedway.
Thiswouldboostintraregionaltrade,whichtendsto
beintensiveinmanufacturedgoods,therebyenabling
economiesofscaleandspecialization(TDR 2007).


Thecriticalimportanceofthedomesticmarket
for domestic industrywas stressed long ago by
Chenery,RobinsonandSyrquin(1986).Theynoted
thatgrowthofdomesticdemandaccountsforabout
threequartersoftheincreaseindomesticindustrial
output in largeeconomies, and slightlymore than
halfinsmalleconomies.buildingontheirinsights,
HaraguchiandRezonja(2010)showedthattheshares
inproductionofdifferent industrialsectorsfollow
asequencewhichresemblesthechangesobserved
inthesectoralstructureofdomesticdemand.This
similaritycanbeobservedparticularlywithregard
to household consumption expenditure in large
economies,where the food and beverages sector
isadriverofsustainedgrowthatlowlevelsofper
capitaincome,motorvehiclesatmediumlevels,and
audio-visualproductsathighlevels.Thefollowing
sectionprovidesfurtherevidenceofchangesinthe
product composition of consumer demand as per
capitaincomerises.




Towards More Balanced Growth: A Greater Role for Domestic Demand in Development Strategies 67


2. Changes in the product composition
of domestic demand


Demand-sidemechanismswhichreflectchanges
inthepatternsofdemandaspercapitaincomerises
haveconstitutedonlyarelativelysmallpartof the
larger search for the stylized facts that character-
izeeconomicdevelopment.Thedecliningshareof
aggregateconsumerspendingonfood(i.e.aneffect
knownas“engel’slaw”)isusuallyconsideredthe
most notable feature of suchdemand-side effects.
Attemptstogeneralizeengel’slawbyenlargingthe
scopeofanalysistomorecategoriesofexpenditure
haveoftenfocusedonchangesinthebasketofneces-
sities (such as food, housing and clothing),while
treatingnon-necessities(suchasdurablegoods)asa
residualoflittleimportance(e.g.Houthakker,1957;
Chenery,RobinsonandSyrquin,1986).


Socioeconomic class is likely to be a very
importantdeterminantofindividuals’consumption
patterns(e.g.lluch,PowellandWilliams,1977).The
reasonisthatpeoplewhoarebetteroffdisposeof
discretionaryincomeandcanshifttheirconsumption
pattern away from only basic necessities. This
shift in consumption patternsmay be based on a
preferencestructurerelatedtoahierarchyofneeds
(Maslow,1954).itimpliesthatconsumerswillstart
spendingbeyondgoodsthatonlysatisfytheirbasicor
subsistenceneedsoncetheirincomeexceedsacertain
threshold.Anotherimportantassumptionassociated
with such a preference pattern is that consumer
demandforanygoodreachesasaturationpoint,so
thatdemandgrowthforthatgoodwillslowdownand
eventuallyceaseasmoreandmorehouseholdsreach
thelevelsofincomethatmarksaturationpoints.18The
thresholdswhichtriggeranaccelerationofdemandfor
specificconsumptionitemsclusteratcertainlevelsof
percapitaincome(Mayer,2013).Theselevelsclosely
correspondtowhatistypicallyusedtocharacterize
anindividualasbecoming“middleclass”.


Thereisnogenerallyaccepteddefinitionofthe
term “middle class”.However, in economics and
applied empirical analysis, it is generally used to
describethesocialstatusofindividualswhohavea
certainamountofdiscretionaryincomeattheirdis-
posalwhichallowsthemtoengageinconsumption
patternsbeyond just the satisfactionof theirbasic
needs, though not – or only occasionally – their
desireforluxuryitems.Giventhatmanyindividuals


aspiretomiddle-classstatus,individualsidentifying
themselvesasbeing“middleclass”isalsooftenused
asadefinition.Thismayexplainwhyinterpersonal
effects on consumer demand, such as bandwagon
effects,wherebyeachperson’spurchasingpatternis
influencedbywhatspecificproductsareboughtby
aproportionofsomerelevantgroupofothers,has
oftenbeenanimportantelementinthediscussionof
middle-classconsumptionpatterns(e.g.Witt,2001).


The twoboundaries that separate themiddle
classfromthepoor,ontheonehand,andfromtherich
ontheother,maybedefinedinrelativeorabsolute
terms.Relativeapproachesusequintilesofincome
distribution or a band around themedian of the
distribution.Themaindrawbackoftheseapproaches
isthattheydonotpermitinternationalcomparisons,
whereastheadvantageofusinganabsoluteapproach
isthatitdoespermitsuchcomparisons.Anabsolute
approachissimilarinspirittointernationalpoverty
measures, and allows the tracing of both the size
andtheincomeshareofthemiddleclassonaglobal
scale.Toensurecomparabilityacrosscountries,such
measuresemploypurchasingpoweradjustmentsto
translate income expressed in domestic currency
unitsintoaninternationallycomparableunit(i.e.the
internationaldollar).19


bussoloetal.(2011)haveusedsuchanapproach,
wherethetwothresholdsdefiningthemiddleclassare
setasequaltothepercapitaincomesofbraziland
italy.20Kharas(2010)hasalsousedthisapproachto
definetheglobalmiddleclassascomprisingindividu-
alswhosedailyexpendituresarebetween$10and
$100inpurchasingpowerparity(PPP)terms.both
thesestudiessetthelowerboundatanannuallevel
of per capita incomeof about 4,000 international
dollars.bycontrast,thedefinitionusedinbussolo
etal.(2011)impliesanupperboundofabout17,000
internationaldollars,whileKharas (2010) sets the
upperboundatabout35,000 internationaldollars.
Thesedifferencesintheupperboundarereflected
indifferencesinhistoricmeasuresofthesizeofthe
globalmiddleclass,aswellinitsfutureevolution.
bussoloetal.(2011:14)estimatethattheproportion
ofthemiddleclassinthetotalworldpopulationwill
increasefrom7.9percentin2000to16.6percent
in2030,andthatoverthesameperiod,thenumber
ofpeopleindevelopingcountriesthatarepartofthe
globalmiddleclasswillgrowmorethanfourfold,to
exceedonebillion.AccordingtoKharas’(2010:27)
estimates, the size of theglobalmiddle classwill




Trade and Development Report, 201368


increasefrom1.8billionpeoplein2009to3.2billion
in2020and4.9billionin2030,whichimpliesthat
theproportionofthemiddleclassinthetotalworld
populationwill increase from26percent in2009
to41percentin2020and58percentin2030.Asia
willaccountforthebulkofthisincrease,withthe
numberofpeoplebelongingtothemiddleclassin
thisregionestimatedtogrowsixfold.Chinaandindia
willaccountformorethanthreequartersoftheAsian
middleclass.ThesizeofthemiddleclassinCentral
andSouthAmericawillgrowbyafactorof2.5,while
insub-SaharanAfricaitwilltriple,yetremainatonly
2percentofthetotal;anditwillremainmoreorless
unchangedineuropeandNorthAmerica.21


ofcourse,thesenumbersaremerelyillustrative
andshouldnotbeconsideredexactpredictions.The
twostudies’projectionsontheevolutionofthemid-
dleclassindevelopingcountriesmaybeconsidered
optimisticasanextrapolationofpastdevelopments
(e.g. in terms of investment and technological
change).Thisisbecausetheydonottakeintoaccount
theunsustainabilityof thepoliciespursuedby the
developed countries during the decade preceding
theoutbreakofthecurrentglobaleconomiccrisis,
whichprovided the favourable external economic
environmentthatallowedhighinvestmentratesand
technological change indevelopingcountries.but
theymay also be considered pessimistic, as they
assumethattheshareofhouseholdconsumptionin
GDPremainsconstantovertimeandthat,inthecase
ofKharas(2010),growthisdistributionneutral,and
thusdonottakeintoaccounttheimpactofpolicies
tostrengthendomesticpurchasingpowerandreduce
incomeinequality,whichthisReportadvocates.As
discussedinsectioneofthischapter,astrategythat
accordsagreaterrole todomesticdemandgrowth
will requirea faster increase inwages than in the
past.Thustheremaybeanacceleratedincreaseinthe
sizeofthemiddleclassifthisstrategyissuccessful.


evidenceonincomedistributionindicatesthat
thesizeofthemiddleclass(asdefinedbyKharas,
2010) varieswidely across countries (chart 2.6).
in 2005,which is themost recent year forwhich
comprehensivedataareavailable,themiddleclass
constituted60percentofthepopulationintheUnited
States,comparedwithonly30percentinChina,and
roughly5percentinindia,butabout80percentin
theRussianFederation.More importantly for the
futureevolutionofconsumptionexpenditureisthe
numberofpeoplethatareataroundtheentrylevel


ofthemiddleclass,wherethenewspendingpatterns
startemerging.Suchincomebracketsarevirtually
absent in the developed economies, but comprise
morethanhalfoftheChineseandaboutthreequarters
oftheindianandindonesianpopulationsrespectively.


Manydevelopingeconomiescontinuetohave
substantialpocketsofpovertyandlaggingregions,
especially in sub-SaharanAfrica andSouthAsia.
Such pockets hamper the expansion of domestic
consumptionofdurable consumergoods.but this
alsoimpliesthatthereisconsiderablepotentialfor
increasing the effectivedemand for, anddomestic
supplyof,basicandnon-durablegoods,suchasfood,
aswellasotherfundamentalneeds,suchasclothing,
accommodation,heatingandlighting,health,educa-
tionandsafety(ChaiandMoneta,2012),including
throughachangeinincomedistribution.


However,manyotherdevelopingandtransition
economiescouldwitnessarapidaccelerationofcon-
sumptionofdurableconsumergoodsinthemedium
term.Changesindistributionaloutcomesthatcould
lift individuals from the lower incomebrackets to
middle-classstatusarecloselyrelatedtothecreation
ofwell-paidjobs.AsnotedinTDR 2012,muchofthe
declineinincomeinequalityinlatinAmericaover
thepast fewyearshasbeendue to thecreationof
suchjobs.Thishascontributedtosomedeveloping
countriesseeing“theemergenceofaworkingmid-
dleclass,whichhasnowsurpassed40percentof
thedevelopingworld’sworkforce”(ilo,2013:12).


Greaterequalityofincomeiswidelyexpected
toboosteconomicgrowth,whichwouldprovidethe
mainimpetustoconsumerspending.indeed,thereis
nowbroadagreementthatgrowthaccompaniedby
highorrisinginequalityisunsustainableinthelong
run,althoughtheremaybetemporaryexceptionsin
countrieswithveryrapidgrowthrates,whereabso-
lutelevelsofincomemayincreasesharplydespite
greaterincomeinequality.Moreover,highlevelsof
incomeinequalitywillholdbackthepaceatwhich
sufficientlylargesegmentsofthepopulationattain
the thresholds of per capita income that lead to
accelerateddemand.Thiscouldwellretard,oreven
prevent, cumulative processes that drive growth
throughassociatedsupplyresponses.


Thediscussioninthissectionimpliesthatthe
process of per capita incomegrowth and/or steps
towards amore equal distribution of income are




Towards More Balanced Growth: A Greater Role for Domestic Demand in Development Strategies 69


accompaniedbytheemergenceofarangeofinvest-
mentopportunitiestoproducegoodsandservicesto
meet thenewdemand.These investmentopportu-
nitieswillariseatdifferentpointsintimewithrespect
tobothindividualproductsandindividualcountries.
Productswillvarybecausedemandfordifferentprod-
uctswillaccelerateatdifferentlevelsofpercapita
income.Variationacrosscountrieswillbeduetothe
differentsizeoftheslicesofthepopulationthatarein,


orabouttoenter,themiddleclass,whoseboundaries
markthelevelsofpercapitaincomewhereproduct-
specificdemandelasticitiesareparticularlyhigh.The
combinationofthesevariationsacrossproductsand
acrosscountriescanengenderasustaineddynamic
growthprocessdrivenbyinteractionsbetweensupply
anddemandovertime.Thenextsectionfocuseson
theeconomicpolicyimplicationsoftheseinteractions
betweensupplyanddemand.


Chart 2.6


PER CAPITA INCOME AND DIFFERENT INCOME CLASSES, SELECTED COUNTRIES, 2005


Source: UNCTAD secretariat calculations, based on Milanovic, 2012.
Note: The two horizontal lines are the lower and upper income limits of the middle class. The size of the middle class in each


country is indicated by the respective country line that is within the shaded section.


2.5


3.0


3.5


4.0


4.5


5.0


5.5


1 2 3 4 5 6 7 8 9 10


Lo
g


of
p


er
c


ap
ita


in
co


m
e


(P
P


P
a


t 2
00


5
pr


ic
es


)


Income distribution deciles within countries


India


China


Brazil


United States


Russian Federation


Nigeria


Indonesia




Trade and Development Report, 201370


The preceding sections of this chapter have
examined the adverse impacts of slow growth in
developed countries on the export opportunities of
developing and transition economies. They have
emphasized that the reduced export opportunities
are likely to concern mainly those countries that
export a large proportion of manufactures to devel-
oped countries. These countries therefore need to
reconsider their growth strategies, giving greater
emphasis to domestic sources of demand growth and
South-South trade.


This section discusses possible policies that
developing and transition economies could adopt in
pursuit of such a strategy. It first looks at changes
in the relative importance of the domestic demand
segments of GDP following the outbreak of the
current global economic crisis. It then focuses on
policies aimed at: (i) increasing domestic demand
by fostering domestic purchasing power, lifting the
income of domestic consumers, increasing domestic
investment and strengthening the impact of public
finances on domestic demand; and (ii) promoting
domestic productivity growth and structural change
with a view to increasing domestic supply capacities
of goods in response to rising domestic demand.
Finally, this section looks at the implications of the
increased importance of developing countries in the
global economy for global development partnerships.


During the period 2008–2009, many develop-
ing and transition economies reacted to a decline in
their net exports by increasing the share of govern-
ment consumption expenditure in GDP (chart 2.7).
Household consumption expenditure as a share of
GDP also increased in some of these countries, such
as Brazil, Malaysia and the Russian Federation, while
it fell in others, such as China and Indonesia. The
latter two countries saw a particularly large increase


in gross fixed capital formation as a share of GDP. In
China, for example, this share increased from 39 per
cent in 2007 to 45 per cent in 2009. This share also
increased, though to a lesser extent, in most of the
other economies presented in chart 2.7, many of
which are rich in natural resources, such as Chile,
Mexico, the Russian Federation and South Africa.


The data for 2011 suggest that there were no
similar increases in gross fixed capital formation
as a share of GDP, which was possibly a reac-
tion to the euro-zone crisis that gained traction in
2011 (chart 2.7). This difference in reaction may be
explained by the fact that in 2008–2009 there were
expectations of an early recovery, which were sup-
ported by episodic signs pointing to a rapid rebound
of growth in developed economies. This had led to the
assumption of only a temporary decline in otherwise
continuously increasing opportunities for exports to
these countries. With the euro-zone crisis, by contrast,
policymakers in developing and transition economies
may have accepted the likelihood of a prolonged
period of sluggish growth in developed economies’
aggregate demand, which therefore suggested the
need to rely less on exports to these economies
for their growth. This variation in responses to the
adverse effects of the Great Recession and the euro-
zone crisis, respectively, may reflect uncertainty and
considerations of how best to deal with the challenge
of managing a change in emphasis from a growth
strategy based on exports towards one based more
on domestic demand. This challenge should not be
underestimated.


There are many difficulties associated with
such a shift in growth strategy. For this shift to be
sustainable in developing and transition economies
that export mainly manufactures, there will need to
be both sustained improvements in technological


E. Policy implications




Towards More Balanced Growth: A Greater Role for Domestic Demand in Development Strategies 71


Chart 2.7


TyPE OF ExPENDITURE AS A ShARE OF GDP, SELECTED ECONOMIES, 2000–2011
(Per cent)


Source: UnctadStat.
Note: The shares are based on data measured at current prices in dollars.


Household consumption expenditure
Gross fixed capital formation


Government final consumption expenditure (right scale)
Net exports (right scale)


-5


0


5


10


15


20


25


0


20


40


60


80


2000 2003 2006 2009


Argentina


2011
-5


0


5


10


15


20


25


0


20


40


60


80


2000 2003 2006 2009


Brazil


2011
-5


0


5


10


15


20


25


0


20


40


60


80


2000 2003 2006 2009


Chile


2011


-5


0


5


10


15


20


25


0


20


40


60


80


2000 2003 2006 2009


China


2011
-5


0


5


10


15


20


25


0


20


40


60


80


2000 2003 2006 2009


Indonesia


2011
-5


0


5


10


15


20


25


0


20


40


60


80


2000 2003 2006 2009


Malaysia


2011


-5


0


5


10


15


20


25


0


20


40


60


80


2000 2003 2006 2009


South Africa


2011
-5


0


5


10


15


20


25


0


20


40


60


80


2000 2003 2006 2009


Taiwan Province of China


2011
-5


0


5


10


15


20


25


0


20


40


60


80


2000 2003 2006 2009


Thailand


2011


-5


0


5


10


15


20


25


0


20


40


60


80


2000 2003 2006 2009


Mexico


2011
-5


0


5


10


15


20


25


0


20


40


60


80


2000 2003 2006 2009


Republic of Korea


2011
-5


0


5


10


15


20


25


0


20


40


60


80


2000 2003 2006 2009


Russian Federation


2011




Trade and Development Report, 201372


dynamismandrisinghouseholdconsumptionexpendi-
turebasedongrowthofrealdisposableincomethrough
nominal incomegrowth, rather than cheap imports.
Andthesetwogoalswouldhavetobeachievedsimul-
taneously,because,ifdomesticproductivecapacityis
notupgraded,anyriseindomesticpurchasingpower
throughhigherearningsandtheconsequentincrease
in domestic consumption expenditurewould only
induceanincreaseinimports.Theresultingimport
boomwouldaddtothechangesinthetradebalance
resultingfromstagnatingexportstodevelopedecono-
mies.Suchmultiplepressuresonacountry’sexternal
accountswould risk causingbalance-of-payments
problemsandstallincomegrowth.inthatcontext,
an expansion of themarkets of other developing
countrieswouldbe of paramount importance, not
onlybecauseitwouldavoidoralleviatetradebal-
ancestrains,butalsobecauseitwouldprovidelarger
andmoredynamicdemand,andthereforeencourage
investmentandtechnologicalupgrading.


individuals require real income growth to
engage in higher consumption expenditure.This
canresultfromadeclineinpricesofgoods,suchas
throughrisingimportsofgoodsthatarecheaperthan
domestically producedones,madepossible by an
appreciationoftheexchangerateand/oraprogressive
delinkingofthesectoralstructureofdomesticpro-
ductionfromthatofdomesticdemand.However,any
attempttoachieverealincomegrowthbyincreasing
importsofcheapgoodsmaycauseimportstogrow
fasterthanexportsandcontributetoagrowingtrade
deficit.Thus,policiesaimedatenhancingdomestic
demandneedtobeaccompaniedbyanappropriate
exchange-ratepolicytoensureexternalbalance,and
byastrategyaimedat increasingdomesticsupply
capacities.


Theremainderofthissectionfocusesonpolicies
aimedatfosteringbothdomesticpurchasingpower
throughincomegrowthandtechnologicalupgrading
toboostdomesticproductivecapacity.


1. Policies to boost domestic demand


Since the 1980s, developing countries have
placedagrowingemphasisonexport-orientedpro-
ductiontodriveexpansionoftheirformalmodern
sectors.butwhilethisstrategyhasbeensuccessful


insomecountries,inmostcasesdomesticdemand
has not increased at the samepace.This is partly
duetoweaklinkagesbetweentheexportsectorand
therestoftheeconomy,andpartlytothestrategyof
domesticcompaniesandgovernmentstoexploittheir
perceived comparative advantage of cheap labour
bykeepingwages lowinorder tostrengthen their
international competitiveness.but sooner or later
suchastrategywillreachitslimitsduetothecon-
straintimposedbylowwagesondomesticdemand
growth, especiallywhen global demandweakens
andmanyothercountriespursuethesamestrategy
simultaneously.


Therefore,policiestoboostdomesticdemandas
anengineofgrowtharewarranted,notonlybecause
ofthecurrentdeflationarytrendintheworldecono-
my,butalsobecauseastrategyofexport-ledgrowth
basedonwagecompression,whichmakescountries
overlydependentonforeigndemandgrowth,maynot
besustainableforalargenumberofcountriesand
overalongperiodoftime.


Agrowthstrategythatgivesgreateremphasis
to domestic demand growthmust start from the
recognition that, even in relatively poor countries
andincountrieswitharelativelylargeexportsec-
tor,labourincomeisthemajorsourceofdomestic
demand.Therefore,policiesaimedatincreasingthe
purchasingpowerofthepopulationoverall,andwage
earnersinparticular,needtobethemainingredient
ofastrategythatfavourspromotingdomesticrela-
tivetoexternalsourcesofgrowth.inmanycountries,
thetwoothermaincomponentsofdomesticdemand
–privateinvestmentandpublicsectorexpenditure–
mayalsohelptoadvancesuchastrategy.


inanycase,thereisastronginterdependence
betweenthethreecomponentsofdomesticdemand.
First,increasedconsumptionofgoodsandservices
thatcanbeproduceddomesticallymakesproducers
ofthesegoodsandservicesmorewillingtoinvest
intheirproductivecapacity.Second,higherinvest-
mentwillcreateadditionalemploymentandwage
income,andthusincreaseboththepurchasingpower
ofdomesticconsumersandthetaxrevenuethatcan
bespentbythegovernment.Moreover,productivity
gainsresultingfromadditionalinvestmentallowa
furtherincreaseinwagesandconsumption.


Third,higherpublicspendingcanhaveapositive
impactonbothprivateconsumptionandinvestment




Towards More Balanced Growth: A Greater Role for Domestic Demand in Development Strategies 73


throughvarious channels. it can create additional
incomeforconsumersandimprovetheconditions
forprivateinvestment.Thelatter isnotonlyitself
asourceofdomesticdemand(evenifalargeshare
ofthecapitalgoodsmayhavetobeimported),but
isalsoindispensableforexpandingdomesticsupply
capacity,andconsequentlyforreducingleakagesof
domestic demandgrowth through imports. Public
investmentininfrastructureisoftencomplementary
to,ifnotaprerequisitefor,privateinvestment,and
helpstoincreaseoverallproductivityintheeconomy.
Totheextentthatthepatternofpublicrevenueand
public spending contribute to reducing income
inequality,consumptionwillbehigheratanygiven
leveloftotalincome,becauselowerincomeearners
spendalargerproportionoftheirincomethanhigher
incomeearners,andtheshareofdomesticallypro-
ducedgoodsandservicesintheirconsumptiontends
tobegreaterbecausetheyarelesslikelytoconsume
importedluxurygoods.Finally,ifthepublicsector’s
contributiontoGDPislarger,governmentshavemore
possibilitytocompensateforfluctuationsindomestic
andexternaldemandthroughcountercyclicalfiscal
policies,andthuspreventlargeswingsinconsump-
tionandinvestment.


(a) Increasing domestic consumption


Policiesthatresultinadeclineofthewageshare
haveoftenbeenjustifiedasbeingnecessarytoreduce
productioncostsandinduceinvestment.However,as
notedabove,householdconsumptionconstitutesthe
largestshareofeffectivedemandinmostcountries,
developedanddevelopingalike.


indeed, empirical evidence suggests that
changesinthewagesharearepositivelycorrelated
withchangesintheshareofhouseholdconsumption
inGDP(asreflectedinthefiguresonthelefthandside
ofchart2.8).Giventhatmostcountriesshowadecline
inthewageshare,thispositivecorrelationimplies
a decline in the share of household consumption
inGDP.22bycontrast,thereisnoclearcorrelation
betweenchangesinthewageshareandtheshareof
investmentinGDP(figuresontherighthandsideof
chart2.8).Thelattercorrelationismildlypositivein
Africaandnilindevelopedeconomies.bycontrast,
itisnegativeineast,SouthandSouth-eastAsiaand
inlatinAmerica,thoughsmallerinabsoluteterms
thanthecorrelationbetweenchangesinwageshares
andthoseinconsumption.23


ofcourse,thesecorrelationsneedtobeinter-
pretedwithcaution,andshouldnotbeconsidered
asindicativeofcausality.inparticular,theyshould
notbeinterpretedasshowingthatinAsiaandlatin
America,higher investment ratesdependonwage
compression. inmostSouth-eastAsian countries,
investment rates fell significantly after theAsian
crisisof1997–1998,evenincountrieswherewages
andconsumptionalsofellasashareofGDP,andwere
balanced by a commensurate improvement in the
currentaccountbalance.RegardinglatinAmerica,
thecomparisonbetweentwopointsintimemaybe
misleading,because2002–2003markedachangein
thetrendsofbothincomedistributionandinvestment
rates. in several countries (e.g.Argentina and the
bolivarianRepublicofVenezuela), sharesofboth
investmentandlabourinGDPdeclinedbetweenthe
early1990sand2002,andthenrecoveredintandem
inthesubsequentyears,showingapositivecorrela-
tionthatisnotapparentinthechart.Finally,thecase
ofChinaillustratesthataslongasadecliningwage
shareisaccompaniedbyrapidincomegrowth,itdoes
notimplyanabsolutefallinlivingstandards.


Soon after the onset of the current financial
crisis,GDP growth in developing and transition
economies remained relatively high or recovered
quickly, as the deceleration or even a decline of
theirexportswascompensatedforbyfastergrowth
of domestic demand resulting from expansionary
monetaryandfiscalpoliciesandfasterwagegrowth.
The rapid recoveryof some large developing and
transition economies also provided amarket for
smaller countries that cannot rely solely on their
domesticdemand.


in order to sustain these domestic demand
dynamicsstemming fromcountercyclicalpolicies,
and in somecasesalso from terms-of-tradegains,
growth-supportingmonetaryandfiscalpolicieshave
tobecomemorepermanentfeatures,astheywerein
the developed countries during “theGoldenAge”
andinthoseemergingeconomiesthatwerethemost
successfulincatchingupduringthe1980sand1990s.
butinorderforgovernmentsandcentralbanksto
pursuefiscalandmonetarypolicies,includingsup-
portivepublicinvestmentandlowinterestratesthat
remainfavourabletoprivatedomesticcapitalforma-
tionoverlongperiodsoftime,itisalsonecessaryto
keep inflation incheck.Achievingbothobjectives
–rapiddomesticdemandgrowthandrelativeprice
stability–couldbegreatlyfacilitatedifthetraditional




Trade and Development Report, 201374


Chart 2.8


ChANGES IN wAGE ShARES, PRIVATE CONSUMPTION AND PRIVATE INVESTMENT
IN SELECTED GROUPS OF COUNTRIES FROM 1991–1994 TO 2004–2007


Source: UNCTAD secretariat calculations, based on UN-DESA, National Accounts Main Aggregates database; ILO, Global Wage
database; and OECD.StatExtracts database.


Note: Data refer to changes in percentage points of the average GDP for each period. When no observation for wage share was
available for the period 1991–1994, the first subsequent observation was used. For Brazil, Mongolia and Niger, data refer to
1995; for Cameroon, Chile, Egypt and Kenya, data refer to 1996; for Panama, data refer to 1997; for Sri Lanka and Uruguay,
data refer to 1998; for India, Indonesia, Mongolia and Peru, data refer to 1999; for Pakistan, data refer to 2000. The shaded
area represents the 95 per cent confidence interval.


Austria


Australia
Canada


SwitzerlandGermany


Denmark


Finland France United
Kingdom


Greece
Ireland


Italy


Japan


Netherlands
Norway


New Zealand


PortugalSweden


United States


−10


−5


0


5


10


−10 −5 0


Austria AustraliaCanada


Switzerland


Germany


DenmarkSpain
Finland


France
United Kingdom


Greece


Ireland


Italy


Japan


Netherlands
Norway


New Zealand


Portugal
Sweden


United States


−10


−5


0


5


10


−10 −5 0


P
riv


at
e


in
ve


st
m


en
t


P
riv


at
e


co
ns


um
pt


io
n


Wage share


Developed economies, excluding Eastern Europe


Wage share


Argentina
Plurinational State of Bolivia


Brazil
Chile Colombia


Costa Rica
Mexico


Panama


Peru


Uruguay


Argentina


Brazil
Chile Colombia


Costa RicaMexico
Panama


Peru Uruguay


Bolivarian Republic of Venezuela


−20 −10 0 10


Plurinational State of Bolivia


Bolivarian Republic of Venezuela


−20 −10 0 10
−20


−15


−10


−5


0


5


10


−20


−15


−10


−5


0


5


10


P
riv


at
e


in
ve


st
m


en
t


P
riv


at
e


co
ns


um
pt


io
n


Latin America


Wage shareWage share


China (incl. Macao) Hong Kong (China)
Indonesia


India
Islamic Republic of Iran


Republic of Korea


Sri Lanka


Mongolia


Malaysia


Philippines PakistanThailand


−20
−15


−10


−5


0


5


10


15


−10 −5 0 5


Hong Kong (China)


Indonesia


India


Republic of Korea


Sri Lanka


Mongolia


Malaysia


Philippines
Pakistan


Thailand


−20


−15
−10


−5
0


5


10


15


−10 −5 0 5


Islamic Republic of Iran


P
riv


at
e


in
ve


st
m


en
t


P
riv


at
e


co
ns


um
pt


io
n


East, South and South-East Asia


Wage shareWage share


−5


0


5


10


15


−5 0 5


−5


0


5


10


15


−5 0


Côte d’Ivoire
Cameroon


Egypt


Kenya


Niger
Senegal


Tunisia


South Africa


5


Côte d’Ivoire
Cameroon


Egypt


Kenya


Niger
Senegal
Tunisia


South Africa


P
riv


at
e


in
ve


st
m


en
t


P
riv


at
e


co
ns


um
pt


io
n


Africa


Wage shareWage share


China (incl. Macao)




Towards More Balanced Growth: A Greater Role for Domestic Demand in Development Strategies 75


macroeconomicpolicytoolkitwerecomplemented
byanappropriateincomespolicy.


Acentralfeatureofanyincomespolicyshould
betoensurethataveragerealwagesgrowat least
at a similar rate as averageproductivity.Previous
TDRshaverepeatedlydrawnattentiontothemerits
ofestablishingsuchalinkwithaviewtocreating
employmentandavoidingafurtherdeteriorationof
incomedistribution (TDR 2010, chap.V andTDR
2012, chap.Vi).These considerations are equally
relevant for domestic-demand-led growth strate-
gies,becausewagegrowthinlinewithproductivity
growthshouldbeabletocreateasufficientamount
ofdomesticdemandtofullyemploygrowingpro-
ductive capacitiesof the economywithouthaving
to rely on continued export growth.At the same
time,inflationcanbekeptwithinalowrangewhen
nominalwagesarenotadjustedtopreviousratesof
inflation,whichwouldriskcausinginflationinertia.
Rather,nominalwageadjustmentsshouldtakeinto
accountaninflationtargetthatguidesthemonetary
policyoftherespectivecountry(seealsoTDR 2012,
chap.Vi).Thiswouldgreatlyfacilitatethetaskofthe
centralbanktopreventinflation,andwidenitsscope
tostimulateinvestmentandgrowth,asproposedin
chapteriiiofthisReport.


Theeffectivenessofsuchanincomespolicythat
ensuresasustainedexpansionofdomesticdemand
aswell as low inflation could be enhanced by a
strengtheningofcollectivebargainingmechanisms
(or their introductionwhere theydonotyetexist)
andbyminimumwagelegislation.Collectivebar-
gainingofwages,andemploymentconditionsmore
generally,wouldalsohelptoachievegreatersocial
consensus about incomedistribution and enhance
social cohesion, provided that bothworkers’ and
employers’ associations, andpossibly government
recommendations or guidelines for such negotia-
tions,broadlyadhere to thewageadjustmentrule.
Suchmechanismsmaybedifficulttoimplementin
manydevelopingcountrieswhere the institutional
frameworkforstructurednegotiationsfordetermin-
ingwages and employment conditions remains to
becreated.


The introduction of a legalminimumwage
may therefore serve as a useful instrument to
protect theweaker social groups, but also, if it is
regularly adjusted to average productivity growth
intheeconomy,asameanstoexpanddemandfor


mostly domestically producedgoods and services
(TDR 2012,chap.Vi.D).Minimumwagesmaypush
up the prices of some labour-intensive goods and
services,butthepurchasingpowerofalargegroup
ofemployeeswouldalsorise,thushelpingtocreate
additionalincomeandemploymentthroughoutthe
economy(seealsoG20,2012:12).Moreover,regular
adjustmentofthelegalminimumwagecanprovide
animportantreferenceforwagenegotiationsinthe
privatesector.


legalminimumwages already exist inmost
ofthedevelopedcountriesandinmanydeveloping
countries,butincountrieswherethereisalargepro-
portionofinformalandself-employment,itisoften
difficult to enforce such legislation.Therefore, in
thesecountriesitisimportanttocomplementpolicies
aimedatincreasingformalemploymentandincreas-
ingthepurchasingpowerofemployeesintheformal
sectorwithmeasurestoboostincomesandthepur-
chasingpoweroftheinformallyandself-employed.


inthiscontext,anumberofdevelopingcountries
haveintroducedpublicsectoremploymentschemes
in order to reduce widespread unemployment
andpoverty (TDR 2010, chap.V; and TDR 2012,
chap.Vi).Suchschemescanplayanimportantrole
withinastrategytoraisedomesticdemand.incoun-
trieswherealargereserveofsurpluslabourexists,
andwherecompetitionbetweentheemployedand
theunemployedandunderemployedtendstodrive
downearnings,publicsectoremploymentnotonly
hasadirectdemand-generatingeffect;thetermsof
such employment, especially the remuneration of
workers,canalsohelptoestablishafloortothelevel
ofearningsinboththeformalandinformalsectors.
Similartowagesintheprivatesectorandminimum
wage levels, remuneration of such employment
should also be improved over time at a rate that
appropriatelyreflectstheaveragegrowthofproduc-
tivityintheentireeconomyaswellastheincrease
intaxrevenuesinagrowingeconomy.Thelayersof
thepopulationthatbenefitdirectlyorindirectlyfrom
theintroductionofsuchschemesarelikelytospend
mostoftheirincomes,andmorethantheaverage,
onlocallyproducedgoodsandservices.


incountrieswitha largeruralsector thathas
manysmallproducers,mechanismsthatlinkagricul-
turalproducerpricestooverallproductivitygrowth
intheeconomywouldbeanotherelementofastrat-
egytoincreasedomesticconsumption.Atthesame




Trade and Development Report, 201376


time,itwouldraiseproductivity,ashigherincomes
wouldenableproducerstomakegreaterinvestments
inequipment.Suchmechanismshavebeenapplied
successfullyinalldevelopedcountriesfordecades.


Consumers’ disposable income can also be
influencedbygovernmentprovisionofbasicservices
(financed, for example, though increased taxation
ofhigherincomegroups),suchashealthcare,care
forchildrenandtheelderly,educationandhousing,
whichwilltendtoreducetheprecautionarysavings
ofthelowerandmiddle-incomegroups.itcanalso
be influencedbychanges in tax ratesand transfer
paymentswithaviewtoreducingincomeinequal-
ityandboostingthepurchasingpoweroflow-and
middle-incomehouseholds.


inaddition,governmentscantakediscretionary
fiscalactions,includingpromotingtheconsumption
of durable consumer goods, for example through
targetedfiscaltransferssuchastaxrebatesoncertain
consumergoods.24incountrieswithadomesticcar
industry,passengercarshaveoftenbeensuchatar-
get,includingaspartofcountercyclicalmeasures.A
widerangeofdevelopedcountries,aswellassome
developingcountries (e.g.China)spurrednewcar
salesthroughso-called“cash-for-clunkers”schemes
in2008–2009.Giventhatsuchschemesgenerallyaim
atreplacingoldcars,whicharemorepollutingand
lessenergyefficient,withnewones,theseschemes
also help to achieve environmental targets. Some
otherdevelopingcountrieshavesuccessfullyadopted
similarschemestargeting“first-carpurchases”.25For
example, in2011Thailandadopted a scheme that
allowedfirst-timecarbuyerstoapplyforataxrefund
oncarsmanufacturedinThailand.26


Householdconsumptionexpenditurecanalso
bespurredbyfacilitatingaccesstoconsumercredit
fortheacquisitionofdurableconsumergoods.27An
easingofconsumercreditmayresultfromchanges
increditconditionsorfromwealtheffectsbasedon
increasedassetpricesthatmakeiteasierforcertain
middle-class consumers to provide collateral for
loans.However,thereareconsiderablerisksinvolved
inencouraginganincreaseofhouseholdconsumption
basedonconsumercredit, as amplydemonstrated
by recent experiences in a number of developed
countries,where episodes of fast growth of such
creditwereattheoriginof,oratleastcontributedto,
balancesheetdisequilibriathatendedinsubstantial
financialturmoil.intheUnitedStateshouseholddebt


asashareofGDPincreasedrapidlyduringthedecade
priortotheonsetoftheGreatRecession,reachinga
peakof102percentin2007(chart2.9).Thisincrease
wascloselylinkedtorisinghouseprices,combined
withthefactthatalmosttwothirdsofhouseholddebt
stemmedfrommortgages.Thisalsoresultedinan
increaseinhouseholddebtasashareofhousehold
consumptionexpenditure,whichpeakedat145per
centin2007.


inmostdevelopedcountries,householdshave
stronglyreduceddebtbypayingitoff,oroftenthey
have defaulted,with attendant adverse effects on
household consumption expenditure.by contrast,
thereseemstobeanunabatedtrendtowardsincreased
householdleveragingindevelopingcountries.This
maybetheresultofacombinationofthreefactors:
a quick economic recovery from the downturn in
2008,which contained job losses, sustained low
interestrates,andassetpriceinflation,includingin
realestate.28


Amongdevelopingandtransitioneconomies,
the level of household debt as a share ofGDP
has becomeparticularly high inMalaysia and the
Republic ofKorea,where it exceeds 80 per cent
(chart2.10).boththesecountrieshavealsoseenasig-
nificantriseinhouseprices.AtleastintheRepublic
ofKorea,thegrowthofhouseholddebtandhouse
pricesmaybecloselylinked,as“mortgagesandother
housingloansmakeupalmost53percentofhouse-
holddebt”(McKinseyGlobalinstitute,2013:25).
Householddebt inMalaysiahas increasedsharply
since2008,itsratiotodisposablepersonalincome
risingfrom150percenttoalmost190percent.in
brazil,China, indonesia andThailand, there has
alsobeenastrongincreaseinthisratiosince2008,
thoughatconsiderablylowerlevels(chart2.10).Such
arapidgrowthofhouseholddebtcanrapidlyplace
aheavyburdenonhouseholdbudgetsandconsider-
ably reduce their consumptionexpenditure.brazil
forexample,witnessedasharp increase indefault
rates on consumer loans in 2011,making banks
increasinglyreluctanttolend,eventhoughadecline
ofbenchmarkinterestratestorecordlowssincethen
hashelpedstemdefaultrates.29


itisdifficulttoassesswhatlevelsandgrowth
rates of householddebt are sustainable.However,
thereareindicationsthatlargerandpersistentcredit
growth,aswellasgrowthepisodesthatstartatrela-
tivelyhighdebt-to-GDPratios,poseagreaterrisk




Towards More Balanced Growth: A Greater Role for Domestic Demand in Development Strategies 77


ofacreditbust,withensuingadverseeffectsonthe
stabilityofacountry’sfinancialsystem(Dell’Ariccia
etal.,2012).itisalsodifficulttoassesstheextent
towhichrapidlyrisingand/orelevateddebtlevels
translateintoexcessivedebtservicingburdensand
decliningconsumptionexpenditure.ifanythresholds
existinthisarea,theywillbedeterminedbyawide
rangeoffactors,includingtheincomestructureof
debtorsandthematurityandinterest-ratestructure
ofloans.Relatedcomprehensivedataarenotavail-
ablefordevelopingcountries.Macro-levelmonetary
policyeasingcan smooth theburdenof the rising
costofhouseholddebtservicing.butforthesame
reasonitcanalsoinducefurtherborrowing,unless
suchmacroeconomic policy easing is combined
withmicro-levelmeasures such as tighter regula-
tions relating to loan-to-value anddebt-to-income
ceilings.30


Thereisthepossibilityofaloomingfinancial
crisisinthosecountrieswherethegrowthofhouse-
hold debt steadily exceeds incomegrowth and/or
wherethesizeofoutstandinghouseholddebtcon-
siderably exceeds the size ofGDP.A crisis could
be triggered by a perception that asset prices are


overvalued,withanassociatedcollapseofhousehold
wealth.butthetriggercouldalsobeasuddensize-
able increase in interest ratesora renewedglobal
economicdownturn thatwould causedeveloping-
country exports to decline and domestic incomes
tofall.Thiswouldmakeitincreasinglydifficultfor
householdstoservicetheirdebt,resultinginturmoil
inthefinancialsectorofthecountryconcerned.


Tosumup,apolicyaimedatspurringhousehold
consumptionexpenditurebyeasingtheconstraintson
borrowingtendstoberisky.Unlesssuchastrategy
successfullyjump-startsavirtuousprocessofaccel-
erating domestic demand and supply, itmaywell
causesubstantialfinancialandeconomicturmoil.The
debtservicingburdenmayrapidlybecomeexcessive
if interestratesrise,growthofhouseholdincomes
stallsorpropertypricesfall.Anysuchdevelopment
would eventually restrain household consumption
expenditure.Amoresustainablestrategywouldthus
betheimplementationofanincomespolicysuchas
outlinedabove.butthecreationofincomeopportu-
nitiesandproductivitygrowththatenablessustained
increases in realwages is closely associatedwith
fixedcapitalformation.Thelatterhasbeenadriving


Chart 2.9


hOUSEhOLD DEbT AND hOUSE PRICES IN ThE UNITED STATES, 1995–2012


Source: UNCTAD secretariat calculations, based on Bank for International Settlements (BIS), Credit to Private Non-Financial Sectors
database; the Federal Reserve, Flow of Funds Accounts of the United States; and the Federal Reserve Bank of Dallas,
International House Price Database.


0


20


40


60


80


100


120


0


20


40


60


80


100


120


140


160


1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012


In
de


x
nu


m
be


rs
, 2


00
5


=
10


0


P
er


c
en


t


Household debt as a share of GDP
Consumer credit as a share of household debt
Home mortgages as a share of household debt
Household debt as a share of household consumption expenditure
Nominal house prices (right scale)




Trade and Development Report, 201378


Chart 2.10


hOUSEhOLD DEbT AND hOUSE PRICES, SELECTED DEVELOPING COUNTRIES, 2000–2012


Source: UNCTAD secretariat calculations, based on data from the United Nations Statistics Division; Bank for International Settlements,
Credit to Private Non-Financial Sectors database; and Federal Reserve Bank of Dallas, International House Price Database.


Note: House price data for Brazil were not available.


Nominal house prices (right scale)


Household debt as a share of disposable personal income
Household debt as a share of household consumption expenditure
Household debt as a share of GDP


0


20


40


60


80


100


120


140


160


0


20


40


60


80


100


120


140


160


180


200


2000 2002 2004 2006 2008 2010 2012


Thailand


0


20


40


60


80


100


120


140


160


180


200


2000 2002 2004 2006 2008 2010 2012


Brazil


P
er


c
en


t


P
er


c
en


t


In
de


x
nu


m
be


rs
, 2


00
8


=
10


0


0


20


40


60


80


100


120


140


160


0


20


40


60


80


100


120


140


160


180


200


2000 2002 2004 2006 2008 2010 2012


Republic of Korea


0


20


40


60


80


100


120


140


160


0


20


40


60


80


100


120


140


160


180


200


2000 2002 2004 2006 2008 2010 2012


Malaysia


P
er


c
en


t


P
er


c
en


t


In
de


x
nu


m
be


rs
, 2


00
5


=
10


0


In
de


x
nu


m
be


rs
, 2


00
5


=
10


0


0


20


40


60


80


100


120


140


160


0


20


40


60


80


100


120


140


160


180


200


2000 2002 2004 2006 2008 2010 2012


China


0


20


40


60


80


100


120


140


160


0


20


40


60


80


100


120


140


160


180


200


2000 2002 2004 2006 2008 2010 2012


Indonesia


P
er


c
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P
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de


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, 2


00
5


=
10


0




Towards More Balanced Growth: A Greater Role for Domestic Demand in Development Strategies 79


forcefordevelopmentinthosedevelopingcountries
andemergingmarketeconomiesthathavebeenthe
mostsuccessfulintheireffortstocatchupwiththe
developedeconomies.bycontrast,ithasremained
at relatively low levels inmanyother developing
countries,especiallyinAfricaandlatinAmerica.


(b) Promoting domestic investment


Akeydeterminantofthewillingnessofentre-
preneurstoinvestinrealproductivecapacityisthe
expected profitability of a potential investment,
whichinturndependsonestimatesthathelpdeter-
minewhetherfuturedemandwillbehighenoughto
fullyutilizetheadditionalproductivecapacity.


Whenwagesgrowataslowerratethanprod-
uctivity, theadditionalsupplycanonlybeutilized
profitablywhenthereisacontinuedincreaseinexport
demand. in the absence of such demand growth,
productivecapacitywillbeunderutilized,and this
will discourage further productive investment and
innovation.Given the current conditions of the
worldeconomy,exportsareunlikelytogrowatthe
samepaceasinthepast,thuswage-drivendomestic
demandgrowthwillbecomeamoreimportantfactor
inthedemandexpectationsofpotentialinvestors.but
afavourableenvironmentfordomesticinvestment
also requires supportivefiscal policies (discussed
in the next subsection) andmonetary conditions,
includingacompetitiveexchangerate,andfinancial
policiesaimedatallowingpotentialinvestorsaccess
tolow-costcredit.


Amonetary policy that seeks to strengthen
domesticdemandandsupplycapacitieswouldkeep
thelevelofinterestrateslow.inthepast,attemptsto
useonlymonetarypolicytofightinflationoftenled
tohighrealinterestrates,whichdiscouragedprivate
domestic investment for two reasons. First, they
meanthighfinancingcostsforpotentialinvestors,and
second,theyoftenattractedforeigncapitalinflowsof
aspeculativenature,whichtendedtoresultincur-
rencyovervaluationandalossofcompetitiveness.
Thisreducedtheexportopportunitiesanddemand
expectations of domestic producers.An incomes
policy based on a regime of productivity-aligned
wagegrowth,asoutlinedabove,wouldfacilitatethe
pursuitofamonetarypolicy that fostersdomestic
investment,becauseitwouldalsoexclude,oratleast
significantlyreduce,theriskofinflationasaresultof


risingunitlabourcosts.Moreover,whenexchange
ratemanagementandcapitalaccountmanagement
can ensure a stable real exchange rate, they can
preventunnecessaryleakagesofdomesticdemand
toforeignmarketsduetothereducedinternational
competitivenessofdomesticproducers.


Financial policies should facilitate access to
creditforsectorsandactivitiesthatareofstrategic
importanceforthestructuraltransformationofthe
economy.Suchfinancial support,whichhasoften
beenusedas an instrumentof industrialpolicy in
developed countries and in successful emerging
economiesinAsia,couldalsohelpsolvetheproblem
ofaccesstoadequatefinancingfacedbymanysmall,
ofteninnovativefirms,includingthoseintheinformal
sectorandinagriculture,whichproduceprimarily
for the domesticmarket. examples of such poli-
ciesincludethedirectprovisionofcreditbypublic
financialinstitutionsorbyinterventioninfinancial
marketsthroughsuchmeasuresasinterestsubsidies,
refinancing of commercial loans andprovision of
guaranteesforcertaintypesofcredit.


Suchmeasures are of particular importance
where the formalmanufacturing sector is still
relativelysmall. in thatcase, it isnotonlycapital
formation in the formalmanufacturing sector that
cancontributetohigherdomesticdemandandgreater
domestic supply capacity, but also productivity-
enhancinginvestmentintheagriculturalsectorand
in small businesses. Small-scale farmers and the
self-employedpursuingnon-farmactivitiesinboth
ruralandurbanareasareparticularlydependenton
financialsupportschemes,becauseitisoftendifficult
orimpossibleforthemtomakeevensmallinvest-
mentsowingtoproblemsorlackofaccesstolow-cost
financefromcommercialbanks(McKinley,2009).


Productivityintheagriculturalsectorcanalso
beenhancedthroughpublicinvestmentinagricul-
turalresearchandruralinfrastructureandpublicly
assisted agricultural support organizations.Many
such organizations were dismantled during the
structural adjustment programmes of the 1990s,
partlyinthecontextofsweepingliberalizationand
privatization,andpartlybecauseanumberofthem
hadseriousgovernanceproblems.butifsuchorgani-
zations are equippedwith appropriate governance
structures, theymay be instrumental in fostering
incomegrowthinruralareasbyprovidingessential
extensionservices,disseminatinginformationabout




Trade and Development Report, 201380


productivity-enhancing investments and efficient
marketing,andfacilitatingaccessofsmallfarmers
toaffordablecredit.ensuringtheparticipationofthe
agriculturalsectorinoverallproductivitygrowthand
thegenerationofhigherpurchasingpowerofthose
working in thissectormayalsorequireprotecting
farmers against the impact of competition from
highly subsidized agricultural products imported
fromdevelopedcountries.


2. The role of the public sector in
strengthening domestic demand


(a) Direct and indirect demand effects of
public expenditure


overmanyyears,economicpolicywasoriented
towardsarelianceonmarketforcesaskeydriversof
growthanddevelopment,withareducedsizeofthe
publicsectorintheeconomy.Governmentinterven-
tionwasconsideredineffectiveonthegroundsthatan
increaseinpublicexpenditurewouldcauseareduc-
tion in private expenditure.This, itwas assumed,
wouldresultingreaterdistortionsinresourcealloca-
tionthanthosegeneratedbythemarketmechanism
alone, leading to suboptimal outcomes for the
economyasawhole.itiscertainlytruethatthepublic
sectorhasasignificantdirectandindirectinfluence
onfactorallocation,butthe“distortions”thiscreates
are not necessarily negative for the economy and
societyaswhole.Moreover,whilepublicfinances
influencefactorallocationatagivenlevelofincome,
totheextentthattheystrengthenaggregatedemand
theyraisethelevelofnationalincome.Taxationand
publicspendingarepotentiallykeyinstrumentsfor
shapingthedistributionofpurchasingpowerinthe
economyandforestablishinglinkagesbetweencom-
paniesinthemodernsectors,exportindustriesand
therestoftheeconomy,whichthemarketmechanism
oftenfailstoaccomplish.


Publicinvestmentinvitalinfrastructuretoensure
transport,water and electricity supply or services
tospecific industrialclusters isoftenaprerequisite
forprivate investment tobecomeviable.Similarly,
public expenditure on education and training can
influence the quality and skills structure of the
labourforceandthepotentialoflabourtocontribute
toproductivitygrowth.Thisinturnleadstohigher


wagesandastrengtheningofdomesticdemand.in
mostdevelopingcountries there isalsoapressing
needtoincreasepublicsectorprovisionofessential
social services, especially those concernedwith
nutrition,sanitation,healthandeducation.


Moreover,governmentscanprovidefiscalincen-
tivesintheformoftargetedtaxrebatesandtemporary
subsidies, aswell as improved public services to
existingfirmsandpotentialentrepreneurs.Successful
development experienceshave shown that if such
measures are conceived as elements of a compre-
hensive industrial policy, they can accelerate the
diversificationofeconomicactivitiesandthedevelop-
mentofstrategicsectorsintheeconomy.Atthesame
time,theycancontributetoemploymentcreation,and
hencetoanexpansionofdomesticdemand.


byinfluencingincomedistribution,thestruc-
tureoftaxationhasindirecteffectsondemand,since
it has an impact on the pattern of net disposable
incomes across different social groups.Aggregate
consumptionandtheincentiveforprivatefirmsto
undertakefixedinvestmentsisgreaterwhenagiven
nationalincomeisdistributedmoreequally,because
lower incomegroupsspenda largershareof their
incomeonconsumption,ingeneral,andondomesti-
callyproducedgoodsandservices,inparticular,than
higherincomegroups.Tax-financedsocialtransfers
canhavesimilareffectsondomesticdemand.


Moreover, countercyclical fiscal policy can
stabilizedomesticdemandduringperiodsof slow
growthorrecession,andthusthedemandexpecta-
tionsofdomesticinvestors.Thelargertheshareofthe
publicsectorinGDP,thegreaterwillbethepotential
forstabilization.


(b) Raising public revenues


Higherpublicspendingforpurposesofstrength-
eningdomesticdemandrequiresanincreaseinpublic
revenuesfromtaxesorothersources.Alternatively,
itmayberationaltofinancecertaintypesofpublic
expenditurebyborrowing.Yetitisoftenarguedthat
thefiscalspaceavailabletogovernmentsindevelop-
ingcountriesistoolimitedtoextendpublicsector
spending.


Clearly, fiscal space in developing countries,
especiallyinlow-incomeandleastdevelopedcountries




Towards More Balanced Growth: A Greater Role for Domestic Demand in Development Strategies 81


(lDCs) is smaller than in developed and emerg-
ingeconomiesowingtotheirlowlevelofnational
income.Moreover, in developing countries, fiscal
space isoften strongly influencedby international
factorsthatarebeyondthecontrolofthesecountries’
governments, such as fluctuations of commod-
ity prices, of interest rates on the public external
debt,andofexternalfinancingintheformofeither
private capital inflowsoroDA.However,within
theseconstraints,fiscalspaceislargelydetermined
endogenously; a proactivefiscal policy influences
themacroeconomicsituationandtheoveralltaxbase
throughitsimpactonprivatesectorearnings.


Taxesplaceaburdenonthedisposableincomeof
theindividualtaxpayer.Consequently,itisfrequently
assumed that taxes divert income and purchasing
power away from the private sector.but this is a
staticviewthatneglectsthefactthattheperceived
tax revenuewill flow back to the private sector
and increase aggregate income in the economy,
therebyenlargingthetaxbase.itisoftenforgotten
thatthenetdemandeffectofaparallelincreasein
theaveragetaxrateandgovernmentexpenditureis
positive,sincesomeoftheadditionaltaxpayments
areattheexpenseofthesavingsoftaxpayers,while
spending of the tax revenuewill cause aggregate
demandtorisebythefullamountofthetaxyield
(Haavelmo,1945).Thisneteffectofadditionaltax-
financedexpendituretendstobegreaterifmoreof
theadditionaltaxburdenfallsonthehigherincome
groups(who,ofcourse,willalsoseetheirincomes
increase, as theyparticipate in theoverall income
effectoftheadditionalexpenditure),andifthelarger
shareofpublicexpenditureisspentondomestically
producedgoodsandservices.Thescopeforusing
taxationandgovernmentspendingforstrengthening
domesticdriversofgrowthmaythereforebegreater
thaniscommonlyassumed.


ofcourse,iftaxratesareraisedaboveacertain
threshold, the behavioural response of thosewho
havetobearthelargestshareofthetaxburdenmay
causethetaxbasetoshrinkalongwiththeeconomic
activity that determines the tax base.However, it
isdifficult todetermineanupper limit for the tax
burden,which not only depends on the level of
taxrates,butalsoonhowthetaxrevenueisused.
Regarding the income tax rate, it has been found
thatindevelopedcountries,thetopmarginalrateat
whichthetotaltaxyieldwillbemaximizedisclose
to60percent(Piketty,SaezandStantcheva,2011),


andthere is littlereasontobelieve that it ismuch
lowerindevelopingcountries,whereincomesoften
grow faster than in developed countries.Taxing
high incomesathigher ratesbyusingprogressive
scales does not remove the absolute advantageof
richerindividuals,andneitherdoesittakeawaythe
incentive for entrepreneurs to innovate andmove
uptheincomeladder.Regardingthecorporatetax
rate,itiscertainlytruethatfiscalmeasurestofoster
privatefixedinvestmentareessential,butthisdoes
notmeanthattaxationofprofitsmustbekepttoa
minimum;reductionsofcorporateincometaxrates
haverarelymotivatedadditionalinvestmentsinfixed
capital(TDR 2012,chap.V;Devereux,Griffithand
Klemm,2002).


Giventhelowdegreeofprogressivityindevel-
oping and transition economies’ tax systems and
thelargedifferencesbetweenregionsandcountries
in this regard, theremay still be scope formore
progressive taxation inmany of these countries.
levyinghighertaxesonthemodernsectorandon
highlyprofitable export activities enables govern-
mentstoprovidefinancialsupportforproductivity
growthandincomegenerationinthetraditionaland
informal sectors.of course, this requires suitable
administrativecapacity.inthisregard,theconditions
indevelopingcountriesvarygreatly,dependingon
theirlevelofdevelopment,thesizeoftheirinformal
sectorandthecompositionoftheirGDP.ontheother
hand,thereareanumberofotherpotentialsources
of revenue that are also available in low-income
countries.Taxationofwealthandinheritanceisone
suchsourcethatcouldbetappedinmanydeveloping
countries.itrequiresrelativelylittleadministrative
capacityandishardertocircumventthanmanyother
taxes.inmanyresource-richcountriestheremaybe
considerablescopeforcollectingalargeramountof
royaltiesandtaxesfromcompaniesactiveintheoil,
gasandminingsectors.Thisisparticularlyimportant
becausetherevenuepotentialfromnaturalresources
hasgrownsignificantlyoverthepastdecade,espe-
ciallyinAfrica,andadisproportionallylargeshareof
therentsfromtheextractiveindustriesarecaptured
bytransnationalcorporations(TNCs).


inthemanufacturingsectoraswell,itmaybe
possibletoraiseadditionalrevenuethroughamore
rationaltaxtreatmentofTNCs.Considerableforeign
direct investment (FDi) is attracted to developing
countriesbecauseitallowsTNCstocombinethelow-
costlabourofthehostcountrywithmoreadvanced




Trade and Development Report, 201382


technology andmore capital-intensive production
techniques than are locally available, resulting in
unit profits that aremany times higher than they
could realize in their homecountry.Alternatively,
TNCscansubstantiallyreducethesalespriceoftheir
productsandtherebygainmarketshares.Thus,the
benefitsofFDiintermsofproductivitygainswillbe
capturedeitherbytheforeigninvestorintheformof
higherprofits,orbyforeignconsumersintheform
of lowerpurchasingprices.Meanwhile,very little
ofthose,oftenenormous,productivitygainsbenefit
thehosteconomies.


insomecountriesthatpursueacoherentindus-
trialpolicy,themarketmechanismmayleadforeign
companiestopurchaseintermediateinputsfortheir
productionfromthelocalmarket.Thisshouldgener-
atesomedemandandemploymentintheeconomy
ofthehostcountry.However,inmanyinstances,the
marketmechanismmaynotgeneratesuchlinkages,in
whichcaselocalcontentrequirementsininvestment
agreementsmighthelp,providedthatthenecessary
localsupplycapacitiesexist.ifthisisnotthecase,or
inadditiontothoserequirements,adequatetaxation
ofhighprofitsresultingfromthelowlabourcosts–
whichattractedtheTNCsinthefirstplace–could
beinstrumentalinensuringthatlinkagesarecreated
withtherestoftheeconomy.Thoselinkagescould
leadtothecreationofdomesticdemand.


TNCs can also contribute to strengthening
domesticdemandinthehostcountriesbyoffering
wagestotheirlocalemployeesthataremoreinline
withtheirproductivitygains.Moreover,governments
inthesecountriesmaybewelladvisedtore-evaluate
thebenefitsofforeigninvestmenttodomesticincome
growth:notonlylowwages,butalsofiscalarrange-
mentstoattractFDimaybedeprivingtheStateof
cruciallyneededpublicrevenuetofinancedevelop-
mentprojectsthatareaprerequisiteforpromoting
a domesticmanufacturing sector.Many countries
competewith other countries in offering lower
taxestoTNCstoattracttheirproductionfacilities,
similar towage competition, often resulting in a
racetothebottom.Suchpoliciesareattheexpense
ofallthecountriesthatenterintosuchtaxandwage
competition.


inorder to stopadownward spiralofwages
andtaxationfromthisprocess,internationalarrange-
mentsmayproveindispensable.Thesemayinclude
aninternationalcodeofconductforTNCs,governing


theemploymentconditionstheyoffertoworkersin
developingcountries,andstrengthenedinternational
cooperationintaxmatters.Suchcooperationshould
aim at reducing tax evasion, aswith theUnited
NationsModelDoubleTaxationConventionbetween
Developed andDeveloping Countries. equally
important,thereshouldbeabetterbalancebetween
ensuringthatgovernmentscompetingforproduction
locations reap a fair share of fiscal benefits from
TNCs’operationsintheircountries,whilepreserving
theadvantagethatforeigninvestorscanderivefrom
FDionthebasisoflabourcostdifferentials.Taking
intoaccountthelargedifferencesinunitlabourcosts
betweenthehomeandhostcountries,thisbalance
would likely allow a higher level of tax revenues
for the host country,while the level of profits of
the foreign investors from their production in the
hostcountrymaybesomewhatlowerthanbefore,
althoughstillseveraltimeshigherthanifitproduced
thesamegoodsinitshomecountry.


inseverallow-incomeandleastdevelopedcoun-
triesitmaystillbedifficultorimpossibletopromptly
implementanyofthesemeasurestoincreasefiscal
spacebecauseoftheirlimitedadministrativeandtax
collectingcapacities.inthesecases,themultilateral
financialinstitutionsandbilateraldonorscouldhelp
byprovidingadditionalresourcesforsocialspend-
ing,aswellastheappropriatetechnicalandfinancial
supportforstrengtheningthosecapacities.


(c) Debt-financed public spending


Debtfinancingofpublicexpendituremaybe
consideredanappropriatemeasurefortwostrategic
reasons.oneisthecountercyclicaleffectarisingfrom
an increase in public sector demandwhenprivate
demandisinsufficienttomaintaineconomicactivity
atalevelwherethelabourforceandtheexistingcapi-
talstockarefullyemployed,particularlywhenthisis
accompaniedbyareductionofnetprivateborrowing,
asinthecurrentsituationofbalance-sheetrecession
experiencedinanumberofdevelopedcountries.The
otheristoacceleratedomesticcapitalformationby
credit-financed public investment in projects that
havealonggestationperiod,suchasinfrastructure,
whichwillbeusedforseveralyearsorevendecades.
Thesewillbenefitnotonlythecurrentgenerationof
taxpayersbutalsofuturegenerations,whosetaxpay-
mentswillthenbeusedtoservicethedebt.




Towards More Balanced Growth: A Greater Role for Domestic Demand in Development Strategies 83


Thereisawidespreadviewthat,totheextent
thatpublicexpenditure isfinancedbygovernment
borrowing,privateagentswilltendtoreducetheir
demandfortworeasons.First,increasedborrowing
bythepublicsectorwillpushupinterestrates,which
willcutprivate investment,andsecond,consumer
demandwillfallandsavingswillrise,becausecon-
sumerswillexpecttopayhighertaxessometimein
thefuturetoenablethegovernmenttorepayitsdebt
(barro,1974).However,boththesepropositionsare
flawed.Thefirstisbasedontheerroneousassumption
thatthepublicandprivatesectorscompetefortheuse
ofagivenpooloffinancialresources.Accordingto
thisview,ifthepublicsectorabsorbsfewerfinancial
resources,morewillbeavailablefortheprivatesec-
torforproductiveuse(iMF,2003:6and110–111).
However,thereislittle,ifany,empiricalevidenceof
acrowdingoutofprivateinvestmentbypublicbor-
rowing(TDR 2010,box3.1;Aschauer,1989).onthe
contrary,publicinvestmenthasbeenfoundtohave
anoverallcrowding-ineffectonprivateinvestment.


evenarelativelylargeincreaseingovernment
borrowing is unlikely to push up interest rates,
becausethisincreasewouldstillbemarginalcom-
paredwiththetotalamountofassetsinthecapital
market.Moreimportantly,theinterestrateisitself
a policy variable determinedby the central bank,
whichcanneutralizeanyeffectthathighergovern-
mentborrowingmayhaveoninterestratelevels.but
evenifthereweretobeariseinthedomesticinterest
rate,becausemonetarypolicydoesnotsupportthe
increaseinthepublicdebt,debt-financedgovernment
spendingwouldcauseaggregatedemandtogrow,and
thiswouldencouragetheprivatesectortoinvestin
additionalproductivecapacity.


The idea that an increase in thefiscal deficit
will restrain current private spending, because it
createsanexpectationofanincreaseinthetaxrate
toenabletheStatetomakenetdebtrepaymentsin
the future, ignores thedynamicsofpublicdebt in
agrowingeconomy.First,publicdebtthatreaches
maturity is usually replaced by newdebt for the
financingofnewexpenditure,andtheneedforanet
debt repayment only occurs in exceptional cases.
in this respect,sovereigndebtdiffers fromthatof
privateagents,sinceStatesaresupposedtolastfor-
ever.Moreimportantly,acredit-financedincreasein
publicexpenditurewillgeneratenewdemandand
greateroutput,whichinturnwillboostbothprivate
incomeandfiscalrevenuesataconstantaveragetax


rate.insuchasituation,itismorelikelythathigher
publicexpenditurewillraiseprivatedemandrather
thanlowerit.


Theseconsiderationsdonotimply,ofcourse,
that debt financing of public expenditure has no
limits. indeed, an important issue inpublic sector
financingindevelopingcountriesandintheassess-
mentoffiscalspacerelatestotherisksinvolvedin
the accumulation of public debt.These risks are
related tofluctuations in economic growth and to
movements in the interest rate on the public debt
thatarebeyondthecontrolofthedebtorgovernment,
especiallywhenthedebtisdenominatedinforeign
currency(seealsochapteriiiofthisReport).Thisis
oneofthereasonswhyalimitforpublicindebted-
nessisdifficulttodetermine.Anotherreasonisthat
economicgrowthandtheprimarybudgetbalanceare
bothpartlyendogenousvariables(i.e.GDPgrowth
andtaxrevenuesarethemselvesinfluencedbythe
sizeofdebt-financedpublicspending).


Still, unsustainablefiscal policies can lead to
sovereigndebtcrises.itmaybepreferableforgovern-
mentstopayalltheircurrentandcapitalexpenditure
out of current revenues.balancedbudget rules or
public deficit ceilings have theirmerits, but they
can also unnecessarily constrain the potential for
countercyclical fiscal actionwhen current fiscal
revenuesfallandreducetheabilityofgovernments
tofinancepublicfixedcapitalformation.Thelatter
isofparticularimportancefordevelopingandtran-
sition economies that have considerable need for
substantialinvestmentsininfrastructure.Therefore,
rulesconcerningthepublicsectordeficitshouldnot
beappliedstrictlytoeverysinglebudgetingperiod;
rather,theyshouldadoptalongertermperspective.
Also,theyshouldtakeintoaccountthepurposesof
publiccreditfinancing.


Regardingthefirstaspect,aruleaccordingto
whichthepublicsectordeficitshouldnotexceedthe
long-termtrendgrowthrateoftheeconomywould
allow short-term cyclical variations of the deficit.
Sincethetrendgrowthratetendstobesignificantly
higherindevelopingandtransitioneconomiesthanin
thedevelopedcountries,theformercountriesmay,in
principle,havegreaterscopefordeficitfinancingthan
thelatter.Regardingthesecondaspect,itisimportant
tobearinmindthatsometypesofspendingarebound
tohavelargermultipliereffectsonoverallincome
growth than others. in addition, theymayhave a




Trade and Development Report, 201384


stronger stimulating effect on private investment.
Thesetypesofpublicspendingaremoresuitablefor
creditfinancingthanothersandalsoarewellsuited
toastrategyofdomestic-demand-ledgrowthbecause
theycontributetomaintaining,orevenenlarging,a
country’sfiscalspace.


Arationalapproachiscertainlytofinancecur-
rentexpendituresuchasthepaymentofcivilservants’
salaries,theconsumptionspendingofpublicentities,
andsocialexpenditurefromtaxationandothercur-
rentrevenues,exceptincaseswherecredit-financing
ofsuchexpenditure iswarranted in thecontextof
countercyclicalaction.inthesesituations,themulti-
plier effects tend to be higher, so that the deficit
willgenerallycorrectitselfasaresultofhighertax
revenuefromtheadditionalincomecreatedbythe
initialdeficitspending.


Publicexpenditureforfixedcapitalformation
isquitedifferent fromthatofcurrentexpenditure,
because, owing to the complementarities between
privateandpublicinvestment,ithasastrongpotential
toincreaseprivateinvestmentoutlaysinadditionto
itsimmediatedemandeffect.inaway,theviabilityof
publicdebtincurredforthefinancingofpublicinvest-
mentcanbeviewedinasimilarwayasprivatedebt
incurredforthefinancingofprivateinvestment.First,
thecreationofdebtisassociatedwiththecreation
ofnewproductiveassets,andsecond,similartothe
pay-offofprivateinvestmentthroughtherevenues
generatedbytheuseofprivateproductivecapacity,
public investmentcanalsobeviewedashavinga
pay-offintheformofadditionaltaxreceiptsdueto
anenlargedtaxbaseresultingfromtheoverallprod-
uctivityincreasesgeneratedbypublicinvestment.


Thissuggeststhatarationalapproachwouldbe
tolimitdebtfinancinginthemediumtermtothelevel
ofexpenditureforpublicinvestment.Withregardto
borrowinginforeigncurrency,thisshouldbelimited
tomeetingacountry’sactualforeignexchangeneeds
(i.e.borrowinginforeigncurrencyonlytotheextent
thatpublicinvestmentsrequiretheimportofcapital
goods,materialandknow-how),orifthereisaper-
ceivedneedtoaccumulateforeignexchangereserves
overandabovethataccruingfromcurrentaccount
balancesandautonomouscapitalinflowsthatarenot
usedbytheprivatesectorforthefinancingofimports.


if the space for public sector borrowing, as
determinedbytheseconsiderations,isnotfullyused,


an increase in credit-financed public expenditure
maybeconsideredasapossiblemeanstoraisenot
only domestic demand but also domestic supply
capacities.


3. Policies for fostering domestic
productivity growth and structural
change


(a) Industrial policies


Within a strategy aimed at giving greater
emphasistodomesticdemandtodrivegrowthand
development,particularattentionshouldbegivento
strengtheningdomesticsupplycapacities.Thisisnec-
essaryinordertoavoidadeteriorationinthebalance
ofpaymentsandatradedeficitresultingfromfaster
growth of domestic demand coupledwith slower
growthofexternaldemand,whichwould increase
thedependenceonforeigncapitalinflowstofinance
such deficits.This is of particular importance for
countriesthathavealargenaturalresourcebasebut
arelativelysmallmanufacturingcapacity,because
governmentsofthesecountriesmaybetemptedto
seekshort-termwelfaregainsfortheireconomyby
usinghighercommodityexportearningstopayfor
importsofconsumergoods,withno,orevenadverse,
effectsondevelopment.


Policies promoting structural transformation
andtechnologicaldynamism31willbenecessaryto
overcome the supplyanddemandchallengesaris-
ingfromwhatislikelytoremainadifficultexternal
environmentcharacterizedbyaslowrecoveryanda
weakgrowthpathofdevelopedeconomies.


Developing-countryfirmsareoftenconsidered
technological laggards thathavedifficultysupply-
ingproductswith thecharacteristicsdemandedby
consumers.Thisisclearlytrueforup-marketgoods
produced for export to developed countries.An
acceleratedandbroadertransferoftechnologyfrom
developedtodevelopingcountriesremainscritically
importantfornarrowingthisgap.Technologytransfer
relatingtocapitalgoodsandequipmentalsoremains
cruciallyimportant.


However, technological lagsplayaconsider-
ablylessimportantrole–ornoneatall–inmeeting




Towards More Balanced Growth: A Greater Role for Domestic Demand in Development Strategies 85


thedemandsofemergingmiddle-classconsumers.
Developing-countryfirmsmay bewell placed to
satisfythedemandsofthesenewconsumers,notonly
byadaptingexistinggoodsandservicestothesecon-
sumers’specificneeds,butalso–andperhapsmore
importantly–bydevelopingnewgoodsandservices
tailoredtotheirneedsorpreferences.32inaddition
totechnologicalinnovation,thedevelopmentofnew
marketinganddistributionnetworkscanbecrucial
forensuringthatnewproductsreachthenewconsum-
ersindomesticmarkets.Developing-countryfirms
mayhaveanadvantageoverdeveloped-countryfirms
inthisrespect,astheyarelikelytopossessvaluable
localknowledgeforthedevelopmentofappropriate
newdistributionnetworksandmarketingstrategies
forconqueringnewdomesticmarkets.lessaffluent
consumers often live outside the largest cities in
placeswhere reliable, high-quality and network-
driven infrastructuremay be scarce, andwhere
distribution systemsmaydiffer from those target-
ingbetter-offurbanconsumers.Developed-country
firms,ontheotherhandtendtouse“theirexisting
high-end products and services through standard
distributionchannelstotargetthemost affluenttier
ofcustomersinthelargestcities”(bostonConsulting
Group,2012:3;emphasisadded).33


Anotherissueconcernstheincreasinglyintense
competitionamongfirmstogainaccesstotheemerg-
ingconsumermarketsindevelopingcountries,and
this is likely to increase even further.established
developed-countryfirms,especiallymultinationals,
aretargetingthesenewmiddleclassesaspotential
consumers,especiallyassluggishdemandgrowthin
theirhomemarketsisslowingdowntheirbusiness
activities. in addition to buildingmarketing and
distributionnetworks,developing-countryfirmswill
need to improve their innovation capabilities and
developappropriatetechnologiesrapidlytosuccess-
fullycompeteandcapturethisnewdemandintheir
domesticmarkets.


Thekindsoftechnologiesneededtosatisfythe
changingdemand structures, and themechanisms
requiredtodevelopthem,arelikelytodifferfrom
thoseassociatedwithlargetechnologicalspurts.The
latterarebasedonadvancesinscientificunderstand-
ingwhichistranslatedbyappliedresearchintothe
developmentofcommercialproducts.bycontrast,
thechangesinmarketconditions,characterizedby
potentiallylargenewmarkets indevelopingcoun-
tries,requirestheidentificationof“latentdemand”


(Schmookler,1962)and the“steering”offirms to
workonproblemsorrequirementsspecifictothose
newmarkets(Rosenberg,1969).34Thismeansthat
demandmay drive both the rate and direction of
innovation,sothatproducers’proximitytomarkets
becomesavaluableasset.


Changesintheproductionstructureofacountry
requiredtomeetnewlyrisingdemandareunlikely
toinvolveasmoothprocess.Thereasonisthatsuch
structuralchanges toprevailingspecializationpat-
terns require a different distribution of resources
across industries.Governments can use industrial
policy to encourage this process. indeed, recent
yearshaveseenarevivalofthedebateontheroleof
industrialpolicy indevelopment,promptedby the
realizationoverthepastdecadethattheWashington
Consensus,whichexcludedanyrolefor industrial
policy, had not fulfilled its promises.As a result,
developing countries, aswell as some developed
countries, started to look for alternative develop-
ment strategies.This search for alternativeswas
accompanied by a revival of interest in classical
ideasofeconomicdevelopment,includingrecogni-
tionoftheimportanceofbothdomesticdemandand
aneconomy’ssectoralstructureforthegenerationof
linkagesandproductivitygrowth.35Thesetendencies
have been spurred by the economic andfinancial
crisisthathasaccentuatedthedebateaboutmarket
failures and the need for institutions and rules to
governmarkets.Moreover,accumulatedevidenceon
thecontributionsofinstitutionsandpoliciestosome
ofthesuccessesindevelopment(e.g.Fosu,2013)has
becomeincreasinglydifficulttoignoreanddismiss.
Asa result,policymakershavebeenmorewilling
to engage in experimentation anddevelopmentof
home-grownsolutions.Manyoftheseexperiments
includeagooddoseofindustrialpolicy,suchasin
brazil,ChinaandSouthAfrica.36


Thereorientationrequiredtoaddresspost-crisis
economicchallengesmayalsobeusedinindustrial
policy to boost developing countries’ engagement
inenvironmentallysustainablegrowthstrategies.37
However,itisclearthatnotalldevelopingcountries
can develop anduse large-scale greenproduction
and technologies for their industrial development.
Nevertheless,someopportunitiesexistforearlymov-
ersthatshouldnotbedisregarded.Asizeableshare
ofthefiscalstimuluspackagesadoptedin2008–2009
byanumberofcountries,especiallyChinaandthe
RepublicofKorea,toaddresstheglobaleconomic




Trade and Development Report, 201386


downturnwasdirectedtogreenmeasuresandinvest-
ments.Thesegreenstimuluspackagescorresponded
to5percentofGDPintheRepublicofKoreaandto
3percentofGDPinChina.Measuredinabsolutedol-
larterms,theUnitedStatesspentabouttwiceasmuch
astheRepublicofKorea.Yetthisamountcorresponds
toonlyabouthalfofChina’sexpenditure,anditcor-
respondstolessthan1percentofGDPintheUnited
States(barbier,2011).TheRepublicofKoreaand
Chinaappeartohaverecognizedmoregenerallythat
investmentsincleanenergytechnologiescanhavea
majorimpactongrowthandemploymentcreation.
Forexample,in2009theRepublicofKorealaunched
afive-yearGreenGrowthinvestmentPlan,spending
anadditional$60billiononreducingcarbondepend-
enceandonenvironmentalimprovements,withthe
aimofcreating1.5–1.8millionjobsandboostingeco-
nomicgrowththrough2020(Zelenovskaya,2012).


Sectionbofthischapterhasdiscussed,inaddi-
tiontotherepercussionsofshiftsinglobaldemandas
aresultofslowergrowthinthedevelopedcountries,
theeffectsofcontinuingfastpopulationgrowthon
thedemandforfoodandnewclimate-change-related
challenges to agricultural production. in the light
of these effects, there is an urgent need inmany
developing countries to improveproductivity, and
thusinvestment,intheagriculturalsector,whichhas
generallybeenneglectedoverdecades. increasing
agriculturalproductivitydoesnotnecessarilyrequire
huge investments in advanced technologies, but
primarilycatchingupwiththeapplicationofexist-
ing technologies.A considerable portion of such
investmentneedstotargetbasicinfrastructure,which
canbeimprovedwiththehelpofpublicworkspro-
grammes.Thesewouldalsocreateadditionalincome
andemploymentinruralareas.


(b) Issues concerning natural-resource-rich
economies


Thestrongimpactoftheglobalfinancialand
economic crisis on natural-resource-dependent
countrieshasagaindemonstratedtheneedforthese
countriestoreducetheirdependenceontherevenues
obtainedfromonlyasmallbasketofcommoditiesby
diversifyingtheirproductionandexportstructures.
in this context, the transformationof their natural
resourcebaseintophysicalcapitalshouldbecomea
keyobjectiveoftheirdevelopmentstrategies.itwill
notonlygeneratenewemploymentopportunitiesand


increasethepurchasingpowerofallthesegmentsof
theirsocieties,butalsoenlargetheirfiscalspacein
themediumtolongterm.


Totheextentthatoveralldemandforprimary
commodities remains robust and that commodity
prices,broadlyspeaking,plateauatalevelthatexceeds
that in the 1980s and 1990s, natural-resource-rich
economieswillcontinue tobenefit from improving
termsoftrade.Nevertheless,theyshouldremainalert
tothecyclicalityofprices.Moreover,asituationof
relativelyhighcommoditypricesalso implies that
these countries should not allow the exploitation
oftheirnatural-resourcewealthtojeopardizetheir
growthinthelongterm.Theycanprevent thisby
ensuring that the revenuesaccruingfromresource
exploitationareusedforinvestinginnewactivities
thatspurproductionandexportdiversification.


Thischallengerelatestohowtodealwithtwo
potentially offsetting forces: “over the short run,
positiveterms-of-tradeshockswillalways(ceteris
paribus)raiseGDP,andtheempiricalissueis…[by]
howmuch.overthelongrun,however,apositive
terms-of-tradeshockinprimaryproduct-producing
countrieswill reinforce comparative advantage,
suck resources into the export sector from other
activities, and cause deindustrialization” (Hadass
andWilliamson,2003:640–641).improvementsin
thetermsoftradeandtheresultingincreaseingov-
ernmentrevenuesshouldbeusedtoreduceincome
inequality and avoid deindustrialization through
publicinvestmentandtheprovisionofsocialservices
whichtargetthosesegmentsofthepopulationthat
donotdirectlybenefitfromresourcerevenues.Also
neededarepoliciesthatspurindustrialproduction,
suchasmaintainingacompetitiveexchangerateand
pursuingamonetarypolicy thatstimulatesprivate
investment.Theseissueshavebeendiscussedinsome
detailbyUNCTAD(2012).


(c) Implications for development partnerships


SincethelaunchoftheMillenniumDevelopment
Goals (MDGs) in 2000 and the adoption of the
MonterreyConsensusin2002,theglobalpartnership
fordevelopmenthasconcentratedlargelyonthepro-
visionofconcessionaldevelopmentassistancewitha
viewtoalleviatingpovertyindevelopingcountries.it
hasalsofocusedonincreasedaccessfordeveloping
countriestodeveloped-countrymarketswithaview




Towards More Balanced Growth: A Greater Role for Domestic Demand in Development Strategies 87


to spurring economic development in developing
countriesthroughexport-orientedgrowthstrategies.


Theincreasedprovisionofbothaidandmarket
accesswas closely related to the greater integra-
tionofdevelopingcountries,especiallyChina,into
globalmarkets.Thefocusoftheglobalpartnership
fordevelopmentonaidandmarketaccesshasoften
beencriticizedforitsneglectofthecrucialimpor-
tanceofinvestmentandthecreationandexpansionof
productivesupplycapacities(see,forexample,TDR
2006).Moreover,theonsetoftheGreatRecession
castsseriousdoubtsonthepertinenceofthisfocus
onaidandmarketaccess.itishighlyunlikelythat
donorcountrieswillmeetthetargetsfordevelopment
assistancesetatvariousinternationalsummitsany
timesooninviewoftheirfiscalproblemsassociated
withtheeffectsoftheGreatRecession.itisalsoclear
thattherulesandregulationsoftradeandinvestment
agreements,aswellastheconditionalitiesattached
toloanagreementswiththeinternationalMonetary
Fund(iMF)andtheWorldbank,havereducedthe
policyspaceofdevelopingcountries.Yet,suchpolicy
spaceisneededtodevelopthedomesticproductive
capacitiesrequiredtobenefitfromimprovedmarket
accessconditionsandenhancedevelopment.


This shortcoming needs to be redressed by
ensuringthattheglobalpartnershipfordevelopment
takesintoaccountthestructuralshiftsthathavebeen
takingplacein theworldeconomysincetheearly
2000s.oneof these shifts, onwhich this chapter
hasfocused,concernsthelikelyemergenceofabout
2billionadditionalmiddle-classconsumersoverthe
nextdecade.Thisshiftcouldbeacceleratedbythe
implementationofadevelopmentstrategythatgives
greaterimportancethaninthepasttotheexpansionof
domesticdemand.Suchastrategy,ifsuccessful,may
alsoleadtoincreasedpurchasingpoweramongthe
lowerincomegroupsindevelopingcountries.This
willopenupnewopportunitiesfortheenhancement
ofproductive capacity and economicgrowth.The
questformarketsharesinthelarge,butonlyslowly
growingmarkets of developed countries, aswell
asintheyetsmall,butrapidlygrowingmarketsin
developingcountries,willbeassociatedwithgreater
internationalcompetition. inorder tomanagesuch
increasedcompetition,developingcountriesmayneed
tomakefulluseofwhateverpolicyspacetheystill
haveattheirdisposalaftertheconclusionofvarious
regional andbilateral trade and investment agree-
mentsandtheUruguayRoundtradeagreements.


However,theseshiftsalsohavemuchbroader
implications. even though the vastly increased
importanceofdevelopingcountries inglobaleco-
nomicgrowth,trade,FDiandcapitalflowsremains
concentrated in only about a dozen of them, this
systemicchangeopensupnewpossibilities.Forone,
itgivesgreaterweighttotheirvoiceandincreases
their bargaining power as a group for reshaping
the rules and institutions that constrain the policy
spaceavailable tocountries thatare latecomers to
development.Thereisalsogreaterscopeforregional
andSouth-Southcooperationinmanyspheresand
throughdifferentformsofinstitutionalarrangements
thatpoolmarketsandresourcesfordevelopment.but
perhapsmostimportantly,theinternationalcommu-
nityshouldnowrealizethat,withthestructuralshifts
intheworldeconomy,“itistimetomoveawayfrom
unidirectionalorasymmetricalrelationships”sothat
development partnerships betweendeveloped and
developingcountries,aswellasamongdeveloping
countries,movetowardsagreaterconsiderationof
“the logicand thespiritof internationalcollective
action”(Nayyar,2012:23).


4. Conclusions


Developingandtransitioneconomiesarelikely
tofacesluggishimportdemandfortheirgoodsasa
resultofaprotractedperiodofslowgrowthindevel-
opedcountries.Thus,forpolicymakersintheformer
set of countries, reverting to the pre-crisis policy
stancewithitsemphasisonexport-orientedgrowth
isnotanoption.Theexternaleconomicenvironment
thatbenefitedsuchagrowthstrategy,especiallydur-
ingthefiveyearspriortotheGreatRecession,was
builtonunsustainableglobaldemandandfinancing
patterns.Countercyclicalmacroeconomic policies
canboostgrowthforsometime,butwilleventually
result infiscal or balance-of-payments constraints
unlesstheyarefollowedbypoliciesthatadoptamore
comprehensiveandlongertermperspective.


Alongertermpolicytosupportrapidandsus-
tainedeconomicgrowthindevelopingandtransition
economiesinthevastlychangingglobalenvironment
will need to consider adopting amore balanced
growthstrategythatgivesagreaterroletodomestic
demandtocomplementexternaldemand.Thepos-
sibilityofrapidlyundertakingsuchashiftinstrategy




Trade and Development Report, 201388


andthepolicymixneededtosupportthisshiftwill
largelydependontheextent towhichthesectoral
structureofdomesticproductionisdelinkedfromthat
ofdomesticdemand.This,inturn,willbeinfluenced
bythesizeofthedomesticmarket.Whilenatural-
resource-richcountriesmaybeabletocontinueto
benefitfromhistoricallyhighcommodityprices,they
shouldensurethattheresultingrevenuesareusedfor
investinginnewactivitiesthatspurproductionand
exportdiversification.


Particularly in countrieswheremanufactures
alreadyaccountforasizeableshareofproduction,
ashiftingrowthstrategyshouldseektoachievean
appropriatebalancebetweenincreasesinhousehold
consumption, private investment and public sec-
tor expenditure.The specificsof this balancewill
largelydependon thecircumstancesof individual
countries,but ingeneral itwillrequireanewper-
spectiveontheroleofwagesandthepublicsector
inthedevelopmentprocess.export-orientedgrowth
strategies emphasize the cost aspect ofwages; by
contrast,amoredomestic-demand-orientedstrategy
wouldemphasizetheincomeaspectsofwages,asit
wouldbebasedonhouseholdspendingasthelargest
componentofdomesticdemand.employmentcrea-
tioncombinedwithwagegrowththatisinlinewith
productivitygrowthshouldcreatesufficientdomestic
demandtofullyutilizegrowingproductivecapacities
withouthavingtorelyoncontinuedexportgrowth.
Household spending could alsobe encouragedby
facilitating access to consumer credit.However,
suchanapproachisrisky,asamplydemonstratedby
recentexperiencesinanumberofdevelopedcoun-
tries.Thepublicsectorcanfurtherboostdomestic


demandbyincreasingpublicemploymentorunder-
takinginvestment,whichisoftenapreconditionfor
private investment.inaddition,changesin thetax
structureandthecompositionofpublicexpenditure
andtransferscouldshapethedistributionofpurchas-
ing power in the economy towards those income
groupsthatspendalargershareoftheirincomeon
consumption.


increased aggregate demand fromhousehold
consumptionandthepublicsectorwouldprovidean
incentivetoentrepreneurstoinvestinincreasingreal
productivecapacity.industrialpolicycouldsupport
theassociatedinvestmentdecisionssothatthesecto-
ralallocationofinvestmentbettercorrespondstothe
newlyemergingpatternsofdomesticdemand.Given
their better knowledge of localmarkets and local
preferences,developing-countryenterprisesmaywell
haveanadvantageoverforeignonesincateringto
thesenewdemandpatterns.Theycouldthusprevent
theriseindomesticdemandfromcausingasurgein
importsfromdevelopedcountries.


Perhapsmostimportantly,distinctfromexport-
ledgrowth,agrowthstrategywithagreaterrolefor
domesticdemandcanbepursuedbymanycountries
simultaneously,includingeventhelargest,without
causingadversespillovereffectsonothercountries
andwithout inducingwage and tax competition.
indeed,ifmanydevelopingandtransitioneconomies
were tomove towards amore balanced growth
strategy simultaneously, their economies could
becomemarkets for each other, spurring regional
andSouth-South trade,and thus furthergrowth in
allofthem.




Towards More Balanced Growth: A Greater Role for Domestic Demand in Development Strategies 89


1 evidenceinchart2.1suggeststhatChinasuffered
onlymildlyfromthetradecollapsein2008–2009.
However,thedataforChinaprobablyunderreport
the actual effects by a sizeablemargin. it iswell
knownthatmuchofChina’sexportsarerecorded
astransshipmentsandre-exportsfromHongKong,
SpecialAdministrativeRegion ofChina (Hong
Kong,SAR)(e.g.FerrantinoandWang,2008),for
whichtheadverseeffectshowninchart2.1isvery
strong.


2 For amore detailed account of the contribution
of different product categories to changes in the
termsoftradeinselecteddevelopingcountries,see
UNCTAD,2012:17–19.


3 StandardChartered (2010:1) defines a supercycle
ingeneralasa“periodofhistoricallyhighglobal
growth, lasting a generation ormore, driven by
increasingtrade,highratesofinvestment,urbaniza-
tionandtechnologicalinnovationcharacterizedby
theemergenceoflarge,neweconomies,firstseen
inhighcatch-upgrowthratesacrosstheemerging
world”.


4 basedontheUnitedNationsPopulationDivision’s
medium-variant estimates (seeWorld Population
Prospects,availableat:http://esa.un.org/wpp/).


5 Morerecently,Chinahasevensurprisedthemarkets
byimportingrice(Wall Street Journal,Chinarice
importsunsettlemarket,7January2013).oeCD-
FAo (2013) also reports considerable growth in
China’simportsofsomeothercommoditiesinrecent
years,includingpigmeat,dairyproducts,maizeand
sugar.


6 See, for instance,Wall Street Journal, “China to
speedup reformofhukousystem”,18December
2012.


7 UNCTAD secretariat calculations, based on data
fromUSDA,backgroundprofileoncorn,at:http://
www.ers.usda.gov/topics/crops/corn/background.
aspx(accessedJune2013).


8 See, for instance,Wall Street Journal, “African
oil exports plunge amid swellingU.S. output”,
28February2013.


9 Foramoredetailedanalysisofthepotentialimplica-
tionsofshaleoil,seeHelbling,2013;Maugeri,2012;
Morseetal.,2012;andPWC,2013.


10 SeeFarookiandKaplinsky(2012)foramoredetailed
discussiononcommoditysupplyresponseandpro-
ductionconstraints.


11 AsdiscussedinmoredetaillaterinthisReport,this
couldalsoexertdownwardpressureon theprices
ofcertaininternationallytradedmanufactures,pos-
siblycausingproducersof suchgoods touseany
productivity increase to reduce unit labour costs.
This,inturn,wouldhaveanegativeimpactonthe
purchasing power ofworkers in these industries,
and thus on domestic demandgrowth, especially
in developing countries that continue to pursue a
developmentstrategythatreliesonexport-oriented
growthoftheirmanufacturingindustries.


12 Durable consumer goods include commodities
which have an expected life span ofmore than
threeyearsandareofrelativelyhighvalue,suchas
refrigeratorsandwashingmachines,togetherwith
othercommoditieswithausefullifeofthreeyearsor
more,suchasaudio-visualproducts.Semi-durable
consumergoodsincludecommoditieswhichhave
anexpectedlifespanofmorethanoneyearbutless
thanthreeyearsandareofrelativelylowervalue,
suchas textiles,apparel, footwearand toys.Non-
durableconsumergoodsincludecommoditieswith
anexpectedlifespanoflessthanoneyear,suchas
partsofapparelandpharmaceuticals.These three
categoriescombinedaccountedfor55percentof
China’stotalexportstotheUnitedStatesin2007.


13 UnitedStates imports of automobiles (chart 2.4)
havealsoreboundedtotheirpre-crisisdynamism.
However,developingcountriesaccountforonlya
smallshareofthoseimports.


14 Thisassumptionrelatestowhateconomistsreferto
as“homotheticpreferences”.


15 Thestructureofthistheoreticalapproachissimilar
tothetheoryofconsumptionproposedbyPasinetti
(1981) in that it is based on a generalization of
engel’slaw(i.e.anincome-drivennon-proportional
expansionofdemandandlearningprocessesbycon-
sumerswhichcausethemtoaltertheirpreferences).
However,ratherthanemphasizingdemand,Pasinetti
basedtheselearningprocessesontheappearanceof
newproductsthatresultfromtechnicalprogresson
thesupplyside.


Notes




Trade and Development Report, 201390


16 indeed,Murphy,ShleiferandVishny (1989:538)
view themiddle class as a necessary “source of
buyingpowerfordomesticmanufacturers”.


17 See the annex to this chapter for amoredetailed
discussionofthesemechanisms.


18 Forempiricalevidencesupportingtheseassumptions
withregardtopassengercars,seeDargay,Gatelyand
Sommer,2007.


19 Theinternationaldollarisahypotheticalcurrency
unitthatisgenerallyexpressedintermsofconstant
pricesinacertainbaseyearandhasthesamepur-
chasingpowerasthedollarintheUnitedStatesin
thatyear.Forthevariousissuesconcerningtheuse
ofpurchasingpowerparityandinternationalaver-
agepricesofcommoditiestocalculatetheunit,see
UnitedNations,1992.


20 “italy’s per capita incomewas used as the upper
thresholdbecauseitwasthecountrywiththelowest
incomeamongtheG7;brazil’spercapitaincome
correspondedtotheofficialpovertylineusedinrich
countriesliketheUSandGermany(about$PPP10
percapitaperday)”(bussoloetal.,2011:14).


21 TheestimatesinKharas(2010)arebasedonprojec-
tionsofGDPfortheperiod2008–2050,whereGDP
isafunctionoftheaccumulationoflabour(based
onprospectsfortheevolutionoftheworking-age
population provided by theUnitedNations) and
capital(basedontheaverageinvestmentrateforthe
period1995–2005),aswellastotalfactorproductiv-
itygrowth(basedonhistoriclong-termtechnology
growth and an assumed process of convergence
withtheUnitedStates).Allthesearecombinedwith
projectionsoflong-termexchange-ratemovements
and purchasing-power conversion rates, aswell
aswithdataon incomedistributionandestimates
ofmeanconsumptionpercapita.Theestimatesin
bussoloetal.(2011)resultfromabroadlysimilar
methodology, though this focuses on the impact
ofeconomicgrowthinChinaandindiaonglobal
growthanddistribution,andemploysgrowthrates
thataredisaggregatedbyeconomicsectorinorder
tobettermodeltheevolutionofincomedistribution.
Whilethemethodologicalapproachesusedinthese
twostudiesmaybe subject tocriticism, theyare,
nevertheless, useful for illustrating the key issue
raisedhere, namely that the developing countries
areprogressivelyaccounting for a larger shareof
globalconsumption.


22 Thecorrelationbetweenthegrowthoflabourincome
andthegrowthofhouseholdconsumptionissignifi-
cantatthe10-percentlevelofconfidence.


23 Thesefindingsaresupportedbyacomprehensive
studybyonaranandGalanis(2012)whichshows
that,takingtheworldeconomyasawhole,asimul-
taneousandcontinuingdecline in thewageshare
leadstoaslowdownofglobalgrowth.Furthermore,
taking countries individually in amore detailed


investigationof16membersoftheG20,theauthors
observethat9ofthemshowapositivecorrelation
betweenwagegrowthandGDPgrowth.Moreover,
4oftheremaining7economieswhichshownegative
correlationsbetweenwagegrowthandGDPgrowth
whentakenindividually,effectivelyregisterlower
growthwhenthewagesharesofalltheeconomies
fallsimultaneously.


24 Therecentdebateonhigheraggregatedemandthat
resultsfromanincreaseingovernmentspending(i.e.
“themultipliereffect”)indicatesthatthiseffectis
generallyhigher–andexceedsunity–inrecessions
thaninmorenormaltimes.


25 itshouldbenotedthatanyschemethatattemptsto
increasethesalesanduseofprivatecarsmaycon-
flictwithurbanizationstrategiesthatgivepriorityto
expandingpublictransportsystems.


26 JPMorgan,“Thailand:autosslowingbutdomestic
demandnotstalling”,Global Data Watch,22March
2013.


27 Revenue fromcapital investments (e.g. dividends)
mayalsoboostdisposablepersonalincome.However,
suchsourcesareunlikelytobeofmuchsignificance
tomostof the segmentsof thepopulation that are
targetedasagentsofincreasedhouseholdconsump-
tionspending(i.e.lowerandmiddle-incomeclasses).


28 insomecountries,suchasbrazil,therapidgrowth
ofhouseholdcredithasalsobeenaffectedbycapital
inflows (which have provided ample liquidity to
banks)andbythedevelopmentofdomesticcredit
markets.ChapteriiiofthisReportaddressesthese
issuesindetail.


29 R.Colitt, “brazil consumer default rate drops to
lowestlevelin16months”,bloomberg,26March
2013; available at: http://www.bloomberg.com/
news/2013-04-26/brazil-consumer-default-rate-
drops-to-lowest-level-in-16-months.html.


30 Thistrade-offispartofthedebate(furtherdiscussed
inchapteriii)aboutwhethercentralbanksshouldbe
concernedexclusivelywithpricestability(e.g.by
pursuinginflationtargeting),orwhethertheyshould
alsoberesponsibleformaintainingfinancialsector
stability,whichmayimplypreventingtheformation
ofassetpricebubbles.Acentralbankthatpursues
inflation targetingwouldmaintain low interest
rateswhentheinflationrateislow.Thelowinterest
rates,inturn,wouldallowhouseholdstocontainan
increaseintheirdebtburden,eveniftheiroutstand-
ingdebt increases.However, a sudden change in
riskperception,caused,forexample,bythebursting
ofanassetpricebubble,willleadtoasuddenand
sizeableriseintheinterestrateonoutstandingdebt,
withensuingadverseeffectsonspending.


31 itisclearthattheneedfortechnologicaldynamism
doesnotconcernonlymanufacturing,whichisthe
focus of this section.However, the primary and
services sectorsoftenprovide feworonlypoorly




Towards More Balanced Growth: A Greater Role for Domestic Demand in Development Strategies 91


paidjobs,andproductivitygrowthinthesesectors
usuallylagsbehindthatinmanufacturing.


32 Arelatedissueconcernstheimpactofashiftofmajor
segmentsoftheendmarketsformanufacturesfrom
developedtodevelopingcountriesonthefunctioning
of global supply chains. industrialization through
participationandupgradinginglobalvaluechains
hasplayedacrucialroleinmanycountries’export-
orienteddevelopmentstrategiesover thepast two
decades.However, empirical evidence suggests
thatsupportingexporters’domesticembeddedness,
ratherthanfavouringparticipationinsupplychains,
iscrucialforproductupgradingandforachieving
profitability and value added (see, for example,
Jarreau and Poncet, 2012; andManova andYu,
2012).Theexistenceofsuchbackwardlinkagesmay
becomeevenmore importantfor theresilienceof
developingcountries,assomesegmentsoftheend
marketsforconsumergoodsshifttotheirdomestic
economies(i.e.closertotheproductionsitesofsuch
goods),therebyalsoincreasingtheforwardlinkages
ofsuchproductionsites.Thismayeventuallyprovide
anopportunityfordeveloping-countryfirmstolead
supply chains, rather thanmerely integrate into
existingchains,anddevelopbytryingtoincrease
thevalue-addedcontentoftheiractivities.


33 it is interesting to note in this context that some
marketanalystshavestartedtowarnevenWestern
producersofluxurygoodsthatthetimemaysoon


be overwhen luxury goods embodying famili-
ar French and italian cultural values sell well,
and that theywill increasingly need to offer less
standardized items,which take account of values
embedded in the cultures of their destination
markets(V.Accary,“lemarchéduluxedansles
paysémergentsestentraindechanger,ilfauts’y
adapter!”,Le Monde Economie,25March2013;
available at:. http://www.lemonde.fr/economie/
article/2013/03/25/le-marche-du-luxe-dans-les-
pays-emergents-est-en-train-de-changer-il-faut-s-
y-adapter_1853658_3234.html).


34 Miles (2010:3)providesadetailed reviewof the
“schismbetweenSchumpeter’semphasisontechnol-
ogybreakthroughsandSchmookler’sstressoninno-
vationrespondingtothepullofmarketdemand.”


35 boththeseissueswerediscussedindetailinTDRs
2003and2006.


36 Theseexperimentsarenotonlyrelatedtothedevel-
opment of domestic supply capabilities required
forsatisfyinggrowingdomesticconsumerdemand,
which is the focus here; they also concern issues
related to global supply chains,where industrial
policyinvolvesregulatinglinkstotheglobalecono-
my,suchasthroughtrade,FDiandexchangerates
(see,forexample,Milberg,JiangandGereffi,2013).


37 industrialpolicycanalsobeavehicle forgreater
regionalintegration,especiallyforsmallcountries
(forUruguay,seeTorres,2013).


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Shifting Growth Strategies: Main Implications and Challenges 95


Manydevelopingcountrieshavepursuedexport-
orientedgrowthstrategiesoverthepastthreedecades.
Thesuccessof suchstrategiesdependson rapidly
growingglobaldemandandtheidentificationofnew
exportmarkets or the expansionof existingones,
combinedwiththeabilityofanexportingcountryto
entermarketsegmentswithhighgrowthandpotential
forproductivitygrowth.


With theonsetof theglobalcrisis, suchstrat-
egies are no longer viable. Demand growth in


developed-countrymarkets, especially theUnited
Statesandeurope,hasdeclinedsharply.Despitean
earlyswiftrebound,itiswidelyexpectedthatslow
growthinthedevelopedcountrieswillreduceexport
opportunitiestothesecountriesforalongtime.This
raises the question as towhether developing and
transitioneconomies,andespeciallythelargeones
amongthem,canshiftfromanexport-orientedtoa
more domestic-demand-oriented growth strategy.
Thisannexaddresseswhatsuchashiftwouldentail.


Annex to chapter II


ShIFTING GROwTh STRATEGIES:
MAIN IMPLICATIONS AND ChALLENGES


Theorientationofacountry’sgrowthstrategy,
whethermore towards exports ormore towards
domesticdemand,impliesdifferencesinthegrowth
contributionofthevariouselementsofthenational
incomeaccountingidentityexpressedas:


Y=C+I+G+(X-M) (1)


whereacountry’soutput(Y)isthesumofhousehold
consumption expenditure (C), investment (I),
governmentexpenditure(G)andthecurrent-account


balance,i.e.thedifferencebetweenexports(X)and
imports(M).1eachelementontheright-handside
oftheequationhastwocomponents,oneofwhich
isautonomousandtheotherafunctionofnational
income,whichinturnequalsoutput(Y).Anexport-
orientedgrowthstrategywillpayparticularattention
to the relationship between exports and imports,
whiletheotherthreecomponentswillbeofgreater
interestinamoredomestic-demand-orientedgrowth
strategy.


1. The national income accounting identity and economic growth




Trade and Development Report, 201396


Mostmodels of economic growth pay little
attentiontothevariouscomponentsofthenational
incomeaccountingidentity.Suchmodelsaresupply-
driven, with output growth being a function of
factor inputs and factor productivity.Aggregate
demandforoutputisassumedtobesufficientforfull
utilizationofcapacity.Tradeistheonecomponent
oftheaccountingidentitythatenterssupply-based
growth analyses, sometimes through the terms of
trade(definedastheratioofexportpricestoimport
prices), butmore usually on the assumption that
“tradeopenness”contributestocapitalaccumulation
or productivity growth.Different studiesmeasure
openness differently: some through tariff rates or
non-tariffbarriers,butmostcommonlyassomeratio
of tradeflows tooutput (HarrisonandRodriguez-
Clare,2010).


Fromsuchasupply-basedperspective,“export-
oriented growth” refers to a high ratio of exports
andimportsrelativetooutput((X+M)/Y),i.e.being
very open to trade.Ahighdegree of openness to
trademaycontribute togrowth if imported inputs
aremoreproductivethandomesticinputs,orifthere
are technological spillovers or other externalities
from exporting or importing. The literature on
globalvaluechainssuggests thatahighdegreeof
tradeopennesswillhaveapositiveeffectongrowth,
particularlyincountriesthatexportalargeproportion
ofmanufacturesandsucceedin“movingupthevalue
chain”,i.e.theyincreasethevalue-addedcontentof
theirexports.Ahighdegreeoftradeopennessisalso
ofmicroeconomicrelevance,sinceitdeterminesthe
degree towhich thesectoralstructureofdomestic
productionisdelinkedfromthatofdomesticdemand.
Thisgapwillbeparticularlywideforcountriesthat
exportahighproportionofprimarycommodities;but
itwillalsobesubstantialforcountriesthatproduce
goods, such as consumer electronics,which few
domesticconsumerscanafford.


The national income accounting identity is
of immediate relevance for themacroeconomic
causation of growth if it is considered from the
demand side. From a demand-based perspective,
“export-orientedgrowth”referstoalargedifference
between exports and imports relative to output
((X-M)/Y), i.e. running a large trade surplus.The
reasonwhythisperspectiveconsidersthedegreeof
opennessasbeinglessrelevantforgrowthis that,
focusingontheshareofhouseholdconsumptionin


output,thenationalincomeaccountingidentitycan
berearrangedas:





Y


MX
Y


GI
Y
C )()(


1



+


−=




(2)


where anygiven share of household consumption
inoutput(i.e.C/Y)iscompatiblewithanunlimited
rangeofvaluesoftradeopenness(i.e.(X+M)/Y).A
country canhave a high share of consumption in
outputandstillexportmostofitsoutput.bycontrast,
thelargerthetradesurplus(i.e.(X-M)/Y),thelarger
willbethegrowthcontributionofexports,andthe
smallerwill be the contributions of the domestic
demandelements(i.e.C,IandG)requiredtoattain
agivenrateofgrowth.


A related demand-basedmeaning of export-
orientedgrowthemphasizestheroleofthebalance-
of-payments constraint in limiting output growth.
Fromthisperspective,exportorientationisrelevant
foracountry’sgrowthstrategyforatleasttworeasons
(Thirlwall, 2002: 53).2 First, exports are the only
trulyautonomouscomponentofdemand,i.e.theyare
unrelatedtothecurrentlevelofnationalincome.The
majorsharesofhouseholdconsumption,government
expenditureandinvestmentdemandaredependenton
income.Second,exportsaretheonlycomponentof
demandwhoserevenuesaccrueinforeigncurrency,
andcan thereforepayfor the import requirements
ofgrowth.Growthdrivenbyconsumption,invest-
mentorgovernmentexpendituremaybeviablefor
ashorttime,buttheimportcontentofeachofthese
componentsofdemandwillneedtobebalancedby
exports.ofcourse,suchbalancingisnotnecessary
if a country accumulates external debt, absorbs a
risingamountofnetcapitalinflowsorletsthereal
exchangeratedepreciate.However,thelengthoftime
anyofthesethreestrategiescanbepursueddepends
verymuchon the external economic environment
(e.g.thesizeoftherateofinterestoninternational
capitalmarkets),andtheycanquicklyspiralintoa
balance-of-paymentscrisis.


Atwhatpointintimethebalance-of-payments
constraintisfeltdependsontheimportcontentofthe
variouscomponentsofaggregatedemand(YD)which
areapartofleakage,i.e.thefractionofachangein
nationalincomethatisnotspentoncurrentdomestic
production,but insteadsaved (s),paid in taxes (t)




Shifting Growth Strategies: Main Implications and Challenges 97


orspentonimports(m).Thus,thedeterminationof
aggregatedemandcanbeschematicallyexpressedas:






mts
XGI


YD ++
++


=


(3)


Aspecialcaseofthisequationisthedynamic
version ofHarrod’s foreign trademultiplier. in
this case, household consumption, investment,
andgovernment expenditure haveno autonomous
elementandtradeisassumedtobebalancedinthe
long run (i.e.X=M), because all output is either
consumedorexportedandallincomeisconsumed
either on domestic goods or imports.Thismeans
that savings and taxesmust equal investment and
government expenditure (i.e. s+t=I+G).Thus, the
growthrateofcountryi(gi)isdeterminedbywhatis
knownas“Thirlwall’slaw”,andexpressedas:


i
i


i
z


g pi
ε


=


(4)


whereεiistheworld’sincomeelasticityofdemand
forexportsfromcountryi,πiistheincomeelasticity
ofdemandforimportsbycountryi,andzistherate
ofworldincomegrowth(Thirlwall,1979).According
toequation(4),acountry’sgrowthrateisdetermined
bytheratioofexportgrowthtotheincomeelasticity
ofdemandfor imports.Thegrowthofacountry’s
exports(xi)–withxi=εiz–isdeterminedbywhatis
goingonintherestoftheworld.it influencesthe
growthofYD,andhencethegrowthofoutput(inthe
shortrunviatherateofcapacityuseandinthelong
runbymotivatingtheexpansionofcapacity).3Given
thecurrentsituationofslowgrowthindeveloping
countries’mainexportmarkets,equation(4)implies
thatdevelopingcountries’economicgrowthwillbe
constrainedbyaslowdownintheexpansionoftheir
exports.


in addition to the impact on the expansion
of exports taken as a bundle, the extent towhich
an exporting country’s growth rate is affected by
economicgrowthintherestoftheworldalsodepends
onitspatternofspecialization.4ifacountryexports
goodsandserviceswitharelativelylargepotential
forinnovationandtechnologicalupgrading,output
growth couldbeboosted through improved factor
productivityor through an increase in the income
elasticityofdemandstemmingfrominnovation-based
improvementsinthequalityofgoods.ifacountry


exportsfromsectorswithmorerapidinternational
demandgrowth,itcouldbenefitfromalargerincome
elasticityofdemand for its exports, thusboosting
outputgrowthbyattainingahigherε/πratio.Sectors
inwhichthereissignificantpotentialforinnovation
maybecalled“supplydynamic”,whilesectorsthat
benefitfromarapidgrowthofinternationaldemand
may be called “demand dynamic” sectors.And
thereisasignificantdegreeofoverlapbetweenthe
two groups (Mayer et al., 2003).Comparedwith
primary commodities,manufactures are usually
considered as having both greater potential for
innovation and technological upgrading aswell
as better international demandprospects.export-
orientedindustrializationisastrategythatexploits
this overlap during periods of favourable export
opportunitieswithaviewtoincreasingacountry’s
ε/π ratio (especially through an increase in ε) and
thereforeitsgrowthrate.ontheotherhand,thisalso
meansthat,inthecurrentcontext,theadverseimpact
ofslowgrowthindevelopedcountriesislikelytobe
greaterondevelopingcountriesthatpursueanexport-
orientedgrowthstrategythatreliesmainlyonexports
ofmanufacturesthanondevelopingcountrieswhose
similarstrategyreliesmainlyonexportsofprimary
commodities.


The argumentmade in this chapter adopts a
demand-sideperspectivemainlybecauseitfacilitates
anexaminationoftheprocessesinvolvedinshifting
theorientationofacountry’sgrowthstrategyfrom
onecomponentofdemand(i.e.exports)toanother
(i.e. domesticdemand).but takingademand-side
perspectiveongrowthalsoallowsestablishingalink
betweentheorientationofgrowthstrategiesandthe
currentdebateonrebalancing,muchofwhichrelates
totheshareofhouseholdconsumptioninaggregate
demand.TheG20leaders’Statement(2009)atthe
PittsburghSummit called for a rotation of global
demandfromcountrieswithacurrentaccountdeficit
(especially theUnited States) towards countries
withacurrentaccountsurplus(suchasChinaand
Germany),where domestic expenditure in deficit
countrieswould no longer exceed their income
butrapidglobalgrowthwouldbemaintained.This
is because surplus countrieswould, at least for a
periodoftime,recordaccelerateddomesticdemand
growthinexcessoftheirincome.Finally,someof
thosecountrieswhoseexportopportunitiesmaybe
adversely affectedby a prolongedperiodof slow
growthindevelopedeconomiesmayriskfallinginto




Trade and Development Report, 201398


theso-called“middle-incometrap”,asthedeclinein
theirmanufacturedexportsmaysignificantlyslow
downeconomicgrowth.itisgenerallyarguedthat
those countrieswill increasingly need to rely on


innovation(i.e.investmentinthenationalaccounting
identity),andhouseholdconsumptionexpenditurein
ordertocontinuetocatchupwiththeincomelevels
andstandardsoflivingofthedevelopedcountries.


Considered froma demand-side perspective,
therearethreemainchallengesinswitchingfroma
growthstrategybasedonexportstoonebasedmore
ondomesticdemand.onerelatestothesizeofthe
domesticmarket.According to equation (2), the
increaseinthesumofC,IandGmustbesufficiently
large to compensate for the decline in the trade
surpluscausedbyafallinexportswithouthavinga
negativeimpactongrowth.WithΔdenotingchanges,
thiscanbeexpressedas:


Y
MX


Y
GIC )()( −∆


−=
++∆



(5)


Concentratingonhouseholdconsumption,the
claimthatasizeablesegmentof thepopulation in
someofthemostpopulousdevelopingandtransition
economies (e.g. brazil, China and the Russian
Federation)hasattainedmiddle-classstatus,andthat
thisstatusisnotfarfrombeingattainedinsomeother
economiesaswell(suchasindiaandindonesia)(e.g.
bussoloetal.,2011;Kharas,2010)suggeststhatthese
economieshaveasufficientlylargedomesticmarket
forrisinghouseholdexpendituretocompensatefor
atleastamajorpartofanydeclineinexportdemand
duetolowgrowthindevelopedcountries.


The second challenge concerns the risk that
a switch in growth strategywill rapidly become
unsustainablebytriggeringasurgeinimportsand
ensuingbalance-of-paymentsproblems.5Differences
intheimportintensityofthedifferentcomponentsof


aggregatedemandimplythattherelativeimportance
ofC,GandIdeterminestheevolutionofimports.
Rewriting equation (1),withmC,mI,mG, andmX
denotingtheimportintensityofC,I,G,andX,leads
to


Y=(C-mCC)+(I-mII)+(G-mGG)+(X-mXX) (6)


whichshowsthatthesedifferencesimplythatchanges
inthecompositionofacountry’saggregatedemand
will cause significant changes in imports,which
occurevenifthelevelofnationalaggregatedemand
doesnotchange.Statisticalevidenceindicatesthatin
mostcountriestheimportintensitiesofexportsand
investmentexceedthatofconsumption,andthatthe
importintensityofhouseholdconsumptionexceeds
that of government consumption, since the latter
includes a large proportion of non-tradables such
asservices(e.g.bussièreetal.,2011).Avariation
in the importcontentsof thedifferentelementsof
aggregatedemandimpliesthatchangesinthetrade
balancehavedifferentindirectimpactsongrowth.6


AsnotedbyMcCombie(1985:63),“anincreasein
exports allows other autonomous expenditures to
be increaseduntil incomehas risenby enough to
induceanincreaseinimportsequivalenttotheinitial
increaseinexports.”


Maintaining some export growthwillmost
likelybenecessaryinordertofinancetheimports
ofprimarycommoditiesandcapitalgoodsrequired
for ongoingurbanization and for an expansion of


2. A demand-side perspective on the transition from an export-oriented
to a more domestic-demand-orientated growth strategy




Shifting Growth Strategies: Main Implications and Challenges 99


domesticproductivecapacity.inthecurrentcontext,
maintainingsomeexportgrowthmaybemorefea-
sible for developing-country exporters of primary
commodities, especially energy. For developing
countriesexportingmanufacturedgoodstodeveloped
countries,itwilldependontheevolutionofimport
demand in developed countries, butwould prob-
ablyalsorequireseekingotherdestinationmarkets,
mainly in developing countrieswhere consump-
tion expenditure is increasing.Maintaining export
growthcouldalsobeachievedby the inclusionof
moresophisticatedgoodsintheexportbasket,such
asthroughupgradinginglobalvaluechainswhich
could both raise exports and reduce imports, but
muchofthescopefordoingsowillalsodependon
theevolutionofimportdemandindevelopedcoun-
tries.However,itmustbeborneinmindthatfrom
theperspectiveoftheglobaleconomy,anycountry’s
tradesurplusmustbeabsorbedbyacommensurate
growthinothercountries’imports.


The third challenge relates to the fact that,
unlike exports, the bulk of the other components
of aggregate demand (i.e. household consumption
expenditure, government expenditure and invest-
ment) is not autonomous, but induced by income
(e.g.C=cY,wherecisthemarginalpropensitytocon-
sume).Thismeansthatforashiftingrowthstrategy
tobesustainable,aninitialincreaseinexpenditure
in the, usually small, autonomous segments ofC,
GandImusttriggeranincreaseinexpenditurein
those segmentsofC,G and I that are inducedby
income,andincomeitselfmustbegeneratedinthe
process.Theremainderofthisannexdiscusseshow
theautonomoussegmentsofthevariouscomponents
ofdomesticdemandcanbeincreased,andhowsuch
increases can create income that, in turn,would
enablegrowthinthosesegmentsthatareafunction
ofincome.


Somepartofgovernmentexpenditureisautono-
mous, and canbefinancedby issuinggovernment
bondsorimposinghighertaxrates.However,muchof
governmentexpenditureandrevenueisendogenous
(such as payments for unemployment benefits and
taxreceipts),andisthereforeafunctionofincome.
The income effects of an increase in government
expenditure,inturn,dependonitsmultipliereffects
and on the degree of internationally coordinated
fiscalexpansion.Thereisanongoingdebateabout
thesizeof themultipliereffect,but it isgenerally
agreedtobehigherinaslumpthaninmorenormal


times(blanchardandleigh,2013).in2008–2009,
simultaneousfiscalexpansionplayedacrucialrole
incompensating for theadversegrowtheffectsof
decliningexportopportunitiesfordevelopingcoun-
tries.However, these countriesmaynot have the
necessaryfiscalspacetoenabletheadoptionofsuch
measures a second time (or evenon a continuous
basisoveragivenperiod).Moreover,thereareques-
tionsastohowmuchofacountry’sfiscalexpansion
undertakenindividuallyspillsovertoothercountries
throughrisingimports.Coordinatedfiscalexpansion
would greatly bolster the growth prospects of all
participating countries, but this requires consider-
ablesolidarityamongStatesandpeoples,whichis
unlikelyintheforeseeablefuture.


investmentalsohasanautonomouscomponent,
particularly public investment in infrastructure
and housing.However, the bulk of investment is
endogenousandisdeterminedbytheopportunitycost
ofcapital.Thisismainlyafunctionoftheshort-term
interestratesetbythecentralbankandexpectations
offuturegrowthofsales.ifentrepreneursexpecta
strong and sustained increase indemand forwhat
theyproduce,theywillengageinlargeinvestment
expenditures financed, for example, through the
creation of liquidity by commercial banks.This
meansthatacountry’soverallshareofinvestment
inGDPmustbecompatiblewithitsoverallshareof
consumptioninGDPtoachieveabalancedexpansion
of domestic demand. if investment continuously
outpaces consumption, the productive capacity
createdwill be underutilized,whichwill depress
revenuesand,totheextentthatinvestmentisdebt
financed, itwill create problems in the domestic
financialsystem.


Turning to the third component of domestic
demand(i.e.householdconsumptionexpenditure),
thefinancialabilityofasizeablegroupofconsum-
erstodelink,atleasttemporarily,consumptionfrom
currentincomewillfacilitateabroad-basedincrease
inconsumptionexpenditure.Suchadelinkingmight
occur,forexample,inanticipationofahigherfuture
incomeorforreasonsofsocialinterdependenciesin
consumption.boththesefactorsmaywellbeconsid-
eredkeycharacteristicsofmiddle-classhouseholds.
Usually, low-incomehouseholdswillnothave the
discretionary income or the savings required to
engage in spending unrelated to current income,
eveniftaxpoliciesandgovernmenttransferstolow-
incomehouseholdsaffectconsumptionspendingby




Trade and Development Report, 2013100


thiscategory.High-incomehouseholdsarelikelyto
preferspendingonconspicuous,luxurygoods,and
theirnumberwillgenerallybesmallerthanthatof
middle-classhouseholds.Moreover,generally it is
middle-classhouseholdsthatseekaccesstoconsumer
creditwhichfinancespurchasesofdurableconsumer
goods.Aninitialprovisionofthepurchasingpower
required for accelerated consumption expenditure
throughsourcesdelinkedfromwageincomewould
alsolimitanyadverseconsequencesforinternational
competitivenessthatcanbeduetoashiftfroman
export-oriented growth strategy,which has often
reliedonlowwages,toagrowthstrategythatrelies
moreonprivateconsumption.However,tobesus-
tainable,thiswilleventuallyrequireahigherwage
income.


The autonomous part ofmiddle-class con-
sumptioncouldalsobefinancedbyborrowingfrom
abroad,whichwouldappearasanexternaldeficit
in the national income accounting identity (equa-
tion1),orthroughvariouspossibilitiesthatwould
reduceleakagebyincreasingthesizeofs(=1minus
themarginalpropensitytoconsumeoutofincome)
inequation(2):areductionofspendingorsavings
by another class of households, for exampleby a
redistributionofincome(throughtaxesortransfers)
fromhigh-incometomiddle-classhouseholds,bor-
rowing from domestic lenders, and/or improved
socialsecuritysystems.


However, if agreater roleofhouseholdcon-
sumption in a country’s growth strategy is to be
sustainableinthecurrentcontext,wherethegrowth
of itsexports isconstrainedbyslowgrowth in its
destinationmarkets,thebulkoftheriseinconsumer
demandmustbemetbydomesticproductionrather
thanbyimports.Someofthisdomesticproduction
may consist of those goods thatwere formerly
exported to developed countries, but the restwill
need tocomefromincreaseddomesticproduction
madepossiblebyinducedinvestment.Thisinturn


will create employment and income for domestic
consumers and lead to an increase in consumption
linkedtocurrentincome.Thusthecreationofdomestic
purchasing power through jobs and income is an
essentialconditionforashiftfromanexport-oriented
to amore domestic-consumption-oriented growth
strategytobesustainable,asitwillboostthenon-
autonomouscomponentofhouseholdconsumption.


Thislatterpointillustratesthatevenagrowth
strategybasedonanincreaseindomesticdemand
needstogivestrongemphasistothesupplystruc-
ture of the economy. induced investmentmaybe
particularlysensitivetotwofactors.First,thetastes
andpreferencesofmiddle-classconsumersindevel-
oping countriesmaywell differ from the existing
high-endproductsmuchsoughtafterbyconsumersin
developedcountriesandbythemostaffluentgroups
of consumers in the largest cities of developing
countries,whoarethestandardtargetsofdeveloped-
countryfirms.itmaybeeasierfordomesticproducers
thanforeignproducerstodevelopgoodswhosechar-
acteristicsmatchthepreferencesoflocalmiddle-class
consumers. Second, emphasizing that trade is not
costless,andthatgeographicaldistancetomarkets
stillmatters,theliteratureoninternationaltradeand
economic geography has shownhowmarket size
andrelativegeographicpositionaffectspecialization
patterns.inparticular,greaterdomesticdemandfor
manufacturedconsumergoods“willleadtohigher
wageswhich, in the presence of non-homothetic
preferencescombinedwithpositivetradecosts,will
shift local production towards themanufacturing
sector”(breinlichandCuñat,2013:134).intaking
advantageoftheassociatedinnovationopportunities,
developing-countryfirmswould need to combine
investment in supply- and demand-dynamic sec-
tors, therebyreducing the importcontentof rising
domestic consumption expenditure, i.e. increasing
theircountry’sε/πratio,asexpressedinequation(4),
especially through a decline inπ associatedwith
privateconsumption.




Shifting Growth Strategies: Main Implications and Challenges 101


1 Treatingthecurrentaccountasexactlyequaltonet
exportsisanapproximation,whichassumestransfers
to equal zero.Transfers in the formofworkers’
remittances play a significant role in the national
incomeofpoorcountries.


2 Foradiscussionofotherdemand-orientedgrowth
models,seeSetterfield,2010.


3 Thisrelationshipissubjecttoanumberofassump-
tions,includingconstantrelativeprices(orthereal
exchangerate),andtheMarshall-lernercondition
beingjustsatisfied(i.e.thesumofthepriceelas-
ticitiesofdemandfor importsandexportsequals
unity),sothatthegrowthofexportsissolelydeter-
minedby thegrowthofworld income.Thirlwall
(2013:87–90)concludesfromareviewofa“mass
ofstudiesapplyingthemodelinitsvariousforms
to individual countries and groups of countries”
thatthe“vastmajorityofstudiessupportthebal-
ance of payments constrainedgrowthhypothesis
fortwobasicreasons.Thefirstisthatitisshown
overwhelminglythatrelativepricechangesorreal
exchangeratechangesarenotanefficientbalance
ofpaymentsadjustmentmechanismeitherbecause
thedegreeoflong-runchangeissmall,ortheprice
elasticity of exports and imports is low.…The
second reasonwhy themodelfits sowell is that
evenifbalanceofpaymentsequilibriumisallowed
…thereisalimittothecurrentaccountdeficitto
GDPratiothatcountriescansustain”.Forfurther
discussionofthedebateaboutthisrelationship,see
McCombie(2011).Forafulldiscussionabouthow
Thirlwall’slawrelatestoKaldoriangrowththeory


andabouttherobustnessofitsbasichypothesisto
extensionssuchastakingaccountofrelativeprice
dynamics,internationalfinancialflows,multi-sector
growth,cumulativecausation,andtheinteraction
between theactualandpotential ratesofgrowth,
seeSetterfield(2011).


4 ForanextensionofThirlwall’slawtoamulti-sectoral
economy,seeAraujoandlima(2007)andRazmi
(2011).


5 While inducedimportsmaybethemainfactor in
theleakageidentifiedinequation(3),savingsand
taxationalsoplayarole.Savingscausehouseholds’
expenditure to be lower than their total income.
Households’ net acquisition of financial assets
andother formsofwealth reduces the amountof
disposable income that constitutes consumption
expenditure.However,dependingontheagestruc-
tureofthepopulationandtheavailabilityofsocial
securitysystems,especiallyforseniorcitizens,this
reductionislikelytobesmallformostindividuals,
especially thosebelonging tomiddle-classhouse-
holds.Dataonthedistributionofhouseholdwealth
indicateahighconcentration,withtheshareofthe
top10percentofadultsholdingovertwothirdsof
globalwealth(Daviesetal.,2010).Moreover,accu-
mulatedwealthisusuallyusedtofinancehousing,
ratherthandurablegoodsconsumption.


6 Thecompositionofprivateconsumptionbetween
tradablegoodsandnon-tradableservicesalsoplays
a role.Workers in the latter sector demandmore
importsbutdonotcontributetoexports,withensuing
adverseeffectsonthebalanceofpayments.


Notes




Trade and Development Report, 2013102


AraujoRAandlimaGT(2007).Astructuraleconomic
dynamics approach to balance-of-payments-con-
strainedgrowth.Cambridge Journal of Economics,
31(5):755–774.


blanchardoandleighD(2013).Growthforecasterrors
and fiscalmultipliers.Working PaperNo 13/1,
internationalMonetaryFund,Washington,DC.


breinlich H and CuñatA (2013). Geography, non-
homotheticity,andindustrialization:Aquantitative
analysis.Journal of Development Economics,103
(July):133–153.


bussièreM,CallegariG,GhironiF,SestieriG,Yamano
N (2011). estimating trade elasticities:Demand
compositionandthetradecollapseof2008–09.NbeR
WorkingPaper17712,Cambridge,MA,December.


bussoloM, deHoyosRe,MedvedevD and van der
MensbruggheD (2011).Global growth and dis-
tribution:China, india, and the emergence of a
globalmiddleclass.Journal of Globalization and
Development,2(2):Article3.


DaviesJb,SadströmS,ShorrocksAandWolffeN(2010).
Thelevelofdistributionofglobalhouseholdwealth.
The Economic Journal,121(1):223–254.


G20(2009).leadersStatement:ThePittsburghSummit.At
http://www.g20.utoronto.ca/2009/2009communique
0925.html.


HarrisonAandRodriguez-ClareA(2010).Trade,foreign
investment, and industrial policy for developing
countries. in:RodrikD andRosenzweigM, eds.
Handbook of Development Economics, Vol.5.North-
Holland,Amsterdam:4039–4214.


KharasH (2010).Theemergingmiddleclass indevel-
oping countries.WorkingPaperNo. 285,oeCD
DevelopmentCentre,Paris.January.


MayerJ,butkeviciusA,KadriAandPizarroJ (2003).
Dynamicproductsinworldexports.Review of World
Economics,139(4):762–795.


McCombie JSl (1985).economic growth, theHarrod
foreign trademultiplier and the Hicks’ super-
multiplier.Applied Economics,17(1):55–72.


McCombie JSl (2011).Criticisms anddefencesof the
balance-of-payments constrained growthmodel,
some old, some new.PSL (Paolo Sylos Labini)
Quarterly Review,64(259):353–392.


RazmiA(2011).exploringtherobustnessofthebalance
ofpayments-constrainedgrowthideainamultiple
goodframework.Cambridge Journal of Economics,
35(3):545–567.


SetterfieldM(ed.)(2010).Handbook of Alternative Theories
of Economic Growth.CheltenhamandNorthampton,
MA,edwardelgar.


SetterfieldM(2011).TheremarkabledurabilityofThirl-
wall’s law.PSL (Paolo Sylos Labini) Quarterly
Review,64(259):393–427.


ThirlwallAP(1979).Thebalanceofpaymentsconstraint
as an explanation of international growth rate
differences.Banca Nazionale del Lavoro Quarterly
Review,32(128):45–53.


ThirlwallAP(2002).Trade, the Balance of Payments and
Exchange Rate Policy in Developing Countries.
CheltenhamandNorthampton,MA,edwardelgar.


ThirlwallAP (2013).Economic Growth in an Open
Developing Economy: The Role of Structure and
Demand. Cheltenham and Northampton,MA,
edwardelgar.


References




Financing the Real Economy 103


Aredesignofdevelopmentstrategiesinvolves
structuralchangeaswellasanexpansionofproduc-
tivecapacitiesandtheiradaptationtonewdemand
patterns,allofwhichrequirefinancing.Theavail-
abilityandconditionsofsuchfinancinghaveevolved
significantlyoverthepastfewdecades.inaddition,
therecenteconomicandfinancialcrisispresentsnew
challengesforthefinancialsectoranditscapacityto
providelong-termcreditforinvestment.Thischapter
analysesthechallengesandoptionscurrentlyavail-
abletodevelopingandemergingmarketeconomies1
tofinancetheirdevelopment.


investmentfinancingindevelopingcountries,
especiallylow-incomecountries,hasbeenfrequently
linked to foreign capital.The view that foreign
financingisnecessaryandefficientisbasedonthe
neoclassicalassumptionthat,sincecapitalisscarce
indevelopingcountriesandabundantindeveloped
ones, themarginal return on capital is higher in
developingcountries, thusprovidingstrongincen-
tivestoinvestmentinthelatter.Moreover,sincethe
levelofincomeislowindevelopingcountries,and
themajorityofthepopulationconsumesmostofit,
resultinginashortageofsavings,it isarguedthat
with open capital accounts, foreign capital could
fillthesavings-investmentgap.Theownersofthat
capitalwouldobtainahigherreturnindeveloping
countriesthanintheirhomecountry,whiletherate
ofinvestmentwouldriseintherecipienteconomy


withoutreducingthealreadylowlevelsofdomestic
consumptionthere.inadditiontothelong-termben-
efitsofhigherinvestmentsincapital-pooreconomies,
access to foreign capitalwould enable short-term
smoothing of the economic cycle. For instance, a
negative external shock that reduces export earn-
ings could be cushioned through a foreign loan,
whichwouldbe reimbursedwhenexportearnings
riseagain.Accesstoforeignfinancewouldtherefore
supportdomesticexpenditureduringbadtimesand
moderateitduringbonanzas,producinganoverall
countercyclicaleffect.


However, empirical evidence has repeatedly
invalidatedthesetheoreticalassumptions.Forsure,
foreigncapitalinamountsthatcanbeproductively
absorbed by the domestic economymay be very
helpful in acceleratingproductivitygrowth,diver-
sification and industrializationwhen it is properly
oriented to investment in realproductivecapacity.
but,asdiscussedinthischapter,unrestrictedcapital
inflowsgenerallyhavenotbeenaccompaniedbya
sustainedincreaseofinvestmentinrealproductive
capacity;norhavetheyledtohigherandmoresta-
bleGDPgrowthrates.First,notallcapitalinflows
areusedforthefinancingofproductiveinvestment.
Foreignloansmaybechannelledthroughdomestic
financialintermediariestowardsfinancialspeculation
orimportsofconsumergoods.Theymayalsobeused
for servicing foreigndebtor re-channelledabroad


Chapter III


FINANCING ThE REAL ECONOMy


A. Introduction




Trade and Development Report, 2013104


through an increase in external private financial
assets(“capitalflight”).Andsecond,foreigncapital
inflowshaveoftenbeenprocyclical,accentuating(or
evengenerating)thebusinesscycleintherecipient
countries. indeed, they have played a key role in
all the“twincrises”(i.e.balance-of-paymentsand
domesticfinancialcrises)ofthelastthreedecades
inthedevelopingworld.


empirical studies conducted by economists
from fairly diverse theoretical schools of thought
have failed tofind a positive correlation between
opennesstointernationalcapitalflowsanddevelop-
ment(bhagwati,1998).indeed,capitalflowshave
notonlybeenasourceofinstability;theyhavealso
provedtobeeitherineffective,orevennegative,for
long-termgrowth(Prasadetal.,2003;Prasad,Rajan
andSubramanian,2007;Jeanne,Subramanianand
Williamson, 2012).This also explainswhy, since
thelate1990s,anincreasingnumberofdeveloping-
country governments have becomemore cautious
aboutreceivingmassiveamountsofcapitalinflows
whichareoftentriggeredbyeventsoninternational
markets and bymonetary policies in developed
countries. Policies in developed countries that
mightgeneratesuchcapitalmovements,suchasthe
recenthugeinjectionsofliquidityaspartof“non-
conventional”expansionarymonetarypolicies,are
criticizedfornottakingintoaccounttheirpossible
macroeconomiceffectsondevelopingcountriesand
fortheirpotentialtofuela“currencywar”.


Therecentglobalfinancialcrisisismorethan
just the latest episode in a long list of boom-bust
cyclesoverthepastthreedecades;itisaneventthat
shouldleadpolicymakerstocallintoquestion,even
more seriously thanbefore, thegovernanceof the
internationalfinancial systemand to seekways to
improve it.This crisis, and the global imbalances
thathavecontributedtoit,haverevealedfundamental
flawsinthefunctioningoffinancialsystems,notonly
inthemajorfinancialcentresbutalsoattheglobal
level.Thecrisishasalsorevealedtheshortcomings
ofmonetarypoliciesthatnarrowlyfocusonmonetary
stability,understoodaslowconsumerpriceinflation.
Thereisapressingneedformonetaryauthoritiesto
paygreaterattentiontofinancialstabilityandtothe
strengthening of the real economy, in addition to


monetarystability.Afterall,itistherealeconomy
thatdeterminesfinancialsoundnessandthecapac-
ityofborrowerstopaybacktheirdebts.Fromthis
pointofview,thecriticalquestionisnothowmuch
moneyisgeneratedbythemonetaryauthoritiesorthe
commercialbanks(asmonetaristtheorysuggests),
butwhether thatmoney is used for productive or
unproductivepurposes.


in aworld of acceleratedfinancial expansion
andlargeinternationalcapitalmovements,developing
countriesfaceadualchallenge.ontheonehand,they
needtohaveeffectivemechanismstoprotectthem-
selvesagainstdestabilizingfinancialshockscausedby
hugecapitalinflowsandoutflows.ontheotherhand,
theyneedtoensurethatthefinancialsystem–orat
leastthelargestpartofit–fulfilsitsmainfunction,
whichistoservetherealeconomybyfinancingpro-
ductiveinvestmentandsupportingthedevelopment
offirmsandtheeconomyasawhole.inorderfor
domesticfinancialsystemstofulfilthesefunctions,
theyhave tobeorganizedandmanaged in sucha
waythattheyprovidesufficientandstablelong-term
financingandchannelcreditflowstoproductiveuses.
Thiswillprobablyrequirereduceddependenceon
foreignshort-termcapitalandagreaterrelianceon
domesticsourcesoffinance,whichareoftenmuch
largerthaniscommonlyassumed.Hence,amajor
policyissueinthefinancialsphereis:howcandevel-
oping countries advance their development goals
despitethecrisisthatcontinuestoweakenfinancial
andeconomicconditionsinthedevelopedworldand
theinternationalfinancialsystem?


Sectionbof thischapter takesa longer term
perspectiveonthisissuebytracingtheevolutionof
globalfinancesincethe1970s,andconsideringhow
thishasaffecteddevelopingandtransitioneconomies.
SectionCthendiscussestheimpactsondeveloping
countriesofboththeglobalfinancialcrisisandthe
policiesfollowedinsystemicallyimportantfinancial
centres.Finally,sectionDdiscussesthelessonsthat
canbederivedfromtheseexperiencesandthepolicy
optionsthatareavailabletodevelopingandtransi-
tioneconomiestoreducetheirmacroeconomicand
financialvulnerabilityandensurethatthestructural
changesneededinthenewglobalenvironmentcan
befinancedinasustainableway.




Financing the Real Economy 105


1. Trends in cross-border capital
movementsandfinancialflows
to developing countries


Since themid-1970s, foreigncapitalflows to
developing countries have increased dramatically,
but theyhavebeenveryvolatile.Theacceleration
offinancial globalization, spurredby far-reaching
liberalizationandderegulationoffinancialsystems
worldwide, led toa rapid increase incross-border
capitalflows,whichjumpedfrom$0.5trillionin1980
(equivalentto4percentofglobalGDPand25per
centofthevalueofinternationaltrade)to$12tril-
lionin2007(equivalentto21percentofglobalGDP
and84percentofinternationaltrade)(chart3.1A).
Muchofthesecapitalmovementstookplaceamong
developedcountries,whichaccountedfor80percent
ofthestockofforeign-ownedfinancialassetsby2007
(lundetal.,2013).


However,therelativeimportanceofdevelop-
ing countries as recipients of international capital
flowshas changed significantly over the past few
decades.These countries saw an increase in such
inflowsbetween1976and1982andagainbetween
1991 and1996, followed in both cases by abrupt
decreases.Theirshareintotalcapitalinflowsreached
itshighest level soonafter theonsetof theglobal
financialcrisis(26.4percentoftotalinflowsduring
theperiod2008–2011).This reflectednotonly an
increaseofflowstodevelopingcountries,butalsoa
sharpfallofflowstodevelopedcountries(table3.1
andchart3.1b).


largeandvolatilecapitalmovementsremaina
challengefordevelopingcountries,andthishasnot
diminishedwith the crisis. indeed, in 2010–2011


capitalflowsactuallyexceededtheirlevelsof2007
inAfrica,latinAmericaandChina.Moreover,the
structuralfactorscontributingtotheirpre-crisissurge
arestillinplace.Thereisstillconsiderablepotential
forinternationalinvestorsindevelopedcountriesto
diversify their portfolios, particularly to emerging
market economies, in searchofhigh returns.This
isduetoagradualdiminishingofthe“homebias”
ininvestmentportfolios,abiasthatmakesinvestors
holddomesticfinancialassetsinexcessoftheshareof
suchassetsinglobalmarketcapitalization(Haldane,
2011).Giventhemagnitudeofglobalfinancialassets
(estimatedat$225trillion,ormorethanthreetimes
theworld’s gross product),2 evenminor portfolio
adjustmentsorientedtowardsdevelopingcountries
wouldrepresentanincreaseinsuchflowsataratethat
coulddestabilizetheeconomiesofthesecountries.3


Anothermajorchangethathassurfacedinthe
last fewdecades is related to thecompositionand
use of capital flows. in the decades immediately
followingtheSecondWorldWar,foreignfinancing
wasrelativelyscarceandconsistedmainlyofforeign
directinvestment(FDi)orloansfromofficialsources,
eitherbilateralormultilateral.bilateralfinancingwas
mainlyintheformoftradecreditsprovideddirectly
bypublicagenciesofdevelopedcountriesorinsured
bythem.Suchcreditsweredirectlylinkedtoimports,
particularlyofcapitalgoods.Multilateralloansfrom
theWorldbank and regional development banks
werealsoorientedtowardsspecificrealinvestment
projects.loansfromtheinternationalMonetaryFund
(iMF)wereofadifferentnature,sincetheysought
tocoverbalance-of-paymentsdeficitsarisingfrom
macroeconomicdisequilibria.ontheborrowers’side,
alargeshareoffinancingwenttothepublicsector
(includingState-ownedfirms)ortoprivateentities
intheformofpublicly-guaranteedloans.


b. global trends in finance and their impacts on
developing and transition economies




Trade and Development Report, 2013106


Fromthemid-1970s,privatelendersincreasingly
replacedofficiallendersasthemainsourcesofexter-
nalfinancingfordevelopingcountries.international
banksrecycledpetrodollarsbyprovidingsyndicated
loansatvariableinterestratestodevelopingcoun-
tries,particularlyinlatinAmerica.by1979–1981,
such commercial bank loans accounted for some
57percentofnetcapitalflowstoemergingecono-
mies,whileofficiallending(bilateralloansorcredit
frominternationalfinancialinstitutions)declinedto
barelymorethan20percent(table3.2).


However,withthelatinAmericandebtcrisisin
1982anda“suddenstop”ofbankcreditintheregion,
officialfinancingagainhadtofillpartofthegap.it
wasusedforservicingdebttoprivatecreditors(ina
schemetermed“revolvingdoor”)inordertoprevent
anoutrightdebtdefault.butthisincreaseinofficial
lending did not last long.As international banks
managed to recapitalize and build up provisions,
andwerethereforeinasufficientlystrongposition
tobeabletooffloadtheirloansthathadbeendeeply
discounted in secondarymarkets, theyengaged in
a debt restructuring process supported by the so-
called“bradyPlan”.Underthisplan,implemented


in several highly indebted countries in the region
inthelate1980sandearly1990s,bankloanswere
transformed into long-term securities,whichwere
thenpartlysoldbytheoriginalbankcreditorstoa
varietyoffinancial investors.Thiswaspartof the
largertrendof“securitization”,whichwasaccom-
paniedbyachangeinthestructureofcreditors in
whichother(non-bank)privatesourcesbecamean
importantsourceoffinanceforemergingeconomies
(table3.2).


Anothermajor change in the composition of
externalfinancialflowstodevelopingcountriessince
the1990shasbeentherapidriseinFDi,whichgrew
fromaround15percentofnetinflowsduringtheperi-
od1976–1982tomorethan50percentinthe2000s.
Thiswasa fairlygeneral trendamongdeveloping
countriesasawhole,includingbothmiddle-income
andleastdevelopedcountries(lDCs).


During the 1980s, external financing from
officialsourcestomiddle-incomecountriesdeclined
further, and recovered only for short periods in
response to the variousfinancial crises (in 1982–
1986,1998and2009).bycontrast,externalfinancing


Chart 3.1


NET CAPITAL INFLOwS by ECONOMIC GROUP, 1976–2011


Source: UNCTAD secretariat calculations, based on IMF, Balance of Payments Statistics database.
Note: Net capital inflows by economic group correspond to net FDI, portfolio and "other investment" inflows.


0


2 000


4 000


6 000


8 000


10 000


12 000


14 000


1976 1981 1986 1991 1996 2001 2006 2011


A. In billions of current dollars


Developed economies Transition economiesDeveloping economies


0


10


20


30


40


50


60


70


80


90


100


1976 1981 1986 1991 1996 2001 2006 2011


B. Percentage of total




Financing the Real Economy 107


in the form of bilateral andmultilateral loans
remainedimportantforlDCsuntilthemid-1990s,
when,with thestartof theHeavily indebtedPoor
Countries(HiPC)initiativein1996,grantsincreas-
ingly replaced concessional loans.Consequently,
theircapitalaccountbalance(whichincludesgrants)
increasedsignificantly,fromanaverageof0.4per
centof theGDPoflDCscountriesfor theperiod


1987–1996to1.9percentonaveragefor1997–2011.4
Thelowshareofprivatecapitalinthecomposition
of capital inflows inlDCs reflects the historical
reluctanceofprivatecapitaltoundertakewhatthey
consideredtoberiskyinvestmentsinlDCs.iteffec-
tivelyshieldedlDCsfromthewavesofcapitalflows
thataffectedandoftendestabilizedotherdeveloping
andtransitioneconomiesoverthelasttwodecades.


Table 3.1


NET CAPITAL INFLOwS by ECONOMIC GROUP AND REGION, 1976–2011


1976–
1982


1983–
1990


1991–
1996


1997–
2000


2001–
2007


2008–
2011


Cumulative
total


In $ billion (annual average) ($ billion)


Developed economies 289 652 1084 2930 5543 3459 78 094
Transition economies … … 12 22 99 146 1 436
Developing economies 71 54 218 239 586 1291 12 462
of which:


Africa 12 9 17 27 30 100 978
Asia 22 33 123 109 449 912 8 386
Latin America and the Caribbean 37 12 78 102 107 277 3 087


Memo item:
LDCs 4 6 6 6 8 27 297
World 360 706 1314 3190 6227 4896 91 992


As a percentage of total


Developed economies 80.2 92.3 82.5 91.8 89.0 70.7 84.9
Transition economies … … 0.9 0.7 1.6 3.0 1.6
Developing economies 19.8 7.7 16.6 7.5 9.4 26.4 13.5
of which:


Africa 3.4 1.3 1.3 0.8 0.5 2.0 1.1
Asia 6.1 4.7 9.4 3.4 7.2 18.6 9.1
Latin America and the Caribbean 10.3 1.7 5.9 3.2 1.7 5.7 3.4


Memo item:
LDCs 1.2 0.8 0.4 0.2 0.1 0.6 0.3
Total 100 100 100 100 100 100 100


As a percentage of GDP


Developed economies 4.1 5.0 5.0 12.1 16.8 8.4 8.3
Transition economies … … 6.3 4.9 8.4 6.6 6.8
Developing economies 4.0 2.0 4.7 3.9 5.7 6.8 4.3
of which:


Africa 4.3 2.2 3.8 5.4 3.3 6.3 3.9
Asia 2.8 2.2 4.7 3.0 6.7 7.3 4.3
Latin America and the Caribbean 5.3 1.5 4.8 4.9 3.9 5.8 4.1


Memo item:
LDCs 5.3 4.5 4.2 3.7 3.1 5.2 4.3
World 4.1 4.5 4.9 10.4 14.2 7.8 7.4


Source: UNCTAD secretariat calculations, based on IMF, Balance of Payments Statistics database.




Trade and Development Report, 2013108


lDCs’lackofaccesstoprivatecapitalwasalsodue
to thestringent limitsonprivateborrowingsetby
thebrettonWoodsinstitutionsinorderforthemto
continue to access concessional borrowing in the
context of debt reduction programmes.Countries
withmoreseveredebtproblemsremaindependent
onhighlevelsofconcessionalfinancingtomaintain
debtsustainability(iMF,2010).5


in themiddle-income countries, the general
shifttoprivatesourcesoffinanceoccurredinparal-
lelwithachangeinrecipientswithineachcountry
andintheiruseoffinancing.Sincethemid-1970s,
foreignfinancinghasbeendirectedincreasinglyto
privatebanksandfirms,muchofitassociatedwith
purelyfinancialmovements, suchas“carry trade”
operationsandfinancialspeculationintherecipient
country, eventually leading to large capital out-
flows.Concomitantly, therehasbeen lessexternal
financingdirectedat importsof capitalgoodsand
productiveinputs.Thisimpliesthatitwasoftenthe
decisionoflenders(internationalinvestors)toinvest
indevelopingcountriesratherthanthedecisionof
borrowerstoseekloans,butthereceivingcountries
initiallywelcomed such inflows as a signof their
creditworthinessandasrecognitionoftheireconomic
performanceandpotential.However,theincreasing
“privatization”ofcapitalflows,andthefactthatthey
frequently represented purelyfinancial operations
rather than transactions related to real investment,
contributedtotheirgreaterinstability,astheybecame
pronetosuddenstopsandreversals.Giventhevery


largeamountsoffundsinvolvedrelativetothesize
of the recipient developing economies, financial
globalization became amajor destabilizing factor
formanyofthem.


2. Capitalflows,boomsandbustsin
emerging market economies


external financial flows to developing and
transitioneconomieshaverepeatedlyprovedtobe
adouble-edgedsword.ontheonehand,theyhave
oftenbeenawayofalleviatingbalance-of-payments
constraintsongrowthandinvestment.ontheother
hand, the large size offinancial inflows and their
instability have often led to an overvaluation of
currencies, lending booms and busts, asset price
bubbles, inflationarypressuresandthebuild-upof
foreignobligationswithoutnecessarilycontributing
eithertogrowthortoimprovingacountry’scapac-
itytoservicethoseobligations.Andthedryingup
orreversalofsuchinflowshasfrequentlyresulted
inpressuresonthebalanceofpaymentsandonthe
financingofboththeprivateandpublicsectors.The
magnitudesinvolvedintheseswingscanbelargevis-
à-visthesizeoftheassetmarketsofthedeveloping
countriesconcernedandalsorelativetothesizeof
theireconomies.Relianceonprivatecapitalinflows
hasthereforetendedtoincreasemacroeconomicand
financial instability thathashampered, rather than
supported,long-termgrowth.


Theexperienceofpastepisodesofstrongnet
capital inflows6 followed by sharp slowdowns or
reversals offers important lessons for the present
situation.Therewerethreemajorwavesofcapital
inflows to emergingmarket economies prior to
themost recent financial crisis: in 1977–1981,
1990–1996 and 2002–2007 (chart 3.2).All these
episodes presented some common features. First,
theyallstartedwhentherewasabundantliquidityin
thedevelopedcountriesresultingfromtheirpursuit
ofexpansionarymonetarypolicies,and/ortheirlarge
balance-of-payments deficitswhichwerefinanced
by the issuanceofdebt in internationalcurrencies
(mainly in dollars).At the same time, developed
countriesexperiencedsignificantslowdownsrelated
todifferentshocks:theoilshockinthesecondhalfof
the1970s,theSavingsandloancrisisintheUnited
States, the crisis of theeuropeanexchangeRate


Table 3.2


COMPOSITION OF ExTERNAL FINANCING TO
EMERGING MARkET ECONOMIES, 1979–2012


(Annual average, per cent)


1979–
1981


1982–
1990


1991–
2000


2001–
2007


2008–
2012


Official flows 21.0 42.9 15.8 -1.0 9.1
FDI 9.9 25.1 40.0 57.5 41.1
Portfolio equity investment 3.2 4.1 9.3 3.7 -0.9
Commercial banks 56.8 9.5 10.2 19.0 13.5
Other private creditors 9.2 18.5 24.7 20.9 37.2


Total 100 100 100 100 100


Source: UNCTAD secretariat calculations, based on Institute of
International Finance, Capital Flows database.


Note: Numbers do not add to 100 due to rounding.




Financing the Real Economy 109


Mechanism(eRM)andthefinancialcrisisinJapan
intheearly1990s,andtheburstingofthedot-com
bubble in theearly2000s.onall theseoccasions,
themonetaryauthoritiesinthedevelopedcountries
lowered their policy interest rates to support their
economiesandfinancialsystems.Giventhesedevel-
opments,developingcountriesappearedtopresent
attractivealternativesforinternationalinvestors,as
theireconomiesweregrowingfasterthanthoseinthe
Northandwereprovidingopportunitiesforhigher
returns(Akyüz,2012).


Second, the reduction or reversal of capital
inflows in emergingmarket economies in the late
1970s,mid-1990sandmid-2000sfollowedincreases
in policy interest rates in developed countries.
Althoughexpansionarymonetarypoliciesindevel-
opedcountrieswereamajorfactorcontributingto
thosecapitalmovements,thesepoliciesalonewere
notenoughtogeneratestrongoutflowstodevelop-
ingcountries;forinstance,thereductionofinterest
ratesindevelopedcountriesbetween1984and1986
didnotgeneratelargeoutflowstoemergingmarket
economiesbecausebanksneededtorecapitalizeand
createadequateprovisionsduetotheirriskylatin


American assets resulting from the debt crisis in
thatregion.


Third, how the capital inflowswere used by
recipientcountrieshasbeenanimportantadditional
factordeterminingtheirimpactonthesecountries.
When a large proportion of the inflowswas used
to finance a higher oil-import bill or investment
projectswhich required imports of capital goods,
theyhelpedtostabilizethedomesticeconomyand
support growth. in other cases, however,where
capitalinflowsweredirectedmainlytoprivatebanks
forfinancingconsumptionor speculativefinancial
investments,ortofirmsforfinancingcurrentexpendi-
ture,theyhad(oftenstrong)destabilizingeffects.if
capital inflowsarenotusedprimarily for imports,
theycanleadtoastrongrealappreciationofthelocal
currencyandseverelyharmdomesticindustries.in
some countries,where currency appreciationwas
thecornerstoneofanti-inflationarypolicies,capital
inflowsweremainlychannelledtotheprivatesector
throughderegulatedfinancialsystems.Thisgener-
atedanuncontrolledexpansionofdomesticcredit,
whichledtofinancialfragilityassociatedwithreal
estateandfinancialbubbles,currencyappreciation


Chart 3.2


neT pRivATe CApiTAl inFlows To eMeRging MARkeT eConoMies, 1978–2012


Source: UNCTAD secretariat calculations, based on Institute of International Finance, Capital Flows database; and UNCTADstat.
Note: Data for 2012 are estimates.


0


200


400


600


800


1 000


1 200


1 400


1978 1984 1990 1996 2002 2008 2012


A. In billions of current dollars


Net private inflows Net private inflows, excl. equity outflows


0


1


2


3


4


5


6


7


8


9


1978 1984 1990 1996 2002 2008 2012


B. As a percentage of GDP




Trade and Development Report, 2013110


andsignificantcurrentaccountdeficits,eventually
resultinginacrash.


Thelastmajorwaveofcapitalinflowstoemerg-
ingmarketeconomieswasbuildingupwhenthese
economiesprogressivelysurmountedtheeffectsof
thefinancialcrisesofthelate1990sanddeveloped
economies turned once again to an expansionary
monetary stance.Capital inflowsfirst poured into
eastandSouth-eastAsiaandthetransitionecono-
miesofCentralandeasterneurope,whichresumed
rapidgrowthratesin2000–2002,whileGDPgrowth
inAfrica,latinAmericaandWestAsiaaccelerated
later,in2003–2004.between2005and2007,inflows
ofprivatecapitaltoalldevelopingregionsreached
unprecedented levels: in 2007, those inflows into
emergingmarketeconomiesamountedto8percent
oftheirGDPandtotalcapitalinflowstodeveloping
countriesexceeded10percentoftheirGDP.During
this period, about 80 per cent of such inflows to
developingcountrieswenttoAsia,whichwasalso
theregionwhereprivatecapitalinflowsaccounted
forthelargestproportionofGDP(morethan10per
centonaverageduring thatperiodcomparedwith
4.9per cent inlatinAmerica and4.2per cent in
Africa).Thetransitioneconomiesalsoreceivedvery
largeamountsofforeigncapitalduringthatperiod
(12.4percentofGDP).7


Thislastmajorwaveofcapitalinflowscameto
ahaltin2008and2009.Thiswasatypical,because
thereversaldidnotoccurinresponsetoanincreasein
interestratesinthemajordevelopedcountries;onthe
contrary,thosecountrieshadloweredinterestratesin
effortstomitigatethecrisis.Rather,whatislikelyto
havecausedthereversalthistimewasthatthecrisis


inthemostadvancedfinancialmarketswasstillfresh
in themindsof investors,making themextremely
riskaverseandeagertominimizetheoverallriskof
theirportfolios.However,thisprovedshort-lived,as
capitalflowstoemergingmarketssurgedoncemore
in2010and2011.Againthiswasatypical,because
“suddenstops”areusually followedbyprolonged
reversals of capital inflows into emergingmarket
economies.ThisconfirmsthefindingbyShin(2011),
thatthecycleoffinancialflowsisdominatedbythe
leveragecycleofbigbanks,whichinturnisassoci-
atedwiththeirperceptionsofrisk.


Anotherdifferencerelatingtotherecentwaves
ofcapitalinflowssince2004isthattheirmaincoun-
terpartinemergingmarketeconomieswasnotlarge
currentaccountdeficits,butrathertheaccumulation
of foreign assets (i.e. capital outflows from these
economies), including international reserves.This
largelyexplainswhythesuddenstopin2008–2009
did not lead to severe economic crises in these
countries.Themain exceptions to this rulewere
the emergingmarket economies ineurope,which
sawhugecurrentaccountdeficitsandexperienceda
severeeconomicsetbackduetoareversalofforeign
capitalinflows.


Themost recent experience shows that large
capitalinflowsfollowedbya“suddenstop”donot
necessarilytriggeranimmediatefinancialcollapse
asinprevious“waves”ofcapitalflows.Thisraises
thequestionastowhetherthefinancialvulnerability
ofemergingeconomieshaschanged,andifso,why.
Whatarethechallengestheynowfaceandhowcan
theybeovercome?Thesequestionsareaddressedin
thenexttwosections.




Financing the Real Economy 111


1. Thefinancialsituationandmonetary
policies in developed countries


(a) Impacts of the crisis and policy responses


in order to understand the challenges for
developing countries, especially emergingmarket
economies thatarepotentialdestinationsofanew
wave of capital flows, it isworth recalling some
importantfeaturesofthelatestcrisisandthepolicy
responseofdevelopedcountries.


Therecentfinancialcrisisresultedfromasurge
of private indebtedness in developed countries.A
widespreadviewfiveyearsaftertheoutbreakofthe
crisisisthatexcessivepublicdebtwasthecause,and
thatitisalsothemainobstacletorecovery.However,
itwastheprivatesectordebtthatincreasedrapidly
from themid-1990s onwards,while public sector
debt,forthemostpart,remainedflatorevendeclined
(chart3.3).itisonlysince2008,followingtheonset
oftheglobaleconomiccrisis,thatpublicsectordebt
begantoriseasaresultoflarge-scalegovernment
bailoutpackages,theeffectofautomaticstabilizers
and additional fiscal policymeasures to stabilize
aggregatedemand.Notwithstandingthisrise,private
debtisstillamultipleofpublicdebt.itissurprising
thatneithertheeconomicauthorities,northecredit
ratingagenciesorthemanagersoffinancialinstitu-
tions, seemed to be aware of themounting risks
causedbysucharapidincreaseinprivatedebt.All
ofthemappeartohavehadextreme,butunjustified,
confidence in the efficiency of financialmarkets
and in theabilityofprivatesectordebtors (unlike
thepublicsector)tohonourtheirdebtobligations.8


once thefinancial crisis broke out, followed
bythebroadereconomiccrisis,therewasamarked


change in the financial behaviour of all actors –
households, financial and non-financial firms and
governments – in themajor developed countries.
Following years ofmounting prosperity, during
whichfinancialmarketshadfuelledthebuild-upof
assetpricebubbles,householdsandfirmssuddenly
sawadramaticdeteriorationoftheirbalancesheets.
Theyfounditmoreandmoredifficult,ifnotimpos-
sible,torevolvetheirdebts,letaloneincreasetheir
borrowing,asthepricesoftheircollateralplunged.
ontheothersideoftheledger,banksfoundthem-
selvesburdenedwithpoor-qualityornon-performing
loansandsecuritiesofdubiousvalue.Thesudden
disruptionofcreditflowsforcedaprocessofdelever-
agingintheprivatesectorthatledtoasharpdownturn
of economic activity.The contractionary effect of
the crisis on economic activity in the developed
economies could be contained only by increasing
debt-financed public spending by governments,
whichactedasborrowers,investorsandconsumers
oflastresort.Theseabruptchangesarereflectedin
thenetlendingorborrowingpositionsoftheprivate
andpublicsectors(chart3.4).


Whenthecrisiserupted,governmentsindevel-
opedcountriesreactedwithstrongmonetaryandfiscal
measures. Public spending rose quite significantly,
whilecentralbanksprovidedemergencyliquidityto
thefinancialsysteminordertocompensateforthe
sharpfallininterbanklendingandreducedinterest
rates.Whentheworstofthecrisisseemedtobeover,
andmanygovernmentsandinternationalinstitutions
(wrongly)believedthatthemajorhindrancetoasus-
tainedrecoverywasnotthelackofglobaldemandbut
theriseinpublicdebt,thismultiprongedsupportive
approachcametoanend.Theviewthattheir“fiscal
space”wasexhausted led toa shift towardsfiscal
austerity, andmonetarypolicy appeared to be the
soleavailableinstrumentofsupport.


C. The global crisis and the challenges ahead




Trade and Development Report, 2013112


Chart 3.3


PRIVATE SECTOR AND GROSS PUbLIC DEbT,
SELECTED DEVELOPED COUNTRIES, 1995–2012


(Per cent of GDP)


Source: UNCTAD secretariat calculations, based on OECD.StatExtracts database.
Note: Data for the United States on “gross public debt” refer to “debt of central government”. Data on “gross public debt” for 2012


are projections.


0


50


100


150


200


250


300


1995 2000 2005 2010


United States


2012
0


50


100


150


200


250


300


1995 2000 2005 2010


United Kingdom


2012


0


50


100


150


200


250


300


1995 2000 2005 2010


Germany


2012
0


50


100


150


200


250


300


1995 2000 2005 2010


Italy


2012


0


50


100


150


200


250


300


1995 2000 2005 2010


Spain


2012
0


50


100


150


200


250


300


1995 2000 2005 2010


Greece


2012


Gross public debtPrivate sector debt




Financing the Real Economy 113


Asinterestrateswerealreadyatorapproach-
ing the lowestpossible limits, centralbanks inall
themajor developed economies turned increas-
ingly to“unconventional”policies,which led toa
rapidexpansionoftheirmonetarybase.Moreover,
inadditiontorescuingprivatefinancialinstitutionsin
trouble,theysoughttorevivecreditanddemand,and
alsotoreducetheperceivedriskoffinancialassets.
Mostimportantly,thecentralbanksagreedtobuy(or
tofinancetheacquisitionof)theirowngovernments’
sovereignbonds.Thisexpandedtheirroleoflender
oflastresortandalsoblurredtheboundariesbetween
fiscalandmonetarypolicies.Theireffortsresulted
inaballooningoftheirbalancesheets.Forinstance,
betweentheonsetofthesubprimemortgagecrisisin
August2007andtheendof2012,thebalancesheetof
thebankofenglandgrewby380percent,andthose
oftheeuropeanCentralbank(eCb)andtheUnited
StatesFederalReserveSystemgrewby241percent
and221percentrespectively.


Thecentralbanksuseddifferent instruments,
dependingonthestructureandneedsoftheirecono-
mies.Thisisreflectedinthedifferentcompositions


and profiles of their balance sheets. The eCb,
giventhemorebank-centricnatureoftheeuro-area
economy, supplied liquidity directly to the bank-
ingsector,mainlythroughalong-termrefinancing
operation (lTRo) (chart 3.5A).9 in addition, it
implementedbondpurchaseprogrammes,including
anewoutrightMonetaryTransactionsprogramme.
TheUnitedStatesFederalReserve,bycontrast,sup-
pliedliquiditythroughsecuritypurchases,notonly
Treasurysecurities,asithadtraditionallydone,but
alsoprivatemortgage-backedsecurities(chart3.5b).
Theselarge-scaleassetpurchasesaimedtostopthe
declineofassetprices,reviveconsumerspendingand
supporteconomicgrowth.Asimilarapproachwas
followedbythebankofenglandand,morerecently,
bythebankofJapan.


Theirstrategieshavebeenpartiallysuccessful.
inparticular,thecommitmentbytheeCbtobuy(in
thesecondarymarket)unlimitedquantitiesofsover-
eignbondsofeuro-zoneperipherycountries(Greece,
ireland,italy,PortugalandSpain)ledtoareduction
oftheirsovereignriskpremiums.However,neither
ineurope nor in theUnited States has the large


Chart 3.4


NET LENDING/bORROwING by SECTOR, UNITED STATES AND EURO AREA, 2000–2012
(Per cent of GDP)


Source: UNCTAD secretariat calculations, based on United States, Bureau of Economic Analysis; and European Central Bank,
Statistical Data Warehouse.


Note: Net lending positions are indicated by positive values, net borrowing by negative values.


-15


-10


-5


0


5


10


2000 2002 2004 2006 2008 2010 2012


A. United States


Households and non-profit institutions serving households
Non-financial business
Financial business
Government
Rest of the world


-15


-10


-5


0


5


10


2000 2002 2004 2006 2008 2010 2012


B. Euro area




Trade and Development Report, 2013114


injectionof“high-poweredmoney”translatedinto
increasedbanklendingtotheprivatesector;onthe
contrary,outstandingcredittotheprivatesectorhas
actuallydeclinedasapercentageofGDP(chart3.6).
The question iswhether the failure of banks to
increaselendingisduetotheirreluctancetolendor
theunwillingnessofcompaniesandhouseholdsto
borrow.Whatisclearisthatthecreditcrunchisnot
due tobanks lacking liquidityoraccess tocentral
bankrefinancing.


euro-zonebanksappeartohavebeenusingthe
additionalliquiditycreatedbytheeCbasameansof
refinancingthemselvesorforaccumulatingdeposits
at theeCb itself: commercial bankdepositswith
theeCbincreasedtothehistoricallyhighlevelof
€800billionduring2012.Atthesametime,eCbsur-
veysofsmallandmedium-sizedenterprises(SMes)
intheeurozoneshowthatlendingactivityisstillvery
low,notonlybecauseofweakdemandforcreditbut
alsobecausefirmsarefindingitdifficult toobtain
loans.Thisisseenasevidencethatcreditmarketsin
theeuro-arearemainhighlydysfunctional.


economichistoryprovidesevidencethatcredit
isslowtorecoverafteramajorfinancialcrisis,and
this timeisnodifferent.Privateactorsintheeuro
zone, Japan and theUnitedStates are increasing
theirsavings,hoardingcashorpayingdowndebt,
andthereforetheirdemandforcreditislargelylim-
itedtorefinancingloansthatarereachingmaturity.
Manyofthemthatarewillingtoborrowmoreare
experiencing difficulty in accessing credit due to
uncertainty about their future income stream and
thevalueoftheircollateral.inaddition,manybanks
needtoberecapitalizedowingtoadeteriorationof
theirloanportfolios,whichisfurtherlimitingtheir
creditsupply.


The failure ofmonetary expansion to boost
privateexpenditure isa reminderof the“liquidity
trap”analysedbyKeynes(1936/1973),whichoccurs
wheneconomicagentsprefertokeepcashholdings
rather than investing funds in areas that present a
highriskofcapitalloss.Anecdotalevidencesuggests
that thismaybehappening to someextent: liquid
reserves held by industry and the banking system


Chart 3.5


ASSET COMPOSITION OF ThE EUROPEAN CENTRAL bANk AND
ThE UNITED STATES FEDERAL RESERVE, 2003–2013


Source: UNCTAD secretariat calculations, based on United States Federal Reserve, Factors Affecting Reserve Balances (H.4.1)
database; and European Central Bank, Statistical Data Warehouse.


0


500


1 000


1 500


2 000


2 500


3 000


3 500


2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013


A. European Central Bank
(Billions of euro)


Lending to euro area credit institutions


Securities (incl. securities held for monetary
policy purposes)


Other assets


Gold and gold receivables


Total assets


0


500


1 000


1 500


2 000


2 500


3 000


3 500


2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013


B. United States Federal Reserve
(Billions of dollars)


Mortgage-backed securities
Central bank liquidity swaps


Treasury securities (notes and bonds)
Gold and other assets


Total assets




Financing the Real Economy 115


in theUnitedStates at the endof2012amounted
tomore than$3 trillion, four timesashighas the
stimuluspackageof$831billionprovidedunderthe
2009AmericanRecoveryandReinvestmentAct.one
recentstudyarguesthatalmosthalfofthisamount
wasin“excess”ofreasonableprecautionaryrequire-
ments,estimatingthatifithadbeenredirectedinto
productiveinvestmentsitwouldhavehelpedcreate
millionsofjobsandlowertheunemploymentrateto
below5percent(Pollinetal.,2011).


othermajor economies have similar stock-
piles,suggestingthatthe“precautionarymotive”for
holdingliquidassetsisunderminingpolicymakers’
attemptstousecheapcapitalasameansofinjecting
lifeintoanervousanddemand-deficienteconomy.in
Japan,forexample,recentestimatesputcompanies’
liquidassetsataround$2.8trillion,up75percent
since2007.Similarly,intheeurozone,households
currentlyholdsome€7,000billionincurrencyand
deposits,andnon-financialcompaniesholdaround
€2,031billion.10


Thiscoexistenceofidleliquidityheldbyagroup
ofeconomicagentsandliquidityshortagesfacedby


othersisnewevidenceofthe“brokentransmission
mechanism”onthemonetaryandfinancialmarkets.
itsuggeststhatpolicyresponsesshouldincludebetter
targetingoftherecipientsofmoneycreation.inother
words,monetaryauthoritiesshouldfindameansof
makingcreditavailabletoagentsthatreallyneedit
forusinginaproductiveway.


(b) Impact on capital flows


The previous subsection has described typi-
calconditions thatareconducive to strongcapital
outflows from developed countries. indeed, they
arelikelytobeevenmoreconducivetoasurgein
outflows than those at the beginning of previous
“waves”.Thisisbecausethereisalargeinterestrate
differentialinfavourofdevelopingcountries,ahuge
amountofliquidityinthebankingsystemandlow
demandforcreditindevelopedcountries.Although
immediatelyfollowingtheonsetofthefinancialcrisis
therewasasharpincreaseinpublicsectorborrowing,
thesubsequentpolicyswitchtofiscalausterityand
publicdebtreductioniscausingdemandforpublic
credittofallaswell.buttheseconditionshavenot


Chart 3.6


MONETARy bASE AND bANk CLAIMS ON ThE PRIVATE SECTOR, 2001–2012
(Per cent of GDP)


Source: UNCTAD secretariat calculations, based on IMF, International Financial Statistics and World Economic Outlook databases.
Note: Monetary base for euro area corresponds to currency issued and central bank’s liabilities to depository corporations.


0


5


10


15


20


25


0


10


20


30


40


50


60


70


2001 2003 2005 2007 2009 2011


A. United States


Bank claims on private sector Monetary base (right scale)


0


10


20


30


40


50


0


20


40


60


80


100


120


140


160


2001 2003 2005 2007 2009 2011


B. Euro area


2012 2012




Trade and Development Report, 2013116


inducedstrongandsustainedcapitaloutflowsfrom
developedcountries;rathersuchoutflowshavebeen
veryvolatile.


Capital outflows from theUnitedStates fell
significantly immediately after the crisis erupted,
andtherewasevenanincreaseininflowsin2008,
testifyingtothecontinuedperceptionofthiscountry
asa“safeportinastorm”eventhoughthestormhad
originated there.outflows from theUnitedStates
recoveredpartiallyinthesubsequentyears,butdis-
playedmarkedvolatility,andremainedlowerthan
theirpre-crisislevels(chart3.7A).Thisshowsthat
theabove-mentionedfactorsarenotsufficientcondi-
tionstoinducesuchoutflows;otherfactors,suchasa
generalclimateofuncertainty,canalsohaveamajor
impactonthesizeofcapitalflows(Shin,2011),as
discussedbelow.


CapitalflowsinandoutofJapan,unlikethose
of theUnitedStates, recovered swiftlyafter some
contractionintheyearsimmediatelyfollowingthe
onsetofthecrisis,andevensurpassedpre-crisisflows,
accountingforbetween10and15percentofGDP
in2010–2011.Portfoliooutflowsin2011remained
relatively high, as investors and speculators took
advantageof close-to-zero interest rates toborrow
inyen and invest abroad.This recoveryof capital
outflowsfromJapanwaspartlybolsteredbyitssup-
portiveregionalenvironmentofeastandSouth-east
Asia,whichcontrastssharplywiththatofeurope.


ineuropetherewasasimultaneouscontraction
ofbothinflowsandoutflowsofcapital(chart3.7b).
by2011,capitalflowswereequivalenttolessthan
20percentofGDP,comparedwithover30percent
duringtheperiod2005–2007.Andsomecomponents
ofthoseflowsdeclinedsharply.Forexample,euro-
zoneportfoliooutflowsfellfrom$1,386billionin
2005tojust$288billionin2010,andeventurned
negative in2011.Thecontractionofcapitalflows
to and fromeuropean countries reflects the sud-
denstop in intraregionalcreditmovementsdue to
thecrisis.Priortothecrisis,easyavailabilityofall
kindsofcross-borderfinancinghadfuelledmounting
imbalanceswithintheeU,whichhavebeenamajor
causeofitspresentproblems.Alsoofrelevancehas
beenthe“balancesheetrecession”thathasdeterred
banksfromlendingbothdomesticallyandabroad,
andwhichhasbeendeeperandlongerineuropethan
inotherdevelopedeconomieswherebanks’recapi-
talizationhasprogressedmorerapidly(Koo,2011).


Capitalmovementswithineurope reproduce
muchof the “centre-periphery”pattern thatmany
developing countries have endured in the past. in
thelead-uptothecrisis,integratedfinancialmarkets
allowed commercial banks in the coreeuropean
countries(France,GermanyandtheUnitedKingdom)
tobuilduplargecross-borderexposuresintheeuro
zone’s“periphery”countries.Duringthesubsequent
years,however,europeanbankssignificantlyscaled
back their exposures to their counterparts in the
periphery(chart3.8).Facedwithmarketvolatility
anduncertainty,banksinthecoreeuropeancountries
begantoreducetheirclaimsontheperipherycoun-
triesin2008.Thiscontinuedtofollowadownward
trend,accountingforareductionof51percentfrom
thefirstquarterof2008tothefourthquarterof2012
anditislikelytobemuchgreaterifotherperiphery
countriesareincluded.11ThestockofGermanbanks’
claimsonperipheraleuropefellbyroughly50per
centfromtheirpre-crisispeakuntiltheendof2012,
fromunder€600billionto€300billion(biS,2013).
Atthelevelofindividualeuropeanbanks,outstand-
ingloanstoperipherybanksdeclinedby30–40per
cent. For example,HSbC reduced its holdings in
euro-zoneperipherybanksby39.5percentinjust
fourmonths, andlloyds reduced themby28per
centoverthesameperiod(GoffandJenkins,2011).


Thepatternofcapitaloutflowsdifferedamong
developedcountries,whichmaybeduetothediffer-
entrecipientsoftheseoutflows.Thestrongdeclinein
capitalflowsintoandoutofeuro-zonecountrieswas
mainlyduetointraregionaldevelopments.Japanese
capitaloutflows,ontheotherhand,werenotstrongly
affectedbythefinancialcrisis,probablybecausethey
targetedmainly emergingmarket economies and
developingcountriesinAsiathatwerenotasseverely
impactedbythecrisis.AsfortheUnitedStates,asa
majorfinancialcentre,ithasstronglinkswithboth
other developed economies and emergingmarket
economies.However,themajorgeneratorsofcapital
movementsare largebankswhosemainoffices in
variouscountrieshandlecapitalmovementsbased
ontheirinterests,andtheygenerategrossoutflows
towards third countries thatmay have originated
fromseveraldifferentcountries.Consequently,there
isnotnecessarilyadirectlinkbetweenthemacro-
economicandmonetaryconditionsprevailingina
specificcountryandthevalueofitscapitalinflows
andoutflows.Thoseconditionsmaypromoteorhin-
dertheincentivesforinternationalbankstoincrease
theirinternationalcapitalflows,whichmaytherefore
originatefromtheirbranchesindifferentcountries.




Financing the Real Economy 117


Chart 3.7


NET CAPITAL INFLOwS AND OUTFLOwS, 2005–2012
(Billions of current dollars)


Source: UNCTAD secretariat calculations, based on IMF, Balance of Payments Statistics database.
Note: Data were available for only 67 developing countries (excluding LDCs) and for 28 LDCs.


-40


-30


-20


-10


0


10


20


30


40


2005 2006 2007 2008 2009 2010 2011


D. Least developed countries


-3 000


-2 500


-2 000


-1 500


-1 000


- 500


0


500


1 000


1 500


2 000


2005 2006 2007 2008 2009 2010 2011


C. Developing countries


-8 000


-6 000


-4 000


-2 000


0


2 000


4 000


6 000


8 000


2005 2006 2007 2008 2009 2010 2011 2012


B. European Union


-2 000


-1 500


-1 000


- 500


0


500


1 000


1 500


2 000


2 500


2005 2006 2007 2008 2009 2010 2011 2012


A. United States


Net errors and omissions Change in reserve assets
Other investment: incurrence of liabilities Other investment: acquisition of financial assets
Financial derivatives: incurrence of liabilities Financial derivatives: acquisition of financial assets
Portfolio: incurrence of liabilities Portfolio: acquisition of financial assets


FDI: acquisition of financial assetsFDI: incurrence of liabilities


Current account balance Capital account balance




Trade and Development Report, 2013118


2. Impacts and policy responses in
developing economies


Thehistoricalexperiencediscussedinsectionb
shows that several factors have played a role in
determiningcapitalmovementsfromdevelopedto
developingcountries.Atleastuntiltheglobalcrisis,
allthewavesofstrongcapitalflowsfromdeveloped
todevelopingcountrieswerestartedby“pushfac-
tors”relatedtoconditionsindevelopedcountries.but
inadditiontherearealso“pullfactors”relatingtothe
demandforforeigncapitalindevelopingcountries
thatinfluencethesizeanddirectionofcapitalflows
toandfromthesecountries.


box3.1presentstheresultsofaneconometric
exercise that analysed the determinants of capital
flows receivedby19 emergingmarket economies
between 1996 and 2012.The disparities inGDP
growthratesandinreturnsonfinancialinvestments
appear to be significant explanatory variables.


Thefirst indicates that fasterGDPgrowthrates in
emergingmarketeconomiesthanintheG-7group
of developed countries had a positive impact on
capital flows from the developed to the emerging
marketeconomies;thesecondestimatesthepositive
impactofinterestratedifferentialsbetweenemerging
marketeconomiesandtheUnitedStates,adjustedfor
gainsorlossesfromexchangeratechanges.Asthese
variablescombineindicatorsfrombothsourceand
receivingcountries,theymaybeseenasboth“pull”
and “push” factors.Risk perception in developed
countrieswasthemainpurely“pushfactor”identi-
fiedinthisexercise,andshowsanegativesign.This
meansthatarisingperceptionofriskindeveloped
countriesdiscouragedcapitaloutflowstoemerging
market economies. Symmetrically, stockmarket
indices in emergingmarket economies reflected
investorsentimentinthereceivingeconomies,hence
representinga“pullfactor”.


Allthesefactorsappeartohavehadasignificant
impactoncapitalflows.However,differentfactors


Chart 3.8


EUROPEAN UNION: CORE COUNTRIES’ COMMERCIAL bANk
ExPOSURE TO PERIPhERy COUNTRIES, 2001–2012


(Billions of dollars)


Source: UNCTAD secretariat calculation, based on BIS, Consolidated Banking Statistics database.
Note: Core countries are France, Germany and the United Kingdom.


0


500


1 000


1 500


2 000


2 500


3 000


I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012


Exposure to Spain Exposure to Greece Exposure to Ireland Exposure to Italy Exposure to Portugal




Financing the Real Economy 119


mayalsohavehadoppositeeffectssimultaneously,
asseemstohavebeenthecaseduringmostof2011
and2012,andalsointhefirsthalfof2013.Some
push factors (particularlymonetary conditions) in
developedcountriesappear tohavehadapositive
impactoncapitaloutflowstoemergingmarketecono-
mies,whileotherpushfactors,suchasanincreasein
perceptionoffinancialriskdiscouragedsuchmove-
ments.Thismayexplaintheconsiderablevolatilityof
thesecapitalflows,anduncertaintyaboutapossible
newbigwaveofcapitalinflowstoemergingmarket
economiessimilartothatof2003–2007.


Whiletheoccurrenceofnewwavesofcapital
outflowsdependstoalargeextentoncircumstances
in thedevelopedcountries, the impact itcanhave
ondevelopingcountrieslargelydependsontheeco-
nomicsituationandgovernmentpoliciesinthelatter.
inthatrespect,thereweresomeuniquefeaturesinthe
mostrecentcrisisthatcanprovidevaluablelessons
forthefuture.Unlikepreviousfinancialcrises,asud-
denstopofcapitalinflowsdidnotgenerallytranslate
into balance-of-payments problems or domestic
financialcrises,themainexceptionsbeinganumber
ofCentralandeasteuropeancountries(asmentioned
above).Consequently,fiscalpolicycouldbeusedfor
supportingtherealeconomyratherthanbailingout
thebankingsystem,leadingtoarapidrecoveryof
GDPgrowth,althoughnottopre-crisisrates.


Theimpactofthefinancialshocksondevelop-
ingcountriesdependedcriticallyontheirpre-crisis
situation. external balances played amajor role:
historically,capitalreversalshadagreateradverse
impact on countries already running large current
account deficits, as theywere forced to suddenly
undertakerecessionaryadjustmentswhentheycould
nolongerfinanceexternalimbalances.Hence,one
reasonfortherelativeresilienceofemergingmarket
economiesisthat,ingeneral,theywerenotrunning
currentaccountdeficits,atleastnotonthesamescale
asoccurredduringprevioussurgesofforeigncapital
inflows.Severalcountries,includingChina,evenhad
“twinsurpluses”–anunusualsituationofsurpluses
inboththecurrentandthefinancialaccount–the
counterpartofwhichwasastrongaccumulationof
officialforeigncurrencyreservesand,insomecases,
anetrepaymentofexternaldebt.Someofthereasons
for thehealthycurrentaccountsofmostemerging
marketeconomiesbeforethecrisiswerefavourable
termsof trade for commodity exporters and/or an
increaseinexportvolumesowingtostrongdemand


fromdevelopedcountries.Thesefavourablefactors
hadnotexistedinprevious“waves”ofcapitalflows.
Anotherfactorexplainingtherelativeresilienceof
theemergingmarketeconomieswasthatinmanyof
themtheauthoritieshadbeenabletopreventexces-
sive currencyappreciation through intervention in
theforeignexchangemarketorthroughsomeform
of capital accountmanagement.Thesemeasures
helpedthemavoid,oratleastcontain,anapprecia-
tionoftheirrealexchangerate.othercountries,such
asbrazil,Chile,ChinaandtheRussianFederation,
though less successful in this regard, had rather
undervaluedcurrencies(fromahistoricalperspec-
tive)atthetimetheircurrenciesbegantoappreciate
(around2004–2005)(chart3.9).


The lower vulnerability of emergingmarket
economies to financial shocks also resulted from
thefactthatmanyofthemhadalreadyexperienced
financialcrisesbetweenthemid-1990sandtheearly
2000s,which had led to a significant contraction
of outstanding bank loans to the private sector
(chart 3.10).Consequently, in the years following
thosecrisesmanybankswereunwillingorunable
toincreasetheircreditoperationsastheysoughtto
consolidatetheirbalancesheets.Atthesametime,
firms and households restrained their demand for
credit.This explainswhy capital inflows did not
haveastrongimpactondomesticcreditexpansion
inseveralofthosecountriesthathadbeenhitatthe
endofthe“secondwave”ofcapitalinflowsinthe
late1990s,suchasArgentina,indonesia,Malaysia,
Mexico, the Philippines andThailand. in other
countries, such asbrazil, theRussianFederation,
Turkey andUkraine,which had also experienced
financial crises earlier, but had again received
massivecapital inflows in theyearspreceding the
2008–2009globalcrisis,domesticcreditexpanded
rapidly.


in lDCs as a group, financial plus capital
inflowsaccounted forabout6percentofGDP in
2010–2011,alevelsimilartothatofotherdevelop-
ingcountries.Mostoftheinflowswereintheform
ofFDiandofficialdevelopmentassistance(oDA)
inthecapitalaccount,whichrepresentedrathersta-
blecapital.inaddition,thelDCshavebeenableto
accumulatereservesforseveralyearsinarowand
reduce their currentaccountdeficit toabout1per
cent ofGDP (chart 3.7).However, the situation
variesconsiderablyamongthesecountries,withoil-
exportinglDCspostingcurrentaccount surpluses




Trade and Development Report, 2013120


Box 3.1


CAPITAL INFLOwS INTO EMERGING MARkET ECONOMIES:
SOME ECONOMETRIC RELATIONShIPS


Thisboxpresentstheresultsofaneconometricexercisethatanalysedthedeterminantsofcapitalinflows
receivedby19emergingmarketeconomiesbetween1996and2012.


Thedependentvariableiscapitalinflows,asmeasuredbynetcapitalinflowsasapercentageofGDP.


Theretainedexplanatoryvariablesare:


• ThedifferentialbetweentherealGDPgrowthoftheemergingmarketeconomiesandtheG7GDP
growthrate(G-DiFF).Apositivedifferentialindicatesthattheemergingmarketeconomiesgrew
fasterthanthedevelopedeconomies,whereasanegativedifferentialindicatestheopposite.


• Thenationalstockexchangeindices(NSei)measurestheequitymarketperformanceofthecompanies
coveredbytheindex.Achangeintheindexrepresentschangesininvestors’expectationsoftheyields
andrisks.


• TheChicagoboardoptionsexchangeSpxVolatilityindex(ViX)measurestheexpectedstockmarket
volatilityoverthenext30-dayperiodfromthepricesoftheS&P500indexoptions.TheViXisquoted
inpercentagepoints,andhighervaluesindicatethatinvestorsexpectedthevalueoftheS&P500to
fluctuatewildlyoverthenext30days.


• Theemergingmarketsinvestmentreturns(eMiR)representthedifferentialbetweentheinterestrates
ofemergingmarketsandtheUnitedStatesatthebeginningofthequarter,adjustedbytheex-post
appreciationrateofthecorrespondingemergingmarketcurrency.itcorrespondstowhataforeign
investorcanobtainbyborrowinginacurrencyatalowinterestrateandinvestingindomesticassets
thatgiveahigherinterestrate,correctedbytheexchangerateappreciation.


The data


Thecapitalinflowsdatafortheseestimationscovered19emergingmarketeconomies:Argentina,brazil,
Chile,China,Colombia,ecuador,india,indonesia,Malaysia,Mexico,Morocco,Peru,thePhilippines,
Poland,theRepublicofKorea,Romania,Singapore,SouthAfrica,ThailandandUruguay.Quarterly
datafromthefirstquarterof1996tothefourthquarterof2012wereextractedfromtheiMFbalanceof
Paymentsdatabaseandcomplementedbynationalsources.


QuarterlyrealGDPdataweretakenfromtheiMFinternationalFinancialStatisticsandnationalsources.
TheywereseasonallyadjustedusingthecensusX12method.Datafortheremainingvariableswere
takenfromthebloombergdatabase,theiMF’sinternationalFinancialStatisticsandnationalsources.


Results


The tablebelowshows the regression resultsbasedonpaneldata.Thepaneldatamodelwithfixed
effectswasestimatedusingfeasiblegeneralizedleastsquares(GlS)alongwithrobuststandarderrors.


Column(1)showsthatforthefullperiodthefourexplanatoryvariableswerestatisticallysignificant
forexplainingcapitalinflowsinemergingmarkets.Morespecifically,theresultsindicatethatawider
differentialgrowthinGDP,anincreaseinthestockexchangemarketindexofemergingmarketeconomies
andanincreaseintheinvestmentreturndifferentialhadapositiveimpactoncapitalinflowsintoemerging




Financing the Real Economy 121


marketeconomies.Conversely,ahigherdegreeofinvestorriskaversion(asmeasuredbytheViXindex)
wasassociatedwithlowercapitalinflowsinemergingmarketeconomies.


Recursivecoefficientestimateswereusedtoevaluatestabilityofthecoefficients.Resultsshowchanges
inthecoefficientsacrosstime,indicatingthattherewasabreakaround2005.Thereforethefullperiod
wasseparatedintotwosub-periods:1996–2005(firstquarter)and2005–2012.Theregressionresults
arepresentedincolumns(2)and(3).Theyshowthat,exceptforthevolatilityoftheS&P500index,the
impactoftheexplanatoryvariableswasmuchlargerintheperiodafter2005thanintheearlierperiod.
eventheGDPgrowthdifferentialisnotmeaningfulforthe1996–2005period.Theseresultsareconsistent
withtheobservationthatcarrytradestrategiesofinvestorscontributedtocapitalinflowsintoemerging
marketeconomiesduringtheperiodoflowinterestratesintheUnitedStates.Thecoefficientsofthe
othertwovariableswerefoundtoremainstable.


Short-termcapital inflows(i.e. thedifferencebetweennetcapital inflowsandnet inwardFDi)were
alsoregressedbasedonthefourexplanatoryvariables.Forthefullperiod(column4),asexpected,the
impactofinvestmentreturnsonshort-termcapitalinflowswaslargerthanthatontotalcapitalinflows,
whereastheotherthreevariablesshowedlowercoefficients.Columns(5)and(6)showresultsforthe
twosub-periods.Theypresentsimilarpatternstothoseobservedfortotalcapitalinflows:theimpactsof
theGDPgrowthdifferential,emergingmarketstockmarketindexesandinvestmentreturnsweremuch
greaterintheperiod2005–2012thanintheperiod1996–2005.


REGRESSION RESULTS FOR EMERGING MARkET ECONOMIES, 1996–2012
(Dependent variable: capital inflows as a percentage of GDP)


Capital Inflows Capital Inflows (excl. FDI)


(1) (2) (3) (4) (5) (6)
Period 1996–2012 1996–2005 2005–2012 1996–2012 1996–2005 2005–2012


Pull factors
Ln(NSEI) (+) 1.704*** 1.068*** 3.421*** 1.272*** 0.800*** 3.117***


Push factors
VIX (-) -0.115*** -0.097*** -0.111*** -0.094*** -0.080*** -0.090***


Combination of both factors
G-DIFF (+) 0.135*** 0.050 0.321*** 0.110*** 0.069** 0.263***
EMIR (+) 0.183** 0.099** 0.250*** 0.204*** 0.129** 0.277***


Number of observations 68 37 32 68 37 32
Number of countries 19 18 19 19 18 19
Total pool (unbalanced observations) 1 066 525 559 1 066 525 559


R-squared 0.445 0.447 0.509 0.336 0.326 0.416
F-test 33.096*** 19.389*** 25.302*** 23.94*** 11.572*** 17.347***
Durbin-Watson 1.442 1.533 1.740 1.465 1.616 1.710
F-test on fixed effects 31.010*** 19.038*** 25.201*** 15.938*** 9.264*** 15.947***
R-squared (without fixed effects) 0.148 0.092 0.094 0.153 0.115 0.103


Note: Estimation used Generalized Least Squares with cross-section weights and was based on panel data and quarterly data.
*** Significant at 1 per cent.
** Significant at 5 per cent.
* Significant at 10 per cent.


Box 3.1 (concluded)




Trade and Development Report, 2013122


andnon-oilexportersrelyingonforeigncapitalfor
financingimportantcurrentaccountandfiscaldeficits
(UNCTAD,2012).


Foreign reserve accumulation and improved
debtmanagementhavebeentwoeffectivestrategies
adoptedbydevelopingcountriestoshieldthemselves
fromthevolatilityofcapitalflowsandinternational
financialshocks.Duringthe2000sseveraldevelop-
ing countries accumulated large external reserves
throughmarket intervention inorder toavoidcur-
rency appreciation arising from capital inflows,
andasaself-insurancestrategyagainst theriskof
suddenstopsandliquiditycrises.Foreignexchange
accumulation in pre-crisis times enableddevelop-
ingcountriestowithstandadverseconsequencesof
capitaloutflowsinthemonthsfollowingthecollapse
oflehmanbrothers.Contrastingwithmanyofthose
countries’ responses tofinancial crises in the late
1990s,thistimetheydidnotdefendfixedexchange
paritiesatanycostbyadoptingtightmonetaryand
fiscal policies; rather, they allowed their curren-
cies to depreciate,with central banks selling part
of their international reserves inorder toavoidan
uncontrolleddepreciation.Thisreflectedpragmatic
andflexible approaches to exchange rate policies,
which preferred intermediary regimes rather than
“cornersolutions”(i.e.freefloatingorirrevocably
peggedexchangerates).itgavethemmoreroomfor
manoeuvre inhandling thefinancialcrisisand for
implementing countercyclical policies in response
to theglobalrecession. italsoshowedthat, in the
absence of an international lender of last resort,
foreign reserves offer a natural protection against
financialmarketshocks.


The greater resilience of several developing
andemergingmarketeconomiestoadversefinancial
eventswasalsoduetotheirlowerlevelsofexternal
debtanditsmorefavourablecurrencycomposition
comparedwithearlierepisodes.Priortotheglobal
financialcrisis,mostofthesecountrieshadmanaged
to sharply reduce their average debt ratios and to
developorexpanddomesticmarketsfortheissuance
ofdebtinstrumentsdenominatedinlocalcurrencies.
Agreaterrelianceondomesticcapitalmarketsfor
thefinancingofpublicexpenditurehelpsdeveloping
countries to reduce their vulnerability to lending
booms and exchange-rate effects generated by
surgesofcapitalinflowsfollowedbysuddenstops
and reversals of suchflows.Although it does not
solve the eventual problemof a foreign exchange


Chart 3.9


REAL EFFECTIVE ExChANGE RATES (REER),
SELECTED COUNTRIES, 1990–2012


(Index numbers, average for 1990–1995 = 100)


Source: UNCTAD secretariat calculations, based on UNCTADstat.
Note: REER are calculated using GDP deflators.


0


20


40


60


80


100


120


140


160


180


200


1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012


Argentina Brazil
Chile Mexico


0


20


40


60


80


100


120


140


160


180


200


1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012


China India
Malaysia Thailand


0


20


40


60


80


100


120


140


160


180


200


1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012


Russian Federation South Africa
Turkey Ukraine




Financing the Real Economy 123


Chart 3.10


bANk CLAIMS ON ThE PRIVATE SECTOR, SELECTED COUNTRIES, 1990–2012
(Per cent of GDP)


Source: UNCTAD secretariat calculations, based on IMF, International Financial Statistics database.


0


20


40


60


80


1990 1995 2000 2005 2010


Argentina


2012 0


20


40


60


80


1990 1995 2000 2005 2010


Brazil


2012 0


20


40


60


80


1990 1995 2000 2005 2010


Mexico


2012


0


40


80


120


160
180


1990 1995 2000 2005 2010


China


2012 0


20


40


60


80


1990 1995 2000 2005 2010


India


2012 0


20


40


60


80


1990 1995 2000 2005 2010


Indonesia


2012


1990 1995 2000 2005 2010
0


40


80


120


160
180


Republic of Korea


2012
1990 1995 2000 2005 2010
0


40


80


120


160
180


Malaysia


2012
1990 1995 2000 2005 2010
0


20


40


60


80
Philippines


2012


0


40


80


120


160
180


1990 1995 2000 2005 2010


Thailand


2012
0


20


40


60


80


1990 1995 2000 2005 2010


Turkey


2012
0


20


40


60


80


1990 1995 2000 2005 2010


Nigeria


2012


0


40


80


120


160
180


1990 1995 2000 2005 2010


South Africa


2012
0


20


40


60


80


1990 1995 2000 2005 2010


Russian Federation


2012
0


20


40


60


80


1990 1995 2000 2005 2010


Ukraine


2012




Trade and Development Report, 2013124


shortage,itshouldbethefirstoptionforfinancing
expenditureindomesticcurrency.Debtdenominated
in local currency also increases policy space
because it allowsexternal shocks, suchas sudden
capitaloutflows,ariseinglobalinterestratesorthe
wideningofsovereignyieldspreads,tobecountered
by currency devaluationswithout increasing the
domesticcurrencyvalueofthatdebt.Furthermore,
debt denominated in local currency allows the
governmentalast-resortoptionofdebtmonetization
inatimeofcrisis.Thesolepossibilityofmonetizing
debtdramaticallyreduces the insolvencyrisk,and
consequentlylowerstheriskpremiumonthedebt.


Summingup,policiesaimedatminimizingrisks
haveplayedanimportantroleinhelpingdeveloping
countriesrideouttheglobalcrisis.Theseincludethe
accumulationofforeignreserves,thedevelopment
ofdomesticdebtmarketsandtheissuanceofdebt
instrumentsthatprovideinsuranceagainstdomestic
andexternalshocks.Althoughsuchinsurancepoli-
ciesmayentailsomecosts,12theyreducedeveloping
countries’vulnerabilitytofinancialshocksandthe
likelihoodofdisruptivefinancialcrises,thecostsof
whichcanbeincommensurablyhigher.


Theobservationthatdevelopingcountrieshave
beenbetterabletowithstandshocksoriginatingin
internationalcapitalmarkets thaninpreviousdec-
adesdoesnotmean,however,thattheyareshielded
againstfinancialturbulenceinthenearfuture.Some
emergingmarket economies, particularlybrazil,
China,theRussiaFederationandTurkey,haveseen
rapidgrowthindomesticcredit,evenafterthe2008
crisis,whichmaybepartlyrelatedtocapitalinflows
(chart 3.10).These same countries have experi-
encedrealappreciationoftheirdomesticcurrencies,
althoughinbrazilandTurkeytherehasbeenapartial
reversal.However, theyremainexposedtofurther
surgesincapitalinflows,whichmightputadditional
pressureon their credit andcurrencymarkets,but
also tosuddencapitaloutflows,whichwould lead
to steep corrections in thosemarkets. in addition,
thosecountriesthatpresentlyrunsignificantcurrent
accountdeficitsarelikelytobefacedwithbalance-
of-payments problems.The degree of financial
vulnerabilitydependstoalargeextentonhowcapital
inflows(andthedomesticcredittheymaygenerate)
areusedintherecipienteconomy:ifalargepropor-
tionoftheflowsisusedforfinancingthepurchase
ofrealestate,leadingtoahousingbubble,thereisa


riskofgreaterfinancialfragilitythanifitisusedfor
productiveinvestment.


Theinstabilityofcapitalmovementstodevel-
oping countries since the crisis,with a temporary
returntotheirpreviouspeakinthefirsthalfof2011
andasubsequentfall thereafter,contrastswiththe
experience of the last fewdecades. Previously, it
tookseveralyearsafteracrisisbeforeanewwave
ofcapitalflowstodevelopingcountriescommenced,
anditwouldlastforseveralyearsbeforereceding.
investorsdriventodevelopingcountriesin2010and
mostof2011seemtohavebeenencouragedbythe
abilityofthesecountriestoresumetheirveryrapid
pre-crisisGDPgrowthratesandbytheperception
that theirfinancial systemsweremore stable than
those of developed countries.However, by then
developedcountrieswerealsorecoveringfromthe
crisis,andconsequentlyinvestmentsthereappeared
lessrisky.but,asparadoxicalasitmayseem,wors-
eningprospectsindevelopedcountriesinthesecond
halfof2011,includinghigherperceivedrisksrelat-
ingtothesovereigndebtofsomeofthem,curtailed
capitalflowstowardsbetterperformingdeveloping
countries.Thisseemstoindicatethatinstabilityin
thedevelopedcountriesreinforcedtheriskaversion
offinancial agents, particularly the largefinancial
institutionsthatarethemaindriversofinternational
capitalflows.Moreover,someoftheseinstitutions
still needed to consolidate their balance sheets by
recapitalizingandcleaninguptheirbalancesheets
bysheddingnon-performingloans.


Atpresent,theprospectofsomeimprovement
ingrowthperformanceandlowerperceivedrisksin
somedevelopedcountriesarecreatinguncertainty
aboutthefutureofcapitalflowstodevelopingand
emergingmarketeconomies.ontheonehand,lower
riskscouldfavouraportfolioreallocationinsearch
ofgreaterprofitability,whichcouldleadtoasurgeof
capitaloutflowstotheselattercountries,ashappened
duringthefirsthalfof2013.butontheotherhand,if
prospectsofeconomicrecoveryandaperceivedrisk
ofmountinginflationleadtotightermonetarypoli-
ciesindevelopedcountries,theremightbeadrastic
reversalofcapitalflowsawayfromemergingmarket
economies.Forexample,thesoleannouncementof
a future,butnon-imminent,discontinuationof the
assetpurchaseprogrammebytheFederalReserve
inJune2013promptedareversalofcapitalflowsto
emergingmarketeconomies.




Financing the Real Economy 125


inconclusion,itisnecessarytoexercisecaution
withregardtocross-bordercapitalflows,especiallyina
climateofhighuncertainty,whensentimentsmorethan
factstendtodrivecapitalmovements,potentiallylead-
ingtoself-fulfillingprophecies.Developingcountries


shouldadoptprecautionarymeasures,asdiscussedin
thenext section,bearing inmind that“theseedsof
emergingmarketcrisesaresowninthebuild-upphase,
asinflowsdwarftheabsorptivecapacityofrecipient
countries’capitalmarkets”(Haldane,2011:2).


1. Theroleandimpactoffinancial
markets: a reassessment


(a) Financial instability


inhisHistory of Economic Analysis,Schumpeter
observed:“Peoplemaybeperfectlyfamiliarwitha
phenomenonforagesandevendiscussitfrequently
without realizing its true significance andwithout
admitting it into theirgeneral schemeof thought”
(Schumpeter,1954:1081).Hemadethisremarkin
thechapteronmoney,creditandcycles.indeed,this
istheareawherethegapbetweenconventionaltheory
–basedonthehypothesisofefficiency,rationality,
neutralityandself-regulatingmarketmechanisms–
andactualexperienceisthemostevident.Thepresent
crisis isanewreminderof the inadequacyof that
theoreticalframework.Thistimethemessageseems
tobestronger,becauseattheepicentreofthecrisisare
themostsophisticatedand“deep”financialsystems
of developed countries.Thus, financial dysfunc-
tioncannolongerbeattributedtounderdeveloped
financial institutions or governance shortcomings,
whichwerecommonlyconsidered tobe thecause
of the repeatedfinancial crises in developing and
transitioneconomiesinthe1980sand1990s.Thereis
nowincreasingrecognitionoftheneedtoreintroduce
thenotionoffinancialinstabilityinthetheoretical
framework(borio,2013;blanchard,2013).


oneessentiallessonofthecrisisrelatestothe
assumed self-correctingmechanisms of financial
marketsandtheirsupposedstabilizingroleforthe


entireeconomy.Historically,repeatedfinancialcrises
havefollowedfairlysimilarpatterns,regardlessof
whereandwhentheyhaveoccurred,whichsuggests
that their cause lies in the verynature offinance.
external shocks and occasionalmismanagement
mayaccentuatefinancialvulnerabilityor triggera
financialcrash,buttheydonotbythemselvesdesta-
bilizewhatareconsideredintrinsicallystablemarkets
(Kindleberger,1978;Galbraith,1994;Reinhartand
Rogoff,2009).Rather,recurrentfinancialinstability
results from the fact thatfinancialmarketsdonot
functionlikegoodsmarkets,wheresuppliersandpur-
chasersareclearlydistinctandwheresomematerial
factors(e.g.productivity,costsandstocks)setlimits
topricemovements.infinancialmarkets,suchlimits
aremuchscarcerorsimplydonotexist(Agliettaand
brand,2013;Wicksell,1935).Unlikeinothermar-
kets,mostagentscanbebuyersaswellassellersin
financialmarkets.Thismayleadto“manias”,when
mostinvestorsanticipatepriceincreasesandbuyers
outnumbersellers,followedby“panics”,whenprices
areexpectedtofallandbuyersdisappearfromthe
market.intimesof“euphoria”,strongexpectations
ofpriceappreciationwilldriveupdemandforsome
financialassets,whichinturnwillincreasetheprices
ofthoseassets,therebygenerating(atleastforsome
time)aself-fulfillingprophecy.


Consequently,onfinancialmarkets,unlikeother
markets,risingpricesencourage–ratherthandiscour-
age–demandforfinancialassets,andtheoppositeis
truewhendemandisfalling, thusleadingtoover-
shooting. investors canmaximize their gains by
incurringdebt:whentheexpectedgainsarehigher


D. Lessons and policy recommendations




Trade and Development Report, 2013126


thanthecostofthedebt,higherleveragingincreases
theratioofprofitstocapital.ifborrowersareableto
providecollateralintheformoffinancialassetsthat
are rising inprice, lenderswillbewilling tomeet
theirdemandforcredit.Andasthatcreditispartly
used forbuyingmorefinancial assets, theirprices
willcontinuetoincrease,therebyfeedingbackthe
whole process and inflating a speculative bubble.
inotherwords,thereisaclosecorrelationbetween
creditsupplyanddemand:theybothgrowinparallel
duringexpansionaryphasesandvalidatetheincrease
inassetprices,withnoendogenousadjustmentforces
inthefinancialmarketstostoptheprocess(Aglietta
andbrand,2013).Whateventuallyleadsfrommanias
topanics is anecdotal: at somepoint anumberof
financialinvestorsandbankschangetheirperception
ofrisk,andtheensuingherdbehaviourmakesthe
financialmarketsabruptlyturnfrombullishtobear-
ish.Thedownwardphaseisnormallymoreabrupt
and spectacular than the upward phase, although
equallyirrational.Financialcrisesarethusrootedin
theeuphoriaphase.


Theperceptionthatfinancialmarketsareinher-
entlyunstableandpotentiallyirrationalchallenges
theorthodoxviewthattheyareessentiallynotonly
stableandefficientthemselves,butalsohelptosta-
bilizetheeconomyasawhole.inthatview,access
to credit is supposed to smooth expenditure, as
non-financial agents canborrowduringbad times
andrepaytheirdebtsduringgoodtimes.Financial
marketsarethereforeseenasplayingacountercy-
clical role. in addition, it is argued that financial
markets help “discipline” policymakers, as they
willreactagainst“marketunfriendly”policiesthat
mightundermineeconomicstability.Therefore,so
theargumentgoes,policymakersshouldnotregulate
intrinsically stablefinancialmarketsbeyond some
basicmicroeconomicprecautionary rules (such as
capitalratios);instead,themarketsshouldregulate
policymakers.However, actual experiences, some
ofwhichhavebeenreviewedinthischapter,show
that,onthecontrary,financialmarketshaveastrong
procyclical bias, and inmanycountries theyhave
encouraged, rather than restrained, unsustainable
macroeconomicpolicies.


(b) International capital flows


The divergence between these two views is
particularlysharpwithrespecttocross-bordercapital


flows(brunnermeieretal.,2012).Formanyyears,
the prevalent viewconsidered almost anykindof
foreign capital flows to developing countries as
beneficial.Theywereseenasconstituting“foreign
savings” thatwould complement national savings
oftherecipientcountriesandleadtohigherratesof
investmentthere.


This view has been challenged on both a
theoreticalandempiricallevel.Theoretically,apre-
existing stockof savings isnotaprecondition for
investment,accordingtothealternative(Keynesian/
Schumpeterian) view. investment can befinanced
throughbankcredit,andsavingsareanendogenous
variableresultingfromtheincomegeneratedinthe
economicprocess(seeTDR 2008chap.iiiandiV;
Dullien,2009).inotherwords,asthecausalityruns
from investment to (ex-post) savings, largerflows
of foreign capital do not automatically increase
investment.This conceptual view is supportedby
theevidenceofhugecapitalinflowscoexistingwith
stagnating investment rates (e.g.Africa andlatin
Americainthe1990s)andsubstantialincreasesin
fixed investment,despite strongoutflowsornega-
tive“foreignsavings”(e.g.ArgentinaandChinain
the2000s).Moreover,itcannotbeassumedthatall
foreign capital finances investment in productive
sectors. it is not because they are called “foreign
savings”,andthat“savingsequalsinvestment”,that
capitalinflowswillautomaticallyincreasedomestic
investment.evenFDidoesnotnecessarilyconsist
ofrealinvestment,sincesomeofthoseflowsinclude
mergersandacquisitions–includingprivatizations
–andcreditsfromheadquarterstoaffiliatesoftrans-
nationalcorporations(TNCs).


Asnotedearlier,experiencewithinternational
capital flows shows that they repeatedly affected
economicstability:theyledtoexcessiveexpansionof
domesticcreditandgeneratedbubblesinequity,real
estateandotherfinancialmarkets;theyalsocaused
anappreciationofthedomesticcurrency,reducedthe
competitiveness of domestic producers in interna-
tionalmarkets,boosteddemandforimportedgoods
andservices,andgeneratedorincreasedthecurrent
accountdeficit.13ofcourse,therearealsoexamples
ofcapitalinflowsfinancinghigherinvestmentrates,
either directly, aswith greenfield investments, or
indirectly through loans effectively used forfixed
capital formation and/or for financing imports of
capitalgoods.Therefore,whatmattersfordeveloping
countriesisnotsimplyaccesstoexternalfinancing,




Financing the Real Economy 127


butalsoadegreeofcontroloverhowthatfinancing
isused.Countriesneedtobeselectiveintermsofthe
quantity,compositionandtheiruseofforeigncapital.


(c) Money, credit and banks


Thefactthatsavingsarenotaprerequisitefor
higherfixedcapitalformationleadstotheconclusion
thattheprovisionofcredit(morespecificallybank
credit), rather thanmoney, shouldbe the focusof
theanalysis(Stiglitz,2013).Creditexpansioncre-
atesdeposits,andconsequentlymoney,andnotthe
otherwayaround(Schumpeter,1954:1079–1080).
This contrastswith themonetarist tradition that
assumesthat“high-poweredmoney”issuedbycen-
tralbanksdeterminestheamountofcreditandother
monetaryaggregates–anassumptionthathasbeen
invalidatedbyrecentexperience,whichshowshow
massivemoneycreationbyacentralbankcanhave
little,ifany,impactintermsofincreasingcreditto
the private sector.More importantly, by focusing
excessively on the quantity ofmoney, economists
andmonetaryauthoritieshavegivenlessimportance
tohowitshouldbeutilized.Moneyisnotneutral,in
particularbecauseitisnotdistributedevenlyamong
alleconomicactorswhenitiscreated.oversimplified
monetarist views ofmonetary creationmiss this
essentialpoint,andyetitiscentraltothewritings
ofCantillon,WicksellandSchumpeter,forinstance.


Thechannelthroughwhichsupplementarypur-
chasingpowerisintroducedinaneconomy,thekinds
ofagentsthatreceiveitandhowitisutilizedhavean
impactontheamountandcompositionofaggregate
demand(i.e.credithasdifferenteffectsdepending
onwhetheritisusedforconsumption,investment,
importsorexports)andonthesectoralstructureof
aneconomy(i.e.therelativeimportanceofagricul-
ture,manufacturesandservices).Theyalsohavean
impactoneconomicpower;forexample,creditmay
concentratepropertybyfinancingtherichorreduce
itsconcentrationbysupportingmicro-,small-and
medium-sized firms.banks are keymechanisms
throughwhichthispurchasingpowerisintroducedin
aneconomy.inordertoperformefficiently,theymust
discriminatebetweengoodandbadprojects,andreli-
ableandunreliableborrowers,insteadofbehaving
like passive intermediaries followingmechanical
protocols,orlosinginterestintheirborrowersafter
havingsecuritizedtheirloansandtransferredtherisk
toanotherentity.


Shifting attention frommoney to credit also
impliesmakingpolicymakersresponsiblenotonly
formonetarystabilitybutalsoforfinancialstability.
Thelatestcrisishasrevealedthatmonetarystabil-
ity,inthesenseofpricestability,cancoexistwith
severefinancialinstability.evenworse,insomecases
monetarystabilityhasincreasedfinancialinstability.
in the euro zone, for example, the eliminationof
exchangerateriskandtheprevalenceoflowinflation
favouredlargecapitalflowsfrombanksinthecore
countriesofthecommoncurrencyareatocountries
intheperiphery,andtherewasavirtualdisappear-
anceofinterestratedifferentialsbetweenthesetwo
setsofcountries.However,thosecapitalflowswere
notusedforspurringcompetitivenessandproduc-
tioncapacities:instead,theyfedassetbubblesand
increased current account deficits.This amplified
intraregionaldisparities,ratherthanreducingthem,
andledtothedifficultsituationinwhicheuropefinds
itselftoday.Thisshowsthat,importantly,itwasnot
theamountofmoneycreationortheoverallavail-
abilityoffinancialresources,butwhoreceivedthose
resources andhow theywere used, thatmattered.
Monetarystabilitybasedonafixednominalexchange
rateledtosimilaroutcomesinmanydevelopingand
transitioneconomiesinpreviousdecades,particularly
inlatinAmericaandSouth-eastAsia.14


2. Counteringfinancialinstability


Giventhatfinancialsystemsarepronetosig-
nificant instabilitywith system-wide implications,
andthatself-regulationandself-correctingmecha-
nismscannotbe reliedupon,monetaryauthorities
andsupervisoryinstitutionsneedtoassumegreater
responsibilityforfinancialstabilityindeveloped,tran-
sitionanddevelopingcountriesalike.Thisinvolves
macroprudential policies relating to international
financial integration,which aim at addressing the
potentiallydestabilizingeffectsofcross-bordercapi-
talflows.Atthenationallevel,italsorequirespolicy
measuresandinstitutionalreformsthatshouldavoid
excessiveleveragingwithoutdiscouragingcreditfor
productiveinvestment.indeed,proactivepoliciesby
centralbanksmaybeneededtospurinvestmentand
growth,andcreateconditionsconducivetofinancial
stability. Financial stabilitywill not be sustained
in the longruninaneconomythatdoesnotgrow
andcreatejobs,becausesoonerorlaterbankswill




Trade and Development Report, 2013128


accumulatenon-performing loans in their balance
sheets.There isalsoaneed toreconsiderhowthe
financial sector is organized, such as separating
commercial banking and investment banking, and
extending transparency requirements, regulations
andtaxationtocover“shadowbanking”andoffshore
centresaswell.Finally,reformofthemacroeconomic
framework is essential, as the existing framework
has contributed significantly to the generation of
unsustainablefinancialprocesses.


(a) Exchange rates and capital account
management


Thepotentiallypositiveroleofforeigncapital
ineconomicdevelopmentisunderminedbytherisk
of it becoming amajor source of instability.This
highlightstheproblemsarisingfromaninternational
financialsysteminwhichasmallnumberofnational
currenciesofdevelopedcountries(particularly the
UnitedStatesdollar)areusedasinternationalmoney.
in each international credit cycle,monetary policy
inthesecountrieshasbeendeterminedbydomestic
considerationsandgoals,suchassupportingdomestic
economicactivityandeasingfinancialdistressinsome
cases,orcontrollingdomesticinflationinothers.little
or no consideration is given to the effects of these
policiesontheglobaleconomythroughtheirimpact
onexchangeratesandcurrentaccountbalances.


Moreover,often,“sudden-stop”episodesofcap-
italinflowshavehadanegativeimpactonemerging
marketeconomiesbytriggeringbalance-of-payments
crises, usually combinedwith banking andfiscal
crises.Andwhensuchinflowshavebeentoolarge
tobeproductivelyabsorbedinthosecountries,they
havegeneratedpricedistortionsandmacroeconomic
imbalances,eventually leading tocapital reversals
andfinancial collapse.Thus, often, it is not only
volatile capitalmovements to and fromemerging
markets,butalso,andprimarily, themagnitudeof
thosemovements vis-à-vis the recipient countries
thathaveadverselyaffectedtheirmacroeconomy.
Thiscanleadtothe“bigfishsmallpondproblem”,as
stressedinHaldane(2011):asbigfish(i.e.largecapi-
talflowsoriginatingindevelopedcountries)enterthe
smallpond(therelativelymodestfinancialmarkets
of capital-importing emergingmarket economies)
theycancauseripplesrightacrosstheinternational
monetarysystem,andnevermoresothanintoday’s
financiallyinterconnectedworld.


Theexistinginternationalmonetaryandfinan-
cial system isnot equippedwithmechanisms that
promoteexchange rate stability,prevent largeand
persistent current account imbalances and ensure
smoothandorderlyadjustmentsto,andcorrections
of,disturbances.ithasbeenunabletorestraindesta-
bilizingcapitalmovementsandorganizeanexchange
ratesystemthatwouldreasonablyreflecteconomic
fundamentals.Theseshortcomingshavebecomeever
moreevidentanddamagingwiththedeepeningof
financialglobalizationandtheincreasingvolumeof
cross-bordercapitalflows.


in the present (non-)system, the burden of
adjustments to global imbalances falls entirelyon
deficit countries that dependon externalfinancial
resources,andnotonanyof themajoractors:big
surplus economies donot needfinancing, and the
countrywith the largest deficit issues themajor
international reserve currency.This introduces a
recessionarybiasintothesystem,becausetheless
powerfuldeficitcountriesareforcedtocutdemand,
whilethereisnoobligationforsurpluscountriesto
increasedemand.


The existing international financial arrange-
ments have also failed to prevent the disorderly
increase in short-term capitalmovements,which
isamajorfactorcontributingtoeconomicinstabil-
ity.Countrieswishingtoavoidtheprocyclicaland
destabilizingimpactofcapitalflowshavetoresortto
unilateralmeasures,suchasforeign-exchangemar-
ketinterventionorcapitalcontrols.Suchmeasures
havebeenrelativelysuccessfulincurbingundesired
capitalmovementsortheirimpactonthedomestic
economy.However,aneffectivecontrolofpotentially
destabilizingfinancial flows requiresmultilateral
arrangements,whicharealsointheinterestofcoun-
tries fromwhich suchflowsoriginate.Theglobal
financial crisis has shown that unregulated capital
flowsgeneraterisknotonlyinrecipientcountries,
butalso insourcecountries,sincesolvencyof the
latters’banksmaybethreatenediftheyareinvolved
inforeigncountries’assetbubbles.Thus,financial
supervisionneedstobeappliedatbothendsofcapital
movements.


Greaterstabilityofexternalfinancingfordevel-
opingcountriesisdifficult–ifnotimpossible–to
achievewithoutbroaderreformoftheinternational
financial andmonetary system.Theexperienceof
thefinancialandeconomiccrisishasmadeitclear




Financing the Real Economy 129


thatweakinternationalarrangementsandinstitutions,
andtheabsenceofinternationalrulesandregulations
inthisarea,carryhighrisksnotonlyfordeveloping
countriesbutalsoforthemostadvanceddeveloped
countries.Yetthewillforinternationalcooperation
toundertakethenecessaryreformsisstilllacking.
Under existingmonetary andfinancial conditions,
andintheabsenceofinternationalreforms,develop-
ingandemergingmarketeconomiesneedtodesign
national, and,where possible, regional strategies
aimedatreducingtheirvulnerabilitytointernational
financialshocks.


As longas therearenomultilaterallyagreed
rulesgoverningtheexchange-ratesystem,thetask
ofreducingtherisksofcurrencymisalignmentand
exchange rate volatility remainswith the govern-
ments andmonetary authorities of each country.
Theserisksarelikelytoincreaseinthecurrentglobal
context of persistent growth disparities between
themajorreservecurrencycountriesandemerging
marketeconomies,andcouldwellbeaccentuatedas
thelatterandotherdevelopingcountriesshift toa
strategythatplacesgreateremphasisthaninthepast
onincreaseddomesticdemandasadriverofgrowth
anddevelopment.


Followingtheirexperienceofthehighcostsof
adopting“cornersolutions”forexchangerates(i.e.
fullyflexibleor irrevocablypegged),mostemerg-
ingmarketeconomieshaveturnedtowardsamore
pragmaticmanaged floating regime.This allows
flexibleinterventionbycentralbankstoavoidboth
excessivevolatilityandunsustainablerealexchange
ratesresultingfromspeculativefinancialoperations
ratherthanfromfundamentals.15


in addition, regional financial cooperation
can support efforts to stabilizemacroeconomic
conditions. Since the 1960s, some regions have
used certainmechanisms thatmake it possible to
reducedependenceonforeigncurrencyforregional
trade, such as clearing payment systems and the
useofdomesticcurrenciesforbilateraltrade.other
institutionsprovidebalance-of-paymentsfinancing
withoutundesirableconditionalitiesattached.Some
regionalarrangementsalsofacilitatethemanagingof
exchangerates,forinstancethroughcredit(orswap)
agreementsamongcentralbanksorthepoolingof
reserves (e.g. thelatinAmericanReserves Fund
(FlAR), theArabMonetaryFund (AMF)and the
ChiangMaiinitiative).Astheseregionalinstitutions


offer supportwithout harsh conditionalities, they
provideaneffectivetoolforcountercyclicalpolicies.


Destabilizing effects and a procyclical bias
causedbycapitalflowscanalsobeprevented,orat
leastmitigated,byresortingtocapitalcontrols,which
arepermittedundertheiMFArticlesofAgreement.
There is extensive experiencewith such controls
inbothdevelopedanddevelopingcountries.They
weretheruleintheUnitedStatesinthe1960sand
ineuropeuntilthe1980s.inthe1990sand2000s,
some emergingmarket economies (e.g.Chile and
Colombia)sought todiscourageshort-termcapital
inflowsthroughtaxationortheimpositionofnon-
remunerateddeposits,whileothersimposedbarriers
on short-termcapitaloutflows (e.g.Argentinaand
Malaysia).More recently,brazil also introduced
taxesoncapitalinflows.Theuseofcapitalcontrolsis
beingincreasinglyacceptedininternationalforums,
althoughstillwithsomereservations.Forinstance,
theiMFhasacceptedthatcapitalcontrolsarelegiti-
mateinstruments,butitsuggestsresortingtothem
onlyinsituationswhenabalance-of-paymentscrisis
isalreadyevidentandafterallothermeasures(e.g.
monetaryandfiscaladjustment)havefailed.16The
problemwithsuchanapproach is that itdoesnot
recognizethemacroprudentialrolethatcontrolscan
playinpreventingsuchacrisisinthefirstplace.


(b) A broader mandate for central banks


Toachievethegoaloffinancialstability,central
banksandothereconomicauthoritiesneedtoadopt
acoordinatedpolicyapproach.Notonlyshouldthe
mandatesoftheformerbebroadened,butalsothe
numberandkindsofinstrumentstheycanuseshould
beincreased,includingformacroprudentialregula-
tionandforkeepingtrackofwhatisbeingfinanced
intheeconomy.Allthisrequiresareassessmentof
theideathatcentralbanksmustmaintaintheirinde-
pendence(blanchard,2013).Therationalefortheir
independencewastokeepthemfreefrompolitical
pressures as they implemented their (supposedly)
technicalresponsibilityofcontrollinginflation.even
incaseswheretheirmandatewaslimitedtoonesingle
goal(monetarystability)withonesingleinstrument
(policyinterestrates),their“technical”naturewas
debatable.Withtheprogressivebroadeningoftheir
mandateandtheiruseofmoreinstruments(already
underway),theyhaveassumedwiderresponsibilities




Trade and Development Report, 2013130


inacomprehensiveapproachtomacroeconomicand
financialpolicy.


Theneedforreconsideringtheroleofcentral
banks,andwithittheconceptoftheir“independence”
forundertakingthesoletaskofensuringstabilityof
pricesofgoodsandservices,hasneverbeenmore
evident thanduring the latestfinancial crisis.The
crisisobligedcentralbankstotakemoreandmore
“unconventional”measures,whichhighlightedthe
gap between the theoretical basis for the concept
ofcentralbankindependenceandtheneed,derived
fromexperience,toinvolvethemonetaryauthorities
ineffortstostabilizefinancialmarketsintheinterests
oftheeconomyasawhole.Theconventionalview
holds that the privatefinancial sector is efficient,
eventotheextentofbeingabletoeasetheimpactof
shocksontherealeconomy.itexcludesthepossibil-
ityofmismanagementbyfinancialinstitutionsand
marketsontheassumptionthattheyalwayshavecor-
rectinformationaboutcurrentandfutureeconomic
developments,andthatitisgovernmentmismanage-
mentthatleadstofinancialcrises.Thepresentcrisis
has turned thathypothesisupsidedown, as itwas
causedbytheprivatesector.Centralbankindepend-
encefromgovernmentdidnotpreventthefinancial
crisis,andthecombinedactionofcentralbanksand
governmentswas indispensable for responding to
thecrisis,includingbailingoutinstitutionsthatwere
considered“toobigtofail”.


Afurtherstepforwardwouldbetoacceptthat
centralbanksmustplayanactiveroleintheimple-
mentation of a growth and development strategy.
Monetary stability, in the sense of price stability,
is insufficient to secure stablefinancial conditions
for therealeconomy.Moreover,financialstability
dependsontheperformanceoftherealsectorofthe
economy,because,inseverecrisissituations,banks
havetendedtoaccumulatenon-performingloansand
eventuallyfail.Thus,supportingeconomicgrowth
shouldnot be consideredmerely a supplementary
responsibilityofcentralbanks;itconstitutesthevery
basisoffinancialandmonetarystability.


(c) Reconsidering regulation of the financial
system


Financialsystemsindevelopingcountriesrequire
appropriate regulations aimed at ensuring that they
servetherealeconomyandthedevelopmentprocess.


Moreover, in seeking to achieve financial stabil-
ity, the regulations should not hamper growth by
undulyrestrictingcredit.inparticular,theyshould
encourage long-term credit to finance productive
investment.indeed,thereisatwo-wayrelationship
betweenfinancial stability andgrowth, in the sense
thatwithoutfinancialstabilityitwouldbedifficultto
achievegrowth;on theotherhand, inasituationof
economicstagnation,loanscouldveryeasilybecome
non-performing,thusposingarisktofinancialstability.


Several developed countries, having been
severelyaffectedbyfinancialcrises,areintroducing
orconsideringfar-reachingchangesinbankregula-
tions.Someofthesechangeshavebeenformulated
by thebaselCommittee onbankingSupervision
(bCbS)throughthebaseliii rules,andothersby
theFinancialStabilityboard(FSb)aswellasother
bodies.Moreover,thesenewrulesarebeingintro-
ducedorconsiderednotonlyindevelopedcountries,
butalso,toalargeextent,theyareshapingregulatory
systemsindevelopingandemergingmarketecono-
mies.Forinstance,baseliiicapitalstandardshave
alreadybeen implemented in11 (outof28)basel
Committeemember jurisdictions, seven ofwhich
areemergingmarketeconomies(China,HongKong
(China),india,Mexico,SaudiArabia,Singaporeand
SouthAfrica),withArgentina,brazilandtheRussian
Federationplanningtoimplementthembytheend
of2013(biS,2013).


Capitalrequirementsarethemainaspectofthe
strengthenedrules.Proposalsnegotiatedatbaseliii
aimtoreviseandextendtheexistingbaseliandii
capitalrequirementsandestablishasimpleleverage
ratiobetweenassetsandcapital.17Microprudential
regulationsofthiskindaretobesupplementedwith
anadditionalmacroprudentialoverlay,suchastheuse
ofcapitalbuffers,sothatintheeventoftheprices
oftheirassetsfalling,bankswillnotfindthemselves
in non-compliancewith capital requirements and
havingtodemandextracapitalwhencreditgrowth
developstoorapidly.Also,forthefirsttime,basel
ruleswillincludeliquidityrequirements,butthereis
stilladebateabouttheirprecisedefinitionasbanks
arenotinagreementoverthesenewrequirements.


Themain idea behind these refurbished and
strengthenedrulesistoreducerisksofbankfailure
andtheneedforpublicbailoutsbycontainingexces-
siveleveraging.Theyalsoseektodeterbanksfrom
fundingmedium-andlong-termlendingbyresorting




Financing the Real Economy 131


tothewholesalemarketforveryshort-termborrow-
ing,ratherthanusingastabledepositbase.


Criticsarguethatbaseliiiregulationsarestill
procyclical,andremaingearedtoevaluatingriskas
estimatedbythemarkets,whichhaverepeatedlybeen
seentofailinthismostimportanttask.Theyarealso
consideredtobeoverlycomplex,evenfordeveloped
countries, and probablymore so for developing
countries.inaddition,verylittleprogresshasbeen
made concerning the “too-big-to-fail” institutions
orincopingwiththe“shadowbanking”partofthe
financialsystem.Withregardtothelatter,thereisa
complexdebateabouthowtoexercisegreatersuper-
visionofderivativemarkets’over-the-counter(oTC)
operations, including requiring public registration
andclearingmechanisms.


Whether the regulatory capital frameworkof
thebaselaccordsshouldbeappliedindeveloping
countriesisanopenquestion.infact,baselaccords,
startingfrombaseliinthelate1980s,weresupposed
toestablishalevelplayingfieldforlargeinternation-
allyactiveinstitutions.For instance, in theUnited
States, only a few institutionswere supposedly
requiredtofollowthoserules,whiletherestofthe
systemwouldcontinuetoberegulatedinthetradi-
tionalway.Fromthepointofviewoftheinternational
financialsystem,thereisnoreasonwhybanksfrom
developingcountriesshouldfollowthesamerules
aslargeinternationalbanks.Progressively,however,
baselruleshavebecomeageneralstandard:every
countryissupposedtoapplythem,evenifnoneof
their banks is amajor active international player.
More specifically, Financial SectorAssessment
Programs(FSAPs)conductedjointlybytheiMFand
theWorldbankaresupposedtocheckwhetherthe
countriesarefollowingbaselrules.inaddition,the
suppositionisthatthedevelopingcountriesbelong-
ingtotheG20–andthereforeautomaticallytothe
FinancialStabilityboard18–shouldsetanexample
tootherdevelopingcountriesbypromptlyapplying
whatever is decided in those various committees,
eveniftheydonotexerciseanyformalauthorityon
countries.


infact,inmanydevelopingcountriesthathave
experiencedseriousbankingcrisessincethe1980s,
capitalandliquidityrequirementshavebeenmuch
higherthanthoseprescribedbybaselrules(inwhat
used tobecalledbasel+ rules).experience in the
applicationofthoserulesindicatesthattherewasa


generalized restriction on lending, in particular to
smallandmedium-sizedenterprises.


Therecentfinancialcrisishasalsoledtonew
thinkingaboutthestructureofbanking.onemain
featureoftheproposedreformsistheseparationof
commercialfrominvestmentbankingactivities.The
ideaistoinsulateretailbankingthatisvitalforthe
normal functioningof theeconomy(as it receives
deposits and savings, delivers loans andmanages
paymentmechanisms)fromriskieractivitiesrelated
to securities trading (Gambacorta andVanRixtel,
2013).inparticular,thenon-deposit-takingsidewill
nothaveaccesstolender-of-last-resortfacilitiesfrom
thecentralbank.Hence,separatingbankingactivities
mayalsohelptoimprovetransparencyinthefinancial
sector,whichwouldfacilitatemarketdisciplineand
supervision, and – ultimately – support efforts to
recoverfromthepresentcrisis,whilealsoreducing
risksoffurthercrises.


ongoingorproposedreformsarelessradical
thantheirnotoriouspredecessor,theGlass-Steagall
Act,adoptedin1933inresponsetoanevenlarger
bankingcrisis.intheUnitedStates,theVolckerRule
prohibitsproprietarytradingbybanksoperatingin
thecountry,anditalsorestrictsprivateequityactiv-
ity.However,althoughtherulebecamelawin2012,
banksweregiventwoyearstocomply.intheUnited
Kingdom, theVickersCommission recommended
placingaring-fencearoundretailbankingactivities,
separatingthemfromtheinvestmentbankingactivi-
tiesoffinancialinstitutions.legislationisplannedfor
2015,andbankswouldhaveuntil2019tocomply.in
europe,theliikanenplanwasannouncedinoctober
2012,whichproposedthattheinvestmentbanking
activitiesofuniversalbanksbeplacedinaseparate
entityfromotherbankingactivities,butthereareno
plansatpresenttolegislateontheseproposals.


Theneedtoseparatedifferentbankingactivitiesis
alsocloselyrelatedtoconcernsaboutbanksize,inpar-
ticularwiththeriseofverylargeuniversalbanksthat
coveranextremelybroadrangeoffinancialactivities
inmanycountriesandjurisdictions.Hence,regulation
seekinglegal,financialandoperationalseparationof
differentbankingactivitieswouldhelp toavoid the
eventualityofcertainfinancialinstitutionsgrowingso
largeandassumingsuchadiversityofactivitiesthat
theirperformancebecomessystemicallyimportant
(Viñalset al.,2013).Developingcountries,where
financial systemsare still in theprocessof taking




Trade and Development Report, 2013132


shapeandwherethereisconsiderablescopeforan
expansionofcommercialbankingactivitiesmaybe
welladvisedtodrawlessonsfromtheexperienceof
thedevelopedcountriesinthisregard.


othermeasuresenvisagedindevelopedcoun-
tries,especiallythoseaimedatimprovingbanking
governance and resolution in case of bank failure
mayalsobeofimportanceindevelopingcountries.
Suchmeasures couldpossibly be easier to imple-
ment incountrieswhosebankingsystemsare still
relativelysmallbutmayexpandastheireconomies
grow.An important objective in this context is to
reduce incentives for highly risky behaviour of
marketparticipantswhocanobtain largefinancial
profitswithouthavingtobeartheconsequencesof
incurringlosses.Resolutionmechanismsmustallow
authorities towind down bad banks, recapitalize
institutionsthroughpublicownership,andforcethe
bail-in of creditors that have becomemuchmore
importantthandepositorsinthefundingofsystemi-
callyimportantinstitutions.Allthiswouldhelpreturn
bankstoproductiveactivitiesasquicklyaspossible,
withouthavingtouseenormousamountsofscarce
publicrevenueinbailoutoperations(borio,2012).19


insummary,thesedifferentcategoriesofregu-
latory approaches reflect awelcomenewpolitical
willingnesstograpplewithlong-standingissuesthat
standinthewayofsustainableeconomicrecovery.
However, their “one sizefits all” approach is not
necessarilythemostappropriatefordevelopingcoun-
tries.Amajorlimitationisthattheytendtonarrowly
focusmoreonthestabilityofthefinancialsystem
thanon its efficiency in termsof serving the real
economy.Yetthislatteraspectisparticularlyimpor-
tantfordevelopingcountries,muchmoresothanfor
developedcountries.Muchstillremainstobedoneto
helpaligntheincentivesofthefinancialsectormore
closelywiththeneedsofproductiveinvestment,job
creationandsustainableeconomicgrowth.


3. Orientingthefinancialsectortowards
serving the real economy


inordertosupportdevelopmentstrategiesthat
giveagreaterroletodomesticdemandfordriving
growth, it is essential for developing countries to
strengthen their domesticfinancial systems.They
need to focuson thefinancial sector’skey role in


economicgrowth,which is thefinancingoffixed
capitalformationthatboostsproductionandgener-
atesemployment.


inmostcountries,investmentsinrealproduc-
tive capacity arefinancedprimarily from retained
profits (internalfinancing)orby resorting tobank
credit(table3.3).Theobservationthatinternalfinanc-
ingisthemainsourceforthefinancingofinvestment
highlightstheimportanceofstrengtheningaprofit-
investmentnexus.Thisisimportantnotonlybecause
ofthedecisiveroleofrisingdemandformakingaddi-
tionalinvestmentinproductivecapacityprofitable,as
discussedinchapterii,butalsobecauseoftheneed
tofinanceprivateinvestment.Thisrunscountertothe
conventionalideathathigherhouseholdsavings,and
thuslowerconsumption,arepreconditionsforgreater
investments.indeed,apolicythataimsatincreasing
thosesavingsasameanstoraisingtherateofinvest-
ment,ratherthanviewingsavingsasresultingfrom
higherinvestment,weakensdemandandeconomic
activity,withanegativeimpactonprofits,whichare
amajorsourceofinvestmentfinance.


Moreover,financingbybankscanenablefirms
toacceleratetheircapitalformationoverandabove
whatispossiblefromretainedprofits.Forpotential
investors toborrow for thispurpose,financingby
banksmustbeavailableinsufficientamountsandat
acostthatiscommensuratewiththeexpectedprof-
itabilityoftheinvestmentproject.Again,aimingat
increasingtheavailabilityoffinancingforinvestment
byencouraginganincreaseinsavingsdepositsinthe
bankingsystemwouldbecounterproductive,because
higherinterestratesalsomeanhighercostsofbank
financingforpotentialinvestors,inadditiontothe
demand-reducingeffectofhigherhouseholdsavings.


Therefore, a more promising approach to
increaseboththepropensitytoinvestandtheavail-
ability of financial resources for investment is to
support demand, encourage the reinvestment of
profitsand facilitateaccess to long-term, low-cost
bankloans.Newloansdonotrequireanincreasein
savingsdeposits;theycanbemadeavailablethrough
thecentralbank’sprovisionofadequateliquidityto
thebankingsystemandbykeepingthepolicyinterest
rateaslowaspossible.


in developing countries, since the financial
systems aremainly bank-based, banking reform
shouldbeapriority.Thefollowingsectiondescribes




Financing the Real Economy 133


abroadrangeofbank-relatedpolicyinstrumentsand
institutionswhichwould enable amore effective
distributionofcreditthatsupportsrealgrowth.


(a) Measures for orienting bank financing to
serve the real economy


Variousmeasurescouldbeconsideredforori-
entingbankfinancingtosupporttherealeconomy.To
beginwith,bankscouldbeencouraged,orobliged,
toundertakeamorereasonableamountofmaturity
transformation operations (i.e. deliver long-term
creditsmatchedbyshort-termdeposits).inthepast,
commercial banks in developing countries often
preferredtograntmainlyshort-termpersonalloans
orbuygovernmentsecuritiesbecausetheyconsid-
ered the risks involved inmaturity transformation
tobetoohigh.However,theserisksmayhavebeen
exaggerated, since, even during severe financial
crises,withdrawals of deposits frombanks never
exceeded25percentoftheirdepositbase.Arevised
regulatory framework could include elements that
encourageadifferentallocationofbankassetsand
creditportfolios,accompaniedbyrequirementsfor
provisioningandforadequatecollateraltotakeinto
account the additional risks related to the longer
maturityofaproportionoftheirassets.Moreover,
public guarantees for commercial bank credit for
thefinancingofprivateinvestmentprojectsortheir


co-financingwithnationaldevelopmentbanksmay
encouragebankstoprovidemorelendingforsuch
purposes.byreducingthecreditdefaultrisk,such
measureswould also lower the risk premiumson
suchlong-terminvestmentloans.Theresultinglower
interestcostforinvestorswouldfurtherreducethe
probabilityofdefaults,andthusreducethelikelihood
ofgovernmentshavingtocoversuchlossesunderthe
guaranteescheme.


Centralbankscouldsupportmaturitytransfor-
mationintheirroleaslendersoflastresort(llR)
andbyprovidingdepositinsurance.Thelattermeas-
urewould reduce the risk of suddenwithdrawals
ofdepositsthatcouldresultinliquidityconstraints
forbanks,whiletheformerwouldaddressliquidity
shortages,shouldtheyoccur.Thesearrangementsare
ofcoursenotnew:thellRprinciplewasproposed
intheearlynineteenthcenturyandalsoadvocated
bybagehot in 1873,while deposit insurance has
been progressively implementedworldwide since
the1930s.butsucharrangementshaveseldomsuc-
ceededinencouragingbankstoprovideasignificant
amountoflong-termfinancingtotherealeconomy.A
morehands-onapproachbythemonetaryauthorities
isthereforerequired.


Historically, central banks have used awide
varietyofinstrumentstochannellong-termfinance
insupportofdevelopmentobjectives(epstein,2005),


Table 3.3


SOURCES OF INVESTMENT FINANCE, SELECTED COUNTRy GROUPS, 2005–2012


Number of
countries


Number of
firms


Internal
finance


Bank
finance


Trade
credit


Equity or
stock sales


finance Other


(Per cent)


All countries 136 70 781 68.4 17.2 4.8 3.8 5.7


Developed Europe 5 3 354 57.7 20.5 3.3 4.9 13.6
Emerging Europe 10 3 196 58.4 25.2 5.0 6.8 4.6
Africa 44 17 971 81.1 9.4 3.4 1.5 4.5
Latin America and the Caribbean 31 14 657 59.0 21.0 10.1 4.4 5.6
Developing Asia 24 20 477 67.1 20.3 2.8 2.8 7.0
Developing Oceania 5 619 53.3 25.8 3.2 9.0 8.7
Transition economies 17 10 507 69.4 15.6 4.3 7.4 3.3


Source: UNCTAD secretariat calculations, based on World Bank, Enterprise Survey database.
Note: Developed Europe comprises Germany, Greece, Ireland, Portugal and Spain. Emerging Europe comprises Bulgaria, Czech


Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Romania, Slovakia and Slovenia.




Trade and Development Report, 2013134


including direct financing of non-financial firms.
Forinstance,beforetheFirstWorldWarandinthe
inter-war period, thebank ofengland supported
differentindustrialsectors,includingtextiles,metal-
lurgy,shipbuilding,aluminium,rayonandwood-pulp
industries.indeed,thebankbecameheavilyinvolved
in some industries, taking equity stakes and par-
ticipating directly in theirmanagement. in 1929,
theSecuritiesManagementTrustwasinstitutedasa
holdingcompanyformanagingthestakesacquiredby
thebankinvariousfirms.Similarly,thebankofitaly
gotinvolvedinthefinancingandindirectmanage-
mentofdifferentindustrialfirms(o’Connell,2012).


Centralbankandgovernment intervention in
creditallocationbecamewidespreadintheimmedi-
ate post-war period in developed and developing
countries alike. For example, France nationalized
themaindepositbanksandestablishedtheNational
CreditCouncil,whichwas inchargeofallocating
credit in accordancewith national interests and
priorities(Coupaye,1978).Creditpolicywaspartly
implementedbyanumberofpublic,semi-publicand
specializedcooperativeinstitutions,whichfinanced
agriculturalactivitiesandthedevelopmentofrural
infrastructure aswell as regional andmunicipal
investments,socialhousingandindustrialandcom-
mercial investments in small andmedium-sized
enterprises(SMes)atpreferentialrates.inaddition,
France’scentralbank influenced the lendingdeci-
sions of the commercial banks through selective
rediscounting at preferential rates, the conditional
releaseofmandatoryreserves,andtheexemptionof
certainactivities(e.g.exportcredits,medium-term
loansforinvestment)fromquantitativecreditceil-
ings(encadrement du crédit)thatwereinplaceuntil
1986,aswellasthroughamultitudeofcreditlines
forspecificusesatpreferentialrates.othereuropean
countries, includingbelgium,Germany, italy, the
Netherlands and theUnitedKingdom, also used
similarinstruments,notonlytosupportsomesectors
andactivities,butalsotodiscouragecredit-financed
personalconsumption,importsandinventoryaccu-
mulation(Hodgman,1973;o’Connell,2012).


inseveralAsianandlatinAmericancountries,
thepredominanceofbankcreditinfirms’debtfinanc-
ingprovidedthebasisforproactivecreditpolicies
aimedatinfluencingtheallocationofbankcreditand
moderatingthecostsofinterest.Thesepoliciesplayed
adecisiveroleinfosteringtheprocessofindustri-
alization,especiallybetweenthe1950sand1980s.


Specializedinstitutions,includingnationaldevelop-
mentbanksandotherState-ownedbanks,channelled
long-termcredittoselectedindustries,agricultureand
housing.Credit distributionby commercial banks,
someofwhichwereState-owned,20wasalsosubject
togovernmentpolicies,orcentralbankregulations.
For instance, in indonesia,Malaysia, theRepublic
ofKorea,ThailandandTaiwanProvinceofChina,
loans to SMes had to constitute a given share of
banks’assets.inaddition,centralbanksintroduced
differentialreserverequirements,rediscountingand
accesstocentralbankloansatregulatedinterestrates
inorder toorientcreditallocation.Theseschemes
playedacentralroleintherapidindustrializationof
manycountries.However,theydidnotalwaysdeliver
theexpectedoutcomes,andinseveralcountriesthey
weremisused,asState-ownedbankssometimespro-
videdcredittootherpublicentitiesforpurposesthat
werenotrelatedtoproductiveinvestment.Asaresult,
non-performingloansburdenedtheirbalancesheets
andunderminedtheirlendingcapacities.ontheother
hand,itwastheprivatizationofState-ownedbanks
andderegulationoffinancialsystemsthatpavedthe
wayformajorfinancialcrisesinlatinAmericaand
eastandSouth-eastAsia.


inlightofthesedifferentexperiences,develop-
ingcountriesneedtocarefullyweightheprosand
consofthedifferentsystemswhenshapingorreform-
ingtheirdomesticfinancialsectors.Theyshouldalso
ensurethatpublicandprivatefinancialactivitiesare
undertakenbyinstitutionsequippedwithappropri-
ategovernance structures and that theyoperate in
theinterestsoftheeconomyandsocietyasawhole.


Atpresent,flawsincreditallocationbyderegu-
latedprivatebanksanddifficultiesinreestablishing
thesupplyofcreditfortherealsectorindeveloped
economies(despiteexpansionarymonetarypolicies)
haveledtoarenewedinterestincreditpolicies.For
instance, inJuly2012thebankofenglandestab-
lished a temporaryFunding forlendingScheme,
with the goal of incentivizingbanks andbuilding
societiestoboosttheirlendingtothecountry’sreal
economy.Underthisscheme,thebankofengland
provideslow-costfundingtobanksforanextended
periodof time,andboth thepriceandquantityof
fundingprovidedarelinkedtotheirlendingperfor-
mance(increasednetlendingtoSMes,forinstance,
givesthemaccesstoagreateramountofcheapfund-
ing) (bankofengland,2013).ThebankofJapan
hadlaunchedasimilar initiativein2010(bankof




Financing the Real Economy 135


Japan,2010).inthesamevein,severalinitiativesaim
toincreaselendingbypublicinstitutionstoSMes.
Forinstance,theGermandevelopmentbank(KfW
entwicklungsbank)istolend€1billiontotheSpanish
development bank (instituto deCréditooficial,
iCo),sothatitcanchannelloanstoSMesinSpain
atGermanlendingrates.inaddition,inJune2013
theeuropeanCouncillaunchedaninvestmentPlan
withthesupportoftheeuropeaninvestmentbank,
whose capitalwas increased by €10 billion.The
planenvisagestheprovisionofadditionalcreditto
provideSMeswithbetteraccesstofinanceandfoster
jobcreation,especiallyfortheyoung(eib,2013).


However,theseinitiativesarefrequentlyintro-
duced as extraordinarymeasures for dealingwith
exceptionalcircumstances.Therearestrongarguments
infavourofcentralbankandgovernmentintervention
toinfluencetheallocationofcreditinnormaltimes,
especiallyindevelopingcountries.Suchcreditshould
aimatstrengtheningthedomesticforcesofgrowthand
reducingfinancialinstability,sincelong-termloans
for investmentand innovationandloans tomicro,
smallandmedium-sizedenterprisesareextremely
scarce even in good times (TDR 2008, chap. iV).
Somerecentreformshavesoughttoencouragethis
kindof interventionby the central banks, thereby
reinforcingorrestoringtheirhistoricaldevelopmental
role.21inadditiontotheobjectivesofmonetaryand
financialstability,centralbanksshouldcomplement
othergovernmenteffortsandpoliciesaimedateco-
nomicdevelopmentingeneral,withanemphasison
improvingproductivityandgeneratingemployment.


Suchpolicieswouldmainlyinvolvecommer-
cialbanksratherthaninvestmentbanks,aspartofa
“socialcontract”betweentheformerandthecentral
bank.Accordingtosuchacontract,thecentralbank
wouldprovidedepositinsuranceandliquiditysup-
portifneeded(asanllR),whilecommercialbanks
would assume the taskofmaturity transformation
followingguidelines by central banks, in addition
to providing lines of credit under certain condi-
tions.Thisisanadditionalreasonfordifferentiating
betweendeposit-takinginstitutionsandinvestment
bankswhich intermediate between investorswill-
ingtorunhigherrisksandnon-financialcompanies
demandinglong-termfinance,andwhichwouldnot
haveaccesstollRfacilitiesandliabilityinsurance.


Managingabankingsystemwithdevelopment
objectives is not a purely technicalmatter; it also


involves political choices, and therefore calls into
question the rationale for keeping a central bank
independent of elected authorities. Strictly speak-
ing,policyinterventionaimedatsecuringmonetary
andfinancialstabilityisalsopoliticalinnature,as
illustratedbythewaythecrisiswasmanaged.inthe
process, central bankshad to distribute gains and
losses,redistributeincomeandwealth,decideforor
against bailouts anddictate rescue conditions, not
onlytoprivatefinancialandnon-financialagents,but
also,aswiththecountriesintheeuro-zoneperiphery,
tosovereignStates.ifitisacceptedthatthemandate
of central banks should be broadened to include
developmentobjectives,thepurelysupposedly“tech-
nical”characteroftheiractivitiesbecomesevenmore
illusory.ifthemonetaryauthoritiesaretoimplement
monetary,financialandcreditpoliciesaspartofa
developmentstrategy,theyneedtocoordinatetheir
actionswiththeothereconomicauthorities.


(b) Towards more diversified financial systems


besides a growing awareness of the need to
reviewtheroleofcentralbanksandthestructureof
commercialbanking,asdiscussedabove,thereisalso
arenewedinterestinthescopeandroleofdevelop-
mentbanks.ThesetypicallyState-ownedbankscan
takedeposits(althoughnotasmuchasnormalcom-
mercialbanks), raise funds incapitalmarketsand
provideloansforprojectsthatareintendedtocontrib-
utetooveralleconomicdevelopment.Historically,
governments established development banks to
providefinancialservicesthatprivatefinancialinsti-
tutionswereunableorunwilling toprovide to the
extentdesired.eventoday,despitedecadesofcriti-
cismofthepublicsectorandawidespreadbeliefthat
privatizationofState-ownedinstitutionswouldaccel-
erategrowthandraiseproductivity,alargenumberof
developmentbanksstillexist.About40percentof
thesewereestablishedbetween1990and2011.More
recently,newoneshavebeencreatedinanumberof
developingandemergingmarketeconomies,includ-
inginAngola,bulgaria,india,omanandThailand.
intheUnitedKingdom,abusinessbankisinthe
processofbeingestablished,aswellasanew“Green
bank”tofinanceenvironmentalprojects;inFrancea
developmentbankwasrecentlycreatedandthereare
alsoplansforanewdevelopmentbankintheUnited
States.Thisindicatesthatgovernmentsstillconsider
nationaldevelopmentbankstobeusefulinstitutions




Trade and Development Report, 2013136


forpromotingeconomicgrowthandstructuralchange
(deluna-MartínezandVicente,2012).


State-ownedfinancialinstitutionsareestimated
toaccountfor,onaverage,25percentofthetotal
assetsoftheworldbankingsystemandfor30per
centofthetotalfinancialsystemoftheeU.inlatin
America, 56 public development banks distribute
$700billionayear–some10percentoftotalcredit
–andholdassetsamounting to25percentof the
region’sGDP(iADb,2013).oneofthebenefitsof
havingasizeablealternativesourceofcreditcreation
and intermediation became clear during the latest
crisis, as development banks played an important
countercyclical role, increasing their lendingport-
foliosjustasmanyprivatebankswerescalingback
theirs.AccordingtoarecentWorldbanksurveyof
90developmentbanksacrossdevelopedanddevel-
oping countries, between late 2007 and late 2009
thesebanksincreasedtheirloanportfoliosby36per
centcomparedwithanincreaseofjust10percent
byprivatebanksoperatinginthesamecountries(de
luna-MartínezandVicente,2012).


because they add diversity to the financial
systemandhaveabroaderrangeofobjectivesthan
theprivatebankingsystem,developmentbanksmay
also be seen once again – alongsidemore active
centralbanks–asnormalcontributorstoahealthy
androbustfinancialsystemingoodtimesaswellas
duringcrises.


Forpotentialentrepreneursseekingtopursue
newandinnovativeactivities,financingoptionsare
particularlyscarce,becausetheyconstituteacredit
risk that is especially difficult for ordinary banks
toevaluate.This iswhysmaller,morespecialized
sourcesoffinancealsohaveanimportantroletoplay
intheoveralldynamicsofthedevelopmentprocess.
Typicalexamplesincludepubliclysponsoredincuba-
torsthataremandatedtofinanceactivitieswhichhave
thepotentialtoenhancediversificationandstructural
changebutwouldnotnormallyhaveaccesstoprivate
bankingsupport.Researchanddevelopment(R&D)
activitiesorcreativeindustries,forexample,areoften
publiclysupportedinmostdevelopedcountries.


othernon-bank-basedsolutionstotheproblems
ofaccessingcredithavealsoemergedinrecentyears.
Forexample,newformsoffinancehavedeveloped
throughthesocialmedia,suchascrowd-sourcingloans
andpaymentmechanismsthatoperatethroughpeer-to-
peernetworks.NetworkssuchastheNewYork-based
Kickstarter,whichhaschannelledover$600million
tothousandsofprojectsoverthelastfouryears,orthe
UnitedKingdom’slendingClub,suggestthatinnova-
tivenewmechanismsareemergingwheretraditional
financialmarkets are failing to deliver.Certainly,
therearemanyhistoricalexamplesof institutional
solutions thatwere innovative once but are now
consideredmainstream, such asworkplace-based
creditunionsorcorporatestructuresofcooperatives.
However,suchmodelswouldnotbeappropriatefor
allenterprises,andmustbeenseenaspartofadiverse
rangeofchoicesexistingwithinabroaderfinancial
structurethatservesavarietyofneeds.


Withinthisbroadargumentforamorediver-
sifiedfinancial systemmadeupofmanydifferent
bankingandfinancialinstitutionsofdifferentsizes,
objectives andmandates, it is clear that today’s
paradigmofuniversal banking involvingverybig
institutions needs to be reconsidered.This is not
onlybecauseof the “too-big-to-fail”problem,but
alsobecause there isaneed to facilitateaccess to
creditforspecificneedsandtoprovidestabilitytothe
systembynotallowingcloselycorrelatedportfolios
to spreadcontagion.even ifmuchof thedirected
creditisstillchannelledthroughcommercialbanks
(forinstance,underafundingforlendingscheme),
aproactivepolicyfordirectingcredittoproductive
usesmayneedtoresorttoanetworkofspecialized
institutions,includingcooperativeanddevelopment
banks.building(orrestoring)suchafinancialstruc-
tureclearlyexceedstheimmediateconcernofcredit
scarcityintroubledtimes.inaddition,thedevelop-
ment of a financial structure thatwould facilitate
theallocationofcredittotherealsectorandtopro-
ductiveinvestmentwouldalsohelpavoidsomeof
thenegativeeffectsofforeigncapitalflowsfeeding
bubblesandconsumptionbooms.onthecontrary,
theeconomywouldbeabletoprofitfromlong-term
capital inflowsbychannelling them to investment
projectsthatrequireimportsofcapitalgoods.




Financing the Real Economy 137


The adjustment of productive capacities to
changesinthecompositionofaggregatedemandis
notjustamatterofreallocatingexistingresources;
inmostdevelopingandtransitioneconomies,italso
requiresacceleratingthepaceofcapitalaccumulation.
Thisnecessitatestheprovisionofreliableandlow-
costfinancetoproducersforproductiveinvestment
throughappropriatemonetaryandcreditpolicies,as
wellasaccesstoexternalsourcesoffinance.


Whilemany developing countries have had
limitedaccesstointernationalcapitalmarkets,oth-
ershavebeenrecurrentlyaffectedbymassivecapital
inflowsfollowedbytheirsuddenstopsandreversals.
Frequently, such inflows have not served to sup-
port long-termgrowth andproductive investment.
Moreover,theirsizeandvolatilityhaveoftentended
to createmacroeconomic andfinancial instability.
Therefore, the extent towhichfinancial resources
contributetogrowthandstructuralchangedepends
ontheircomposition,theirallocationamongdiffer-
entgroupsofusers,andhowtheyareusedbythe
recipients.


Thelatestfinancialcrisis, likepreviousones,
hasshownthatunregulatedfinancialmarketshavea
strongpotentialtomisallocateresourcesandgenerate
economicinstability.Sinceprivatecapitalflowsare
inherentlyunstableandoftenunproductive, active
interventionbyeconomicauthoritiesisindispensable
forpreventingdestabilizingspeculationandforchan-
nellingcredittoproductiveinvestment.Acautious
andselectiveapproachtowardscross-bordercapital
flows, includingpragmaticexchange-ratemanage-
mentandcapital-accountmanagement,wouldreduce
thevulnerabilityofdevelopingandtransitionecono-
mies toexternalfinancialshocksandhelpprevent
lendingboomsandbusts.Suchanapproachcould


alsoincludemeasuresaimedatusingforeigncapital
fordevelopment-enhancingpurposes,especiallyfor
financingimportsofessentialintermediateandcapi-
talgoodsthatarenotyetproduceddomesticallyand
thatcannotbefinancedbycurrentexportearnings.
Thiscouldbeparticularlyimportantinmanyleast
developedcountrieswithaviewtoincreasingtheir
overallproductivityandeconomicdiversification.


Perhapsmoreimportantly,developingandtran-
sitioneconomiesmustincreasinglyrelyondomestic
sourcesoffinance.Asretainedprofitsconstitutethe
mostimportantsourceoffinanceforinvestmentin
real productive capacity, followedbybank credit,
strengtheningtheprofit-investmentnexusandinflu-
encingthebehaviourofthebankingsysteminthe
wayitallocatescreditareofparticularimportance.
Themarketmechanismalonecannotbereliedupon
to achieve this; a variety of fiscal and regulatory
measurescanalsobeused,asdemonstratedbymany
successfulindustrializingcountries.


Moreover,monetary policy alone is not suf-
ficienttostimulateinvestment,asevidencedbythe
policy response to the ongoingfinancial and eco-
nomicproblemsindevelopedcountries.Monetary
expansionin thesecountrieshasfailedto increase
banklendingtoprivatefirmsforrevivinginvestment
inrealproductivecapacity.Thispointstotheneed
foracreditpolicyaswell.Centralbankscouldsup-
portmaturitytransformationinthebankingsystem
and encourage, or oblige, banks to providemore
lendingforthefinancingofproductiveinvestment.
Thereisnothingradicallynewinsuchapolicy.There
are numerous examples fromboth developed and
developingcountriesofcentralbankinvolvementin
orientingcreditthrough,forexample,directfinanc-
ingofnon-financialfirms,selectiverefinancingof


E. Summary and conclusions




Trade and Development Report, 2013138


commercialloansatpreferentialrates,andexempt-
ingcertaintypesofbanklendingfromquantitative
creditceilings.


Creditpolicycanalsobepartlyimplementedby
otherpublic,semi-publicandcooperativeinstitutions
forfinancingagriculturalandindustrialinvestment,
inparticularbySMes,atpreferentialrates.National
andregionaldevelopmentbanksmayprovideloans
andfinancial services that private financial insti-
tutions are unable or unwilling to provide.More
generally,anetworkofspecializeddomesticinstitu-
tionsmaybemoreeffectiveinchannellingcreditfor
development-enhancingpurposesthanbiguniversal
banks.Thereisalsothedangerthatthesebanksmay
eventuallyexpandtoanextentthattheybecomenot


only“toobigtofail”butalso“toobigtomanage”
and“toobigtoregulate”.


Thus,forsupportingdevelopmentandstructural
changewhatisneededisnotonlybetterregulation
ofthefinancialsystemaimedatachievingmonetary
andfinancialstability,butalsoarestructuringofthe
financial–particularlythebanking–systemtoensure
thatitservestherealeconomybetterthaninthepast.
Monetaryandfinancialstabilityandsustainedgrowth
arecomplementarygoals:withoutthefirsttwo,sta-
blegrowthof investment,outputandemployment
wouldbedifficulttoachieve,andwithoutsustained
growth,thereistheriskthatcorporatefailuresand
non-performingbankloanswillunderminemonetary
andfinancialstability.


Notes


1 Thetermemergingeconomies(oremergingmarket
economies)referstoanumberofcountriestypically
belongingtothemiddle-incomegroup,thatprivate
financialinstitutionsconsidertobepotentialclients.
Theyarealso seenasofferinghigherprofits than
developedeconomies,buttheyalsopresenthigher
risks.Thisgroupofcountriesincludesseveralnew
entrantsintotheeUwhichpreviouslywereclassified
astransitioneconomies.


2 This corresponds to the global stock of debt and
equityoutstanding,asestimatedbylundetal.,2013.


3 Forinstance,anincreaseoftheexposureofUnited
Statesinstitutionalinvestors,suchaspensionfunds,
toemergingmarketdebtfromthecurrentaverageof
4percentto8percentoftheirportfolio(asrecom-
mendedbysomeinvestmentadvisers)wouldfunnel
intoemergingmarketbonds$2trillion,abouttwice
thetotalamountofbondssoldbyemergingmarket
corporationsandsovereignStatesin2012–arecord
year(RodriguesandFoley,2013).


4 UNCTADsecretariat calculations, basedon iMF,
Balance of Payments Statistics database and
UNCTADstat.


5 These countries are:Afghanistan,burkinaFaso,
burundi,Djibouti, theGambia,Grenada, thelao
People’sDemocraticRepublic,Maldives,SaoTome
andPrincipe, Saintlucia, SaintVincent and the
Grenadines,Tajikistan,TongaandYemen.


6 Net capital inflows correspond to gross inflows
(e.g. an increase of inward FDi or a new credit
received)minusthereductionofforeignliabilities
(forinstance,throughdisinvestmentofinwardFDi
orthepayingbackofaforeignloan).itdoesnottake
intoconsiderationcapitaloutflows,suchasoutward
FDiorthegrantingofcredittoanon-resident.


7 UNCTADsecretariat calculations, basedon iMF,
Balance of Payments Statistics database and
UNCTADstat.


8 Suchabelief,popularizedattheendofthe1980s
intheUnitedKingdombyNigellawson,thethen
Chancelloroftheexchequer(andoftenreferredto
as“lawson’slaw”),endedinthe“sterlingcrisis”in
1992andthatcurrency’swithdrawalfromtheeRM.


9 The intermediation of the banking system also
allowedtheeCbtocircumventitsstatutorylending
limitsinfinancingitsmemberStates.Thiswasalso




Financing the Real Economy 139


convenientforthebanksthatcouldobtaineCbloans
ataninterestrateof1percentandacquiresovereign
bondswithmuchhigherreturns.


10 DatafromtheeCb,euroAreaAccounts,Statistical
Data Warehouse; availableat:http://www.ecb.int/
stats/html/index.en.html.


11 Data from thebank for international Settlement,
Consolidated Banking Statisticsdatabase.


12 inparticular,ifcentralbankssterilizemoneycreation
resulting from the accumulation of international
reservesbyincreasingtheirliabilities,afinancialcost
arisesifinterestearningsfrominternationalreserves
aresmallerthantheinterestpaymentsresultingfrom
thenewdebtissuances.


13 inthisrespect,therecentabilityofsomelDCsto
accessprivatecapitalmarketsshouldbeexercised
with caution. Since 2007, several sub-Saharan
Africancountries,suchasAngola,theDemocratic
RepublicoftheCongoandSenegal,haveissuedsov-
ereignbonds.However,whilesuchforeign-currency
denominated government debt allows them some
roomformanoeuvre,itcarriessignificantmaturity
andcurrencyrisks,andmakesthosecountriesvul-
nerabletothedestabilizingimpactofprivatecapital
movements(StiglitzandRashid,2013).


14 ThecaseoftheArgentinean“ConvertibilityPlan”
between1991and2001was,inthatsense,aharbin-
gerforwhatishappeningtotheeuro-zoneperiphery.
inArgentina,policymakerssoughtmonetarystabil-
ityasthemainmacroeconomictargetbyadopting
acurrencyboardschemewithanirrevocablyfixed
exchangerate.Atthesametime,theyderegulated
boththedomesticfinancialsystemandcapitalflows.
Asexchange-rateriskseemedtohavedisappeared,
capital inflows of the carry-trade type spurred
domestic credit and raised asset prices, leading
to some years of rapidGDPgrowth, although it
alsoledtoincreasingcurrentaccountdeficits.The
subsequentlossofcompetitivenesseventuallyhurt
economicgrowthandmadethecountrydependent
onever-increasingcapitalinflows.Anyslowdownof
capitalinflowsledtoeconomicrecession,asin1995
and 1998–2001.After several years of economic
depressionandincreasingdifficultiesinmaintaining
the exchange-ratepeg, a reversal of capitalflows
ledtothecollapseoftheConvertibilityPlan.The
Governmenttriedtorestoretheconfidenceoffinan-
cialmarketswithalawthatsoughttoeradicatefiscal
deficits(throughtheso-calledZero-deficitAct)by
requiringthatcurrentexpenditures(exceptinterest
payments)beadjustedquarterlytoexpectedfiscal
revenues.Thisledtoanacross-the-boardreduction
of13percentinpublicservants’salariesandpen-
sions, among other expenditures,which actually
aggravatedtheeconomicdepressionand,asacon-
sequence,alsoaffectedpublicrevenues.Meanwhile,
thefiscaldeficitremainedstatic.Asdepositswere


increasinglywithdrawn frombanks and used for
buyingUnitedStatesdollars,theillusionthat“every
pesoisbackedbyadollar”provedtobefalse,andthe
currencyboardhadtobeabandoned.Therefollowed
ahugedevaluationanddefaultof a largepropor-
tionoftheexternaldebt.Thesetwounplannedand
undesiredoutcomessetthefoundationsforeconomic
recovery,astheyrestoredcompetitivenessandled
todebtrestructuringandreduction.


15 Thistopichasbeenextensivelydiscussedinprevious
TDRs (see, for instance,TDR 2009,chap. iVand
TDR 2011,chap.Vi).


16 inaddition,theiMFintroduceswhatamountstoa
kindofconditionalitybysubjectingthecountriesthat
exercisetheirprerogativetointroducecapitalcon-
trols(establishedinArticleVi,sec.3oftheArticles
ofAgreements)tosurveillancedisciplines,asstated
inArticleiV.


17 Theproposalwasputforwardearlyinthereformula-
tionprocess,buthasgainedstrengthaftertestsapplied
by thebaselCommittee onbankingSupervision
showedthatthereishugevariationbetweendifferent
banks’estimationsoftheirrisk-weightedassets,lead-
ingtosignificant“savings”intheamountofcapital
requiredtobesetasidetosupporttheiractivities.


18 Since2009,allG20membersarerepresentedonthe
baselCommitteeonbankingSupervision(bCbS)
andtheFinancialStabilityForum(FSF),andcon-
sequentlyontheFinancialStabilityboard(FSb).


19 intheUnitedStates,theDodd-FrankActseeksto
imposeabail-inofcreditors in theeventofbank
failureandpreventagovernmentbailoutofbanks.


20 Untilthe1980s,thebulkofdepositsandloanswas
concentrated in State-owned commercial banks
in indonesia, theRepublic ofKorea andTaiwan
ProvinceofChina,andthesebanksstillplayamajor
roleinChinaandindia.


21 Forexample,in2010,thecentralbankofbangladesh
setcommercialbanksatargetforloandisbursements
toSMesandwomenentrepreneurs,andthetargetis
supportedbyarefinancingscheme.Achievementis
aconditionfortheapprovalofnewbranchesofthe
concernedbank.inaddition,itrequiredallprivate
andforeignbankstodirect2.5percentoftheirtotal
loans to agriculture (bangladeshbank, 2013). in
india, theReservebankof india established that
40percentofadjustednetbankcreditmustbetar-
getedtothefollowingprioritysectors:agriculture,
SMes,micro credit, education, housing, off-grid
energysolutions forhouseholdsandexportcredit
(for foreign banks only) (Reservebank of india,
2012).SeveralothercentralbanksinAsiancoun-
tries,includingCambodia,China,Malaysia,Nepal,
Pakistan andVietNam, direct credit to priority
sectors,areasorborrowers(typicallySMes),either
bysetting lending targets tocommercialbanksor
throughrefinancingprogrammes(bhattacharayya,




Trade and Development Report, 2013140


2012).inlatinAmerica,mostcentralbanksaban-
doned their developmentmandates in the 1990s,
andfocusedoninflationtargets.However,apolicy
reorientationseemstobeunderway.Forinstance,
inMarch2012ArgentinareformeditsCentralbank
Charter,which increased its ability to implement
credit policies.Under the new regulation, in July
2012thecentralbankdeterminedthatallcommercial
banksmustlendtoproductiveinvestmentatmoder-
ateinterestrates–atleasttheequivalentof5percent
oftheirdeposits–andatleasthalfofthosecredits


mustbedirectedtoSMes.Thisschemecomplements
the rediscount linewhichwasmade available to
banksthatfinancenewinvestmentprojectsunderthe
bicentennialFinancingforProductionprogramme
launchedinJune2010.betweenJuly2012andMay
2013, the credit granted through these two credit
schemes accounted formore than 50 per cent of
thetotalcreditdeliveredtoprivatefirmsduringthis
period(bCRA,2013).Thisshouldgraduallyreduce
banks’strongbiasinfavourofshort-termfinancing
andfacilitatingaccesstocreditbySMes.


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Selected UNCTAD Publications 143


trade and development report, 2012 UnitedNationspublication,salesno.e.12.ii.D.6
Policies for Inclusive and Balanced Growth iSbN978-92-1-112846-8


Chapter i CurrentTrendsandChallengesintheWorldeconomy


Chapter ii incomeinequality:TheMainissues


Chapter iii evolutionofincomeinequality:DifferentTimePerspectivesandDimensions


Chapter iV ChangesinGlobalizationandTechnologyandtheirimpactsonNationalincomeinequality


Chapter V TheRoleofFiscalPolicyinincomeDistribution


Chapter Vi TheeconomicsandPoliticsofinequalityReconsidered


trade and development report, 2011 UnitedNationspublication,salesno.e.11.ii.D.3
Post-crisis policy challenges in the world economy iSbN978-92-1-112822-2


Chapter i CurrentTrendsandissuesintheWorldeconomy


Chapter ii FiscalAspectsoftheFinancialCrisisanditsimpactonPublicDebt


Chapter iii FiscalSpace,DebtSustainabilityandeconomicGrowth


Chapter iV FinancialRe-RegulationandRestructuring


Chapter V FinancializedCommodityMarkets:RecentDevelopmentsandPolicyissues
Annex: ReformofCommodityDerivativesMarketRegulations


Chapter Vi TheGlobalMonetaryorderandtheinternationalTradingSystem


trade and development report, 2010 UnitedNationspublication,salesno.e.10.ii.D.3
Employment, globalization and development iSbN978-92-1-112807-9


Chapter i AftertheGlobalCrisis:AnUnevenandFragileRecovery
Annex: CreditDefaultSwaps


Chapter ii PotentialemploymenteffectsofaGlobalRebalancing
Annex: SimulationoftheTradeandemploymenteffectsofGlobalRebalancing:


ATechnicalNote


Chapter iii MacroeconomicAspectsofJobCreationandUnemployment


Chapter iV StructuralChangeandemploymentCreationinDevelopingCountries


Chapter V RevisingthePolicyFrameworkforSustainedGrowth,employmentCreationand
PovertyReduction


UNITED NATIONS CONFERENCE
ON TRADE AND DEVELOPMENT


PalaisdesNations
CH-1211GeNeVA10


Switzerland
(http://unctad.org)


Selected UNCTAD Publications




Trade and Development Report, 2013144


trade and development report, 2009 UnitedNationspublication,salesno.e.09.ii.D.16
Responding to the global crisis iSbN978-92-1-112776-8
Climate change mitigation and development


Chapter i TheimpactoftheGlobalCrisisandtheShort-termPolicyResponse
Annex: TheGlobalRecessionCompoundstheFoodCrisis


Chapter ii TheFinancializationofCommodityMarkets


Chapter iii learningfromtheCrisis:PoliciesforSaferandSounderFinancialSystems


Chapter iV ReformoftheinternationalMonetaryandFinancialSystem


Chapter V ClimateChangeMitigationandDevelopment


trade and development report, 2008 UnitedNationspublication,salesno.e.08.ii.D.21
Commodity prices, capital flows and the financing of investment iSbN978-92-1-112752-2


Chapter i CurrentTrendsandissuesintheWorldeconomy
Annextabletochapteri


Chapter ii CommodityPriceHikesandinstability


Chapter iii internationalCapitalFlows,Current-AccountbalancesandDevelopmentFinance
Annex: econometricAnalysesofDeterminantsofexpansionaryandContractionary


Current-accountReversals


Chapter iV DomesticSourcesofFinanceandinvestmentinProductiveCapacity


Chapter V officialDevelopmentAssistancefortheMDGsandeconomicGrowth


Annex: DetailsoneconometricStudies


Chapter Vi CurrentissuesRelatedtotheexternalDebtofDevelopingCountries


trade and development report, 2007 UnitedNationspublication,salesno.e.07.ii.D.11
Regional cooperation for development iSbN978-92-1-112721-8


Chapter i CurrentissuesintheWorldeconomy


Statisticalannextochapteri


Chapter ii Globalization,RegionalizationandtheDevelopmentChallenge


Chapter iii The“NewRegionalism”andNorth-SouthTradeAgreements


Chapter iV RegionalCooperationandTradeintegrationAmongDevelopingCountries


Chapter V RegionalFinancialandMonetaryCooperation


Annex1 TheSouthernAfricanDevelopmentCommunity


Annex2 TheGulfCooperationCouncil


ChapterVi RegionalCooperationinTradelogistics,energyandindustrialPolicy


trade and development report, 2006 UnitedNationspublication,salesno.e.06.ii.D.6
Global partnership and national policies for development iSbN92-1-112698-3


Chapter i GlobalimbalancesasaSystemicProblem
Annex1: CommodityPricesandTermsofTrade
Annex2: TheTheoreticalbackgroundtotheSaving/investmentDebate


Chapter ii evolvingDevelopmentStrategies–beyondtheMonterreyConsensus


Chapter iii ChangesandTrendsintheexternalenvironmentforDevelopment
Annextablestochapteriii


Chapter iV MacroeconomicPolicyunderGlobalization


Chapter V NationalPoliciesinSupportofProductiveDynamism


ChapterVi institutionalandGovernanceArrangementsSupportiveofeconomicDevelopment




Selected UNCTAD Publications 145


trade and development report, 2005 UnitedNationspublication,salesno.e.05.ii.D.13
New features of global interdependence iSbN92-1-112673-8


Chapter i CurrentissuesintheWorldeconomy


Chapter ii incomeGrowthandShiftingTradePatternsinAsia


Chapter iii evolutionintheTermsofTradeanditsimpactonDevelopingCountries
Annex: DistributionofoilandMiningRent:SomeevidencefromlatinAmerica,1999–2004


Chapter iV TowardsaNewFormofGlobalinterdependence


******


trade and development report, 1981–2011 UnitedNationspublication,salesno.e.12.ii.D.5
Three Decades of Thinking Development iSbN978-92-1-112845-1


Part One TradeandDevelopmentReport,1981–2011:ThreeDecadesofThinkingDevelopment
1. introduction


2. interdependence


3. Macroeconomicsandfinance


4. Globaleconomicgovernance


5. Developmentstrategies:assessmentsandrecommendations


6. outlook


Part Two PanelDiscussionon“ThinkingDevelopment:ThreeDecadesoftheTrade and Development Report”


openingstatement
byAnthonyMothaeMaruping


originsandevolvingideasoftheTDR
introductoryremarksbyRichardKozul-Wright
StatementbyRubensRicupero
StatementbyYιlmazAkyüz


TheTDRapproachtodevelopmentstrategies
introductoryremarksbyTaffereTesfachew
StatementbyJayatiGhosh
StatementbyRolphvanderHoeven
StatementbyFaizelismail


Themacroeconomicreasoninginthe TDR
introductoryremarksbyCharlesGore
StatementbyAnthonyP.Thirlwall
StatementbyCarlosFortin
StatementbyHeinerFlassbeck


evolvingissuesininternationaleconomicgovernance
introductoryremarksbyAndrewCornford
StatementbyJomoKwameSundaram
StatementbyArturoo’Connell


Thewayforward
ClosingremarksbyAlfredoCalcagno


Summaryofthedebate


******




Trade and Development Report, 2013146


Thesepublicationsmaybeobtainedfrombookstoresanddistributorsthroughouttheworld.Consultyourbookstoreor
writetoUnitedNationsPublications/SalesSection,PalaisdesNations,CH-1211Geneva10,Switzerland,fax:+41-22-
917.0027,e-mail:unpubli@un.org;orUnitedNationsPublications,TwoUNPlaza,DC2-853,NewYork,NY10017,
USA,telephone+1-212-963.8302or+1-800-253.9646,fax:+1-212-963.3489,e-mail:publications@un.org.internet:
http://www.un.org/publications.


the financial and economic Crisis of 2008-2009 UnitedNationspublication,salesno.e.11.ii.D.11
and developing Countries iSbN978-92-1-112818-5
editedbySebastianDullien,DetlefJ.Kotte,
AlejandroMárquezandJanPriewe


introduction


the Crisis – transmission, impact and special features
JanPriewe
What Went Wrong? Alternative Interpretations of the Global Financial Crisis
DanielaMagalhãesPratesandMarcosAntonioMacedoCintra
The Emerging-market Economies in the Face of the Global Financial Crisis
JörgMayer
The Financialization of Commodity Markets and Commodity Price Volatility


SebastianDullien
Risk Factors in International Financial Crises: Early Lessons from the 2008-2009 Turmoil


the Crisis – Country and regional studies
laikeYangandCorneliusHuizenga
China’s Economy in the Global Economic Crisis: Impact and Policy Responses


AbhijitSenGupta
Sustaining Growth in a Period of Global Downturn: The Case of India


AndréNassif
Brazil and India in the Global Economic Crisis: Immediate Impacts and Economic Policy Responses


PatrickN.osakwe
Africa and the Global Financial and Economic Crisis: Impacts, Responses and Opportunities


looking forward – policy agenda
AlejandroMárquez
The Report of the Stiglitz Commission: A Summary and Comment


RicardoFfrench-Davis
Reforming Macroeconomic Policies in Emerging Economies: From Procyclical to Countercyclical Approaches


JürgenZattler
A Possible New Role for Special Drawing Rights In and Beyond the Global Monetary System


DetlefJ.Kotte
The Financial and Economic Crisis and Global Economic Governance


******


the global economic Crisis: UnitedNationspublication,salesno.e.09.ii.D.4
systemic failures and multilateral remedies iSbN978-92-1-112765-2
Report by the UNCTAD Secretariat Task Force
on Systemic Issues and Economic Cooperation


Chapter i Acrisisforetold


Chapter ii Financialregulation:fightingtoday’scrisistoday


Chapter iii Managingthefinancializationofcommodityfuturestrading


Chapter iV exchangerateregimesandmonetarycooperation


Chapter V Towardsacoherentefforttoovercomethesystemiccrisis


******




Selected UNCTAD Publications 147


regional monetary Cooperation and growth-enhancing policies:
the new challenges for latin america and the Caribbean
UnitedNationspublication,UNCTAD/GDS/2010/1


Chapter i WhatWentWrong?AnAnalysisofGrowthandMacroeconomicPricesinlatinAmerica


Chapter ii RegionalMonetaryCooperationforGrowth-enhancingPolicies


Chapter iii RegionalPaymentSystemsandtheSUCReinitiative


Chapter iV PolicyConclusions


******


price formation in financialized Commodity markets: the role of information
UnitedNationspublication,UNCTAD/GDS/2011/1


1. MotivationofthisStudy


2. PriceFormationinCommodityMarkets


3. RecentevolutionofPricesandFundamentals


4. FinancializationofCommodityPriceFormation


5. FieldSurvey


6. PolicyConsiderationsandRecommendations


7. Conclusions


******


Thesepublicationsareavailableonthewebsiteat:http://unctad.org.CopiesmaybeobtainedfromthePublications
Assistant,MacroeconomicandDevelopmentPoliciesbranch,DivisiononGlobalizationandDevelopmentStrategies,
UnitedNationsConference onTrade andDevelopment (UNCTAD), Palais desNations,CH-1211Geneva 10,
Switzerland;e-mail:gdsinfo@unctad.org.




Trade and Development Report, 2013148


UNCTAD Discussion Papersareavailableonthewebsiteat:http://unctad.org.CopiesofUNCTAD Discussion Papers
maybeobtained fromthePublicationsAssistant,MacroeconomicandDevelopmentPoliciesbranch,Divisionon
GlobalizationandDevelopmentStrategies,UnitedNationsConferenceonTradeandDevelopment(UNCTAD),Palais
desNations,CH-1211Geneva10,Switzerland;e-mail:gdsinfo@unctad.org.


unCtad discussion papers


******


No.210 Dec.2012 GiovanniAndreaCoRNiA Developmentpoliciesandincomeinequalityinselected
andbrunoMARToRANo developingregions,1980–2010
No.209 Nov.2012 AlessandroMiSSAle Multilateralindexedloansanddebtsustainability
andemanuelebACCHioCCHi
No.208 oct.2012 DavidbiCCHeTTi Thesynchronizedandlong-lastingstructuralchangeon
andNicolasMAYSTRe commoditymarkets:evidencefromhighfrequencydata
No.207 July2012 AmeliaU.SANToS-PAUliNo Trade,incomedistributionandpovertyindeveloping


countries:Asurvey
No.206 Dec.2011 AndréNASSiF, Thelong-term“optimal”realexchangerateand
CarmemFeiJó thecurrencyovervaluationtrendinopenemerging
andelianeARAúJo economies:Thecaseofbrazil
No.205 Dec.2011 UlrichHoFFMANN Somereflectionsonclimatechange,greengrowth


illusionsanddevelopmentspace
No.204 oct.2011 PeterboFiNGeR Thescopeforforeignexchangemarketinterventions
No.203 Sep.2011 JavierliNDeNboiM, Shareoflabourcompensationandaggregatedemand
DamiánKeNNeDY discussionstowardsagrowthstrategy
andJuanM.GRAñA
No.202 June2011 PilarFAJARNeS Anoverviewofmajorsourcesofdataandanalyses


relatingtophysicalfundamentalsininternational
commoditymarkets


No.201 Feb.2011 UlrichHoFFMANN Assuringfoodsecurityindevelopingcountriesunder
thechallengesofclimatechange:Keytradeand
developmentissuesofafundamentaltransformationof
agriculture


No.200 Sep.2010 JörgMAYeR Globalrebalancing:effectsontradeflowsand
employment


No.199 June2010 UgoPANiZZA, internationalgovernmentdebt
FedericoSTURZeNeGGeR
andJerominZeTTelMeYeR
No.198 April2010 leeC.bUCHHeiT Responsiblesovereignlendingandborrowing
G.MiTUGUlATi


No.197 March2010 Christopherl.GilbeRT Speculativeinfluencesoncommodityfuturesprices
2006–2008


No.196 Nov.2009 MichaelHeRRMANN Foodsecurityandagriculturaldevelopmentintimesof
highcommodityprices


No.195 oct.2009 JörgMAYeR Thegrowinginterdependencebetweenfinancialand
commoditymarkets


No.194 June2009 AndrewCoRNFoRD Statisticsforinternationaltradeinbankingservices:
Requirements,availabilityandprospects


No.193 Jan.2009 SebastianDUllieN Centralbanking,financialinstitutionsandcredit
creationindevelopingcountries


No.192 Nov.2008 enriqueCoSio-PASCAl Theemergingofamultilateralforumfordebt
restructuring:TheParisClub


No.191 oct.2008 JörgMAYeR Policyspace:What,forwhat,andwhere?
No.190 oct.2008 MartinKNoll budgetsupport:Areformedapproachoroldwinein


newskins?




Selected UNCTAD Publications 149


G-24 Discussion Paper Seriesareavailableonthewebsiteat:http://unctad.org.CopiesofG-24 Discussion Paper
SeriesmaybeobtainedfromthePublicationsAssistant,MacroeconomicandDevelopmentPoliciesbranch,Division
onGlobalizationandDevelopmentStrategies,UnitedNationsConferenceonTradeandDevelopment(UNCTAD),
PalaisdesNations,CH-1211Geneva10,Switzerland;e-mail:gdsinfo@unctad.org.


g-24 discussion paper series
Research papers for the Intergovernmental Group of Twenty-Four
on International Monetary Affairs and Development


No.59 June2010 AndrewCoRNFoRD Revisingbasel2:TheimpactoftheFinancialCrisisand
implicationsforDevelopingCountries


No.58 May2010 KevinP.GAllAGHeR PolicySpacetoPreventandMitigateFinancialCrisesin
TradeandinvestmentAgreements


No.57 December2009 FrankACKeRMAN FinancingtheClimateMitigationandAdaptation
MeasuresinDevelopingCountries


No.56 June2009 AnuradhaMiTTAl The2008FoodPriceCrisis:RethinkingFoodSecurity
Policies


No.55 April2009 ericHelleiNeR TheContemporaryReformofGlobalFinancial
Governance:implicationsofandlessonsfromthePast


No.54 February2009 GeraldePSTeiN Post-warexperienceswithDevelopmentalCentral
banks:TheGood,thebadandtheHopeful


No.53 December2008 FrankACKeRMAN CarbonMarketsandbeyond:ThelimitedRoleof
PricesandTaxesinClimateandDevelopmentPolicy


No.52 November2008 C.P.CHANDRASeKHAR GloballiquidityandFinancialFlowstoDeveloping
Countries:NewTrendsinemergingMarketsandtheir
implications


No.51 September2008 UgoPANiZZA TheexternalDebtContentiousSixYearsafterthe
MonterreyConsensus


No.50 July2008 StephanyGRiFFiTH-JoNeS enhancingtheRoleofRegionalDevelopmentbanks
withDavidGRiFFiTH-JoNeS
andDagmarHeRToVA
No.49 December2007 DavidWooDWARD iMFVotingReform:Need,opportunityandoptions
No.48 November2007 SamlAiRD AidforTrade:CoolAidorKool-Aid
No.47 october2007 JanKReGel iMFContingencyFinancingforMiddle-income


CountrieswithAccesstoPrivateCapitalMarkets:
AnAssessmentoftheProposaltoCreateaReserve
Augmentationline


No.46 September2007 JoséMaríaFANelli RegionalArrangementstoSupportGrowthandMacro-
PolicyCoordinationinMeRCoSUR


No.45 April2007 SheilaPAGe ThePotentialimpactoftheAidforTradeinitiative
No.44 March2007 injooSoHN eastAsia’sCounterweightStrategy:AsianFinancial


CooperationandevolvinginternationalMonetaryorder


No.43 February2007 DeveshKAPURand beyondtheiMF
RichardWebb


No.42 November2006 MushtaqH.KHAN GovernanceandAnti-CorruptionReformsinDevelop-
ingCountries:Policies,evidenceandWaysForward


No.41 october2006 FernandoloReNZo iMFPoliciesforFinancialCrisesPreventionin
andNelsonNoYA emergingMarkets


No.40 May2006 lucioSiMPSoN TheRoleoftheiMFinDebtRestructurings:lending
intoArrears,MoralHazardandSustainabilityConcerns


No.39 February2006 RicardoGoTTSCHAlK eastAsia’sGrowingDemandforPrimaryCommodities
andDanielaPRATeS –MacroeconomicChallengesforlatinAmerica


******






Q u e s t i o n n a i r e


Trade and Development Report, 2013


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