TWN Info Service on WTO and Trade Issues
growth paradigm, says UNCTAD
Geneva, 15 Sep (Kanaga Raja) -- The developing and emerging-market economies that have focussed their current export-oriented strategies on the markets of the major developed economies for achieving growth and creating employment should rethink their policies, the United Nations Conference on Trade and Development (UNCTAD) has advised.
In its Trade and Development
Report (TDR), UNCTAD said that export-led growth ambitions will meet
with increasing constraints now that the debt-financed consumption boom
Policies for sustainable economic growth, job creation, and reductions in poverty should be based on establishing a balanced mix of domestic and overseas demand, said UNCTAD.
"The shift in focus on domestic-demand-led growth is necessary both in developed and emerging-market economies with large current-account surpluses and under-utilized production potential in order to prevent the recurrence of imbalances similar to those that contributed to the outbreak of the global financial crisis," said UNCTAD Secretary-General Dr Supachai Panitchpakdi in the overview to the report.
"Past experience and theoretical considerations suggest that a sustainable growth strategy requires a greater reliance on domestic demand than has been the case in many countries over the past 30 years... Especially for developing countries, this may call for a rethinking of the paradigm of export-led development based on keeping labour costs low," he added.
According to the report, there is widespread agreement that the persistently large imbalances in the world economy - with sizeable current-account deficits in some countries, particularly the US, and sizeable current-account surpluses in others, notably China, Germany, Japan and a number of oil-exporting countries - contributed to the outbreak of the current economic and financial crisis and facilitated its global spread.
There is also agreement that a smooth and non-deflationary reduction of these imbalances is indispensable for ensuring that the recent global economic upturn continues.
Although the US accounted
for about 50% of the aggregate current-account deficits in the world
economy, and China for about 22% of all surpluses in pre-crisis 2007,
the global imbalances are far from being just a bilateral problem between
the US and China.
However, while so far
there is little evidence that adjustments in the two countries would
be able to help bring about a global re-balancing, in the
The recent growth trajectories
"However, the external position of neither of these two countries is sustainable," says the report.
It is now widely accepted
that in order to recreate a favourable external environment for development,
the challenge for policy-makers is to achieve a non-deflationary and
durable rebalancing of demand in the world economy. Such re-balancing
will probably have to include a decline in the share of consumption
in aggregate income in the
"While there are
different views on the causes and effects of global imbalances, there
can be little doubt that the saving and consumption patterns of
The report examines
a number of issues relating to re-balancing in the context of the national
economies in the
It says that a decomposition of the national income and product accounts in the savings-investment balance, with the components of net national savings disaggregated, highlights the secular decline in the US household savings rate since the beginning of the 1980s, with a particularly sharp drop around the year 2000.
The decline in the
More importantly, notes the report, the increase in US household consumption was largely debt-financed.
"Facilitated by easy consumer credit, lax lending standards, a proliferation of exotic mortgage products, the growth of a global market for securitized loans and soaring house values, burgeoning household spending created strongly growing household debt and led to a sharp decline in the United States household savings rate to almost zero."
The increase in private consumption was unsustainable because it was not supported by a similar expansion of labour compensation in the private sector. Compared to previous upswings, the economic expansion that ended with the onset of the current crisis had been characterized by a low increase in employment - a phenomenon sometimes referred to as "jobless growth" - and by the relative stagnation of real wages.
As a result, said UNCTAD, private sector labour compensation grew at an unusually sluggish pace and fell short by more than $800 billion (in real terms) relative to the trajectory of the previous four business cycles.
Buoyant consumer demand
It is unlikely that
the sharp decline in US imports of consumer goods could be compensated
by an increase in consumer spending and associated imports of consumer
In order for Chinese
consumption to compensate for the reduction in
According to the report,
domestic demand could also expand in other relatively large and rapidly
growing developing countries, notably
Rather, household consumption
in developed countries in the European Union (EU), particularly
The report finds that
the most internationally visible characteristic of
Such emphasis on foreign
demand for economic growth inevitably increased
The report also notes
that private consumer spending in
However, the report adds, a low and declining share of private consumption in aggregate demand is a characteristic frequently observed in rapidly industrializing economies during their early phase of economic take-off.
There is widespread
agreement that measures such as an increase in government spending on
social security (including pensions, health and education) and public
investment in housing could help reduce household precautionary savings
and may help increase consumer spending in
The report says that the tendency of a falling share of consumption in GDP results mainly from the decline in labour compensation as a share in GDP. The latter development, in turn, is closely related to structural change, involving a shift from activities with a high employment share (particularly agriculture) towards industrial activities with a generally lower employment share, and to an emphasis on capital-intensive production in the manufacturing sector.
However, achieving such structural change - which is a natural process in a country's economic development - without real wages growing more rapidly relative to productivity than in the past may become increasingly difficult.
According to media reports, minimum wages have been rising strongly in several provinces. While this evidence suggests a broad tendency towards rising wages, it must be interpreted with caution, says the report, adding that part of it could be a reaction to more supportive agricultural policies, such as the abolition of the agricultural tax.
All of these factors taken together could be a powerful stimulus to domestic consumption.
The report also examines
the implications of the re-balancing processes in the
are inferred from a simulation of the impact of reduced consumer spending
The report suggests
that the net effect of the adjustments in the
This is due to the
fact that not only the absolute value of the consumer goods bought by
Chinese households but also their import content is much smaller than
that of goods bought by US households. Moreover, the composition of
consumer goods imported by
As a result, there
will be a tendency towards a deterioration in the trade balance of many
other countries in the world economy, unless the necessary adjustments
Since world exports
are set to decline, especially for industrial goods, with the largest
declines likely to occur in the most labour-intensive industrial sectors,
the net effect of adjustments by
According to the report,
The two large industrialized
The report points out
that other countries that are often suggested as possible future markets
for countries that pursue export-oriented growth strategies are some
large emerging-market economies in the South, particularly
However, the import
Thus, stresses the report, any additional contribution to global re-balancing will have to come from other major deficit and surplus countries. To the extent that it comes from other deficit economies, the impact will be deflationary, as it would have to rely on import retrenchment.
Hence, to achieve a
recovery of global output growth and employment creation without reproducing
the large imbalances that had built up in the run-up to the crisis,
the key element in demand management worldwide would have to be expansionary
adjustment in the major industrialized surplus economies, namely
However, notes the
Moreover, the stagnation of private consumption in Europe, exacerbated by the tendency for EU governments, especially the German Government, to hasten towards fiscal consolidation programmes makes it unlikely that a major contribution to global re-balancing and a substantial stimulus for global output and employment growth will come from the European surplus economies.
This means that the developing-country exporters that had focussed their export-oriented development strategies on the markets of the major developed economies should perhaps adapt to the new situation.
A reorientation towards private consumption, accompanied by a corresponding refocus on investment expenditure, would reduce developing countries' dependence on GDP growth in developed countries, the report says.
The report also argues that export-led growth strategies tend to lead to relative wage compression, which may seem indispensable for strengthening or maintaining the international competitiveness of producers in any economy.
But if many or all countries adopted this strategy, it would lead to a "race to the bottom" with regard to wages. This would translate into insufficient growth of workers' purchasing power, which itself is an important determinant for aggregate demand growth and job creation. A more sustainable growth strategy would be one that relies on domestic demand from wage increases linked to aggregate labour productivity increases.
Such a strategy would build on a virtuous circle whereby a favourable environment for fixed capital formation enables productivity growth, the gains from which are distributed equally between labour and capital, so that the share of wages does not decline over time and domestic demand rises at least at the same pace as productivity.
This way, additional employment, new wage income and incentives for further investment in real productive capacity can be created, the report concludes.