INSIGHT: Relying on export-led growth - think again, says UNCTAD

17 September 2013 17:04  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS)--Developing nations can’t revert to pre-crisis growth strategies in a changed economic and global financial environment, the United Nations trade and development arm, UNCTAD, warned last week.

Much slower global growth means that emerging economies would be better advised to place their bets and attempt to stimulate domestic demand through a broader based domestic consumer-driven growth model.

The failure of policymaking in the developed world to tackle the consequences of the 2008/09 financial crisis continues to have widespread implications.

The agency’s latest annual trade and development report speaks of a structural shift in the world economy and the need for fundamental changes in prevailing growth policies.

Particularly those countries that have relied on export-led growth need to think again and adopt a more balanced model that stimulates domestic and regional demand, it says.

“Distinct from export-led growth, demand-led strategies can be pursued by all countries simultaneously without beggar thy neighbour effects,” it adds.

It warns that growth strategies that rely primarily on exports must sooner or later reach their limits. Many countries pursuing similar strategies based on low labour costs and taxes lead to a “race to the bottom with few development gains but potentially disastrous social consequences”.

“Five years after the onset of the global financial crisis the world economy remains in a state of disarray, with global output growing at around 2 per cent and global trade growth virtually grounding to a halt,” UNCTAD says.

Its message for the developed economies is to address the fundamental causes of the crisis; “rising income equality, the diminishing economic role of the state, the predominant role of a poorly regulated financial sector and an international system prone to global imbalances”.

And those countries that have relied on developed world growth have to think again.

But it is not a question of abandoning export-driven growth, rather tuning the domestic economy so that domestic consumption and private and public investment can work to stimulate output.

The consequences of a greater focus on domestic demand can be seen in some national policies in chemicals and the filling out of product supply chains. Greater domestic investment in chemicals production might be expected as countries try to maintain economic growth against the backdrop of generally weaker global output.

“Fostering the purchasing power of the population is a key element in this regard,” UNCTAD says. “It can be achieved through an incomes policy, targeted social transfers and public sector employments schemes.

Income creation and redistribution favouring lower- and middle-income households is crucial to this development strategy, because those households tend to spend larger share of their incomes on consumption, particularly of locally or regionally produced goods and services.”

Chemical companies would do well to target product output and development to markets which directly address the needs of this significant proportion of the world’s fast-growing population.  

The agency’s report also suggests that the emerging economies should come to rely increasingly on domestic sources of investment finance. Large cross-border capital flows to developing economies have often led to lending booms and busts and to the amassing of significant foreign liabilities.

“A network of specialised institutions, including national and regional development banks, may be more effective in channelling resources than the large global banks, it suggests, “which tend to become not only ‘too big to fail’ but also ‘too big to regulate’”.

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By: Nigel Davis
+44 20 8652 3214

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