Rethinking the case for structural reforms

With no consistent policy direction, the developed economies seem to be either riding a short-lived debt-driven bubble or languishing in a low-growth equilibrium


UNCTAD economists warn of a creeping financialization in emerging markets beginning to take its toll on productive investment. Too much of corporate profits in emerging markets go towards paying dividends or buying existing financial assets. Photo: Mint
UNCTAD economists warn of a creeping financialization in emerging markets beginning to take its toll on productive investment. Too much of corporate profits in emerging markets go towards paying dividends or buying existing financial assets. Photo: Mint

The optimism of last year’s sustainable development goals (SDGs) is already fading.

Eight years after the financial crisis, developed countries are still struggling to return to a solid growth path, boost household incomes and tackle growing socioeconomic divisions. Productivity growth is stuck in low gear and global trade languishes in the doldrums, leading some to draw parallels with the 1930s. Fears of a return to protectionism are growing amid a rising wave of public frustration and insecurity, which in turn are gaining further political traction.

Developing economies, having for a while believed they had decoupled from events in the developed economies, are now worried that inadequate or irresponsible policy actions could spell trouble ahead. The average growth rate across the developing world is already well below the pre-crisis figure and several large emerging economies are in, or close to, recession.

While the haemorrhaging of net capital flows from developing countries, which began in the second quarter of 2014, has been temporarily staunched, a risk of deflationary spirals remains, in which capital flight, currency devaluations and collapsing asset prices stymie growth, shrink government revenues and heighten anxiety about the sustainability of debt positions.

With no consistent policy direction, the developed economies seem to be either riding a short-lived debt-driven bubble or languishing in a low-growth equilibrium. Financial markets are chastened but unreformed, debt levels are higher than ever and inequality continues to rise. Most of the upside gains have resulted from asset price rises and increased corporate profits; most of the downside adjustment has fallen on debtor countries and working families, with wages, employment and welfare provision under constant pressure from a return to austerity measures.

Moving beyond this abnormal state of affairs requires abandoning the policy cocktail of fiscal austerity and monetary unorthodoxy and rethinking the case for structural reforms. This is the case laid out by the United Nations Conference on Trade and Development (UNCTAD) in its recently released Trade and Development Report (TDR) 2016.

These countries cannot expect, at a time when too many goods are already chasing too few consumers, to trade their way to a lasting recovery. Nor after more than two decades of deregulation, and informalization, does a solution lie in further labour market flexibility; even recent International Monetary Fund (IMF) research confirms that stronger unions are good for inclusiveness and inclusiveness is good for growth.

A more consistent and ambitious programme is needed, which combines reflation (led by large-scale public investment aligned to the SDGs), regulation (above all to make finance serve the real economy, beginning by railing in the shadow banking system) and redistribution (principally from profits to wages whether through minimum wage legislation, support for labour unions, progressive taxation or restructuring of public and private debts).

Advanced countries have followed this path before and it is just such a coordinated new deal that is needed at the global level to underpin the SDGs. Unlike the new deal that saved capitalism in the 1930s, such a global new deal will need to find ways to boost investment, both public and private, in developing countries.

On this point, UNCTAD economists led by Richard Kozul-Wright, the lead author of the TDR and the head of the globalization division, warn of a creeping financialization in emerging markets beginning to take its toll on productive investment. As they show, too much of corporate profits in emerging markets are going towards paying dividends or buying existing financial assets. And the problem is being heightened by a rising trend of corporate debt to bolster these trends. This is a slippery slope along which advanced economies have already fallen. At the same time, the fiscal revenues in the South needed to boost public investment are under threat from the tax-avoiding and evading practices of multinational corporations.

Tackling this investment squeeze will need a strong regulatory hand at the national level, but in today’s interconnected world, the international community also needs to step in. However, the multilateral architecture is lurching, if not crumbling. The trading system represented by the World Trade Organization has abandoned its development agenda, the financial system has thrown in the towel against boom and bust liquidity cycles, the Basel Accords continue to offer only limited protection against international banks that remain too big to fail, and serial corporate tax avoiders in India and elsewhere receive little more than a perfunctory slap on the wrist.

Of particular concern, according to UNCTAD, is that a fairer and more efficient process for restructuring sovereign debt has not materialized from recent negotiations at the United Nations. The record of sovereign debt crises is that they can set back economic and social progress by a decade or more, and shackle the capability of governments to engage in the types of economic and social investments necessary for sustainable development. That would put an end to the SDG timeline before it had even begun.

READ MORE