With global growth likely to be below 2.5% (below 2% in advanced industrialized countries and 4% in developing countries, which is well below the pre-2008 crisis figure) and growth in global trade dropping to 1.5% last year, deflationary spirals remain a major risk across countries. The risks also include capital flight, currency devaluations and collapsing asset prices which could stymie growth and shrink government revenues.
“A world economy populated by consumers with insufficient purchasing power and too much debt and producers with large profits and a weak propensity to invest is unlikely to provide the stable economic foundation on which a sustainable and inclusive economic growth can be built," UNCTAD cautioned in its annual Trade and Development Report (TDR) 2016.
“Policymakers all around the face a difficult combination of sluggish investment, productivity slowdowns, stagnant trade, rising inequality mounting levels of debt," said UNCTAD secretary-general Mukhisa Kituyi.
“Solutions require an ambitious rethink, not a tepid business-as-usual reaction," he said.
The 215-page report called for “structural transformation" as elements of the global economy are not enabling sustainable and inclusive development. Many developing countries, including India, have become cases of “stalled industrialization" in which shares of industrial income and employment have stagnated after prolonged periods of growth of manufacturing output, the report suggested.
“Enthusiasts for efficient markets once promised that financial deregulation would boost productive investment, but this promise has not been met," according to Richard Kozul-Wright, head of UNCTAD’s division on globalization and development strategies, and lead author of the report.
“It is the corrosion and breakdown of the profit-investment nexus that poses a major obstacle to reviving growth, in developed and developing countries alike," Kozul-Wright suggested.
Over the years, the TDR has become an accurate barometer for assessing the destabilizing consequence of market-driven and unregulated financial markets. While the Paris-based Organization for Economic Cooperation and Development (OECD), the International Monetary Fund, the World Bank, and the World Trade Organization had pressed for liberal financial and trade policies up to the 2008 financial crisis, UNCTAD’s TDR and its prescient analysis had repeatedly cautioned of the destructive impact on development caused by unregulated financial markets and relentless export-led industrialization.
The TDR 2016 welcomes signs of change in policy rethinking by IMF which is now attaching importance to “macroeconomic adjustments." The necessary next step for the IMF and other international economic institutions, according to UNCTAD, is “to move away from a narrow discussion of structural reform that promotes a familiar package of liberalization and deregulation measures" and consider wide range of actions for increasing productivity, creating more and better jobs, boosting household incomes, increasing fiscal revenues and investment, and fostering technological progress. It cautioned that global markets can be good servants but bad masters and ceding authority to markets remains a political choice.
It argued that public spending has a crucial role to play in the process of structural transformation.
“Transport, logistics and telecommunication infrastructures, power and water utilities, the provision of education, professional training and research and development(R&D) support, and information and coordination services strongly influence productivity growth in all sectors, as well as the pace and patent of structural transformation," the report suggested.
Investment in both public and private sectors must be coupled with “building linkages between leading subsectors and the rest of the economy," according to the TDR.
While developing countries have increased their share in global exports of manufactures, which grew from around 10% in 1980 to nearly 45% by 2014, trade is increasingly taking place among South-South countries. “A big part of the problems," according to the report, is that “export-led industrialization in the current era has been a generally disappointing generator of broadly shared, high-wage employment- an often overlooked but essential aspect of successfully linking export and industrialization."
Further, many of the weak links between trade in manufactures and industrialization can be traced to the problem of deficient global aggregate demand, it argued, suggesting that “growth strategies, in both North and South, based on wage compression and fiscal authority mean there is no enough demand in the traditional developed-country destinations for export-led industrializers."
Therefore, large emerging economies like India must “change their focus from export-oriented industrialization to domestic-demand driven industrialization." The report has called for ensuring high levels of aggregate demand, high levels of investment, a stable exchange rate, along with supportive fiscal policies. It underscored the need for greater investments in public R&D along with investment in both formal educational institutions and in shop-floor training.
More important, countries like India must pursue intermediate input substitution industrialization which will transform export processing zones into more integrated industrial development parts with much stronger linkages to the rest of the economy, the TDR argued.
“Establishing a strong profit-investment nexus will require institutional and policy initiatives, including the creation or deepening of the banking system, ensuing it has appropriate capacities for long term credition provision, along with proactive industrial policies," Kozul-Wright said.