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UNITED NATIONS CONFERENCE ON TRADE AND DEVELOPMENTGENEVA
TRADE AND DEVELOPMENTREPORT, 2014
UNITED NATIONSNew York and Geneva, 2014
Chapter II
TOwARDS A SUSTAINED ECONOMIC RECOVERy: REVIEw OF POLICy OPTIONS
Towards a Sustained Economic Recovery: Review of Policy Options 15
Thischapterexaminessomeofthemainmacro-economicpolicystancesindevelopedanddevelopingcountries and their policy options. it shows thatnotonlyistherecoveryofglobalgrowthsincethefinancialcrisisratherweak,butalsoitsdriversareinadequate. indeed, in severalmajor economies,policiesintendedtospurtherecoveryaresimilartothose that led to the latestglobalcrisis in thefirstplace,whichraisesjustifiabledoubtsaboutthesus-tainabilityofthemodestGDPgrowthattainedsofar.Thechapterthenundertakesanempiricalmodellingexercise tohighlight thepossibleconsequencesofcurrentpolicies,andoffersanalternativesetofpolicyoptions.Thismethodologyhelpstohighlightissuesof consistency (or the lack of it) betweendiversepoliciesappliedatthenationallevel,aswellastheinterrelationships between the outcomes of thosepoliciesindifferentcountriesandregions.
SectionAanalysesthepolicyapproachesadopt-ed bydeveloped anddeveloping countries.Thesepoliciesconsistofavariedmixofwagecompression,reducedpublicsectorspending,andaheavyrelianceonliquidityexpansionthatcausesassetappreciationsanddebtbubbles,especiallyindevelopedcountries.Whilesuchpoliciesmaycontributetofastergrowthinasubsetofcountriesintheshortrun,suchapat-ternofexpansionsowstheseedsofafuturecrisis.Totheextentthatlabourincomesdonotincreaseandpublicsectorservicesandsocialprotectionarecut
back,therecanbenosolidgrowthofrealdemandto fully absorb the additional liquidity created byexpansionarymonetary policies.Todate,most oftheextraliquidityhasflowedinsteadintospeculativeactivityormovedabroad.Policymakingindevelop-ingcountriesisfurtherchallengedbythesetrends,whichhaveeitherdistortedpricesorshiftedresourceallocationsawayfromprimarydevelopmentgoals.Altogether,risksofahard-landingareincreasing,andifthisoccurs,itcouldhavestrongnegativeeffectsonglobaldemandandfinancialstability.
Sectionbassessesthisconfigurationofpolicieswiththehelpof theUnitedNationsGlobalPolicyModel (GPM), and evaluates themacroeconomicimplications for themedium term. itmeasurestheimpactofcurrentpoliciesongrowth,demand,financialstabilityofthepublicandprivatesectors,andexternalbalances.Themodellingframeworkisthenusedtoexaminetheimpactofadifferentsetofpolicychoicesthatreplicatesomeofthemorefavour-ableconditionsthatprevailednotsolongago.Thishypotheticalexercisedemonstratesthatcoordinatedincomespolicieswhichwould restore thepatternsof distribution of themid-1990s, combinedwithsupportivefiscalpoliciesandinvestmentpromotionpolicies,coulddeliverarobust,sustainedandmorebalancedgrowthperformancethanabaselinewhichassumesaprolongationofcurrentpolicystances.
Chapter II
TOwARDS A SUSTAINED ECONOMIC RECOVERy: REVIEw OF POLICy OPTIONS
Trade and Development Report, 201416
Tomany observers, the improvement, albeitsmall, of the growth performance of someof themajoreconomiesin2013cameasapleasantsurprise.Thatmomentum is expected to continue through2014.Meanwhile,projectionsforsomedevelopingandtransitioneconomiessuggestthatgrowthislikelyto be slower than expected, but nevertheless con-siderablyfasterthaninmostdevelopedeconomies.overall,thereislikelytobesomeimprovementinglobal growth performance in 2014.At an initialglance,thiswouldappeartobeawelcometrend,butadeeperlookatthenatureofthisgrowthrevivalraisesconcerns.Theanalysisthatfollowssuggeststhattherecentgrowthinanumberofimportanteconomiesmaynotbebasedonsoundpolicies.Thus,evenifthecurrentpaceismaintainedforsometime,vulner-abilitytofinancialshockspersists,duetoarepeatofthepolicyfailingsthatledtothe2008globalcrisis.
1. Policy stances in the developed world
(a) Synchronizedprematurefiscalcontractions
inmostdevelopedeconomies,therewasasharpturnaroundoffiscalpolicyin2010,withtheapparentwithdrawaloffiscalstimuli,butwhichwaseffective-lyacontractionofgovernmentspending(chart2.1).Thechartshowsthedifferencesinrealgovernmentspendingongoodsandservicesbetweenthesecondquarterof2010and the last quarterof2013, as apercentof real2010Q2GDP(thus reflecting thecumulativecontributionofgovernmentspendingtoGDPgrowth).However, thismaynotbe the idealmeasure,sinceitassumesthatzerogrowthofgov-ernmentspendingisaneutralstance.infact,afterextraordinarymeasures,suchasafiscalstimulus,are
removed,atrulyneutralstancewouldbetoreturntoa“normal”growthpathofrealspending,whichcanbeestimatedintheformofalong-termtrend.1Hence,chart2.1alsocomparestheactualvalueofrealgov-ernmentspendingwithwhatcouldhaveresultedifgovernmentspendinghadfolloweditslong-termpaceofgrowth,whichisamoremeaningfulindicationofthedegreeofthefiscaladjustmentfrommid-2010.
Chart2.1confirms that themostpronouncedcasesoffiscalausterityhavebeenintheperipheralcountriesoftheeuroarea.ThenegligiblesizeoftheeuropeanbudgetandthereluctanceoftheeuropeanCentralbank(eCb)toassumetheroleoflenderoflast resortaffected thedegreeand timingoffiscaladjustments in these countries.Due to such insti-tutionalflaws,nationalgovernmentshadtoabsorbthecostsofthecrisis,inmanycasesleavingthemlittlealternativebuttosubsequentlysqueezepublicspending.bythelastquarterof2013,realgovern-ment spending on goods and services inGreece,ireland, italy, Portugal, Slovakia and Spainwasbelowthe levelof2010,showingshortfalls in therangeofroughly1percentto2.5percentofGDPover this period (2010Q2−2013Q4).Comparingtheseobservedpatternswiththelong-termtrendofgovernmentspending,theimpliedadjustmentturnsouttobemorethantwicethosefigures.otherecono-miesintheeuroareaalsochangedtheirfiscalstance.evenifgovernmentspendinginrealtermsremainedclosetothelevelsof2010,whencomparedwiththelong-term trend, almost all these other economieseffectively adopted a contractionary fiscal stancefrom2010Q2totheendof2013.
Severaldevelopedeconomiesoutsidetheeuroareafollowedasimilarpath,promptedbythethreatthat fiscal deficits,whatever their cause,may beviewed as a sign of economic “indiscipline” andresultincreditdowngrades.itwasfearedthatsuch
A. Policy threats to a global economic recovery
Towards a Sustained Economic Recovery: Review of Policy Options 17
downgradesmight cause stampedesby concernedinvestors.Amongtheseeconomies,acloserexamina-tionoftheUnitedKingdomandtheUnitedStatescanoffersomeusefulpointers.intheformer,thefiscalstimulusadoptedtoavertadeeperrecessionafterthefinancial crisiswas reversedprematurely, causingasecondrecession.initially,arecoveryinexportshelpedweathertherecession,butthatrecoveryturnedouttobeshort-lived.Amoderaterelaxationofthefiscalstanceeventuallyfollowedinresponsetotheweak growth performance.The cumulative effectofgovernmentspendingfrom2010Q2to2013Q4accountedforamere0.6percentofGDP,andbytheendofthatperiod,realGDPintheUnitedKingdomremainedbelowthelevelof2007.2
intheUnitedStates,adjustmentsimposeduponfinancially stretched state and local governmentsstarted in 2009Q4,3 followed in 2010 by cuts infederalspendinginthewakeofdiscussionsonthedebtceiling.ContributionsofrealspendingtoGDPgrowthby thegovernmentsectorasawholehavebeenconsistentlynegativesince2010Q3,amount-ingtoacumulativenegativecontributionof1.6percent by 2013Q4.Comparedwith the long-termtrend,therewasacumulativegapinrealgovernmentspendingofmorethan3percentofrealGDPfrom2010Q2to2013Q4.
on the whole, governments in developedcountriesadoptedcontractionaryfiscalstancesfrommid-2010totheendof2013,whencomparedwiththelong-termtrend.onlyJapanandFrancemain-tainedthetrendgrowthofspendingoverthisperiod.ThecaseofJapanisrevealing.itexperiencedalongdeflationaryperiodbeforebeingadverselyaffectedfirst by the global crisis and subsequently by theearthquakeof2011.TheGovernment’sadoptionofstrongmonetaryandfiscalstimulioverthepasttwoyears (referred to as “Abenomics”) hasmetwithsomesuccesssofar.DomesticdemandhasbeenamoreimportantdriverofJapan’sGDPgrowththanitsnetexports,whichinturnimpliesapositiveeffectonglobaldemand.Thisisthekindofadjustmentthatshouldbeexpectedfromasurpluscountrytohelpavoidaglobaldeflationarytrap.
Finally, in Sweden and Switzerland publicspendingincreasedabovethetrendafter2010,whichisconsistentwiththeirslightlybettergrowthperfor-mancecomparedwithmosteUcountries.
(b) Mercantilist race to increase exports
intheaftermathofthefinancialcrisisitisnormalto expect subdued spendingbyhouseholds,whichwere affected by a fall in asset values and heavydebtburdens.Thisnarrows theoptions forpolicy-makers inattempting toreviveaggregatedemand.butifpublicsectordemandisalsosuppressed,theonlyremainingalternativesarenetexportrecoveryora revivalof“animalspirits” that triggerapushinprivateinvestment.4Unlesshouseholds’balance
Chart 2.1
ChANGE IN REAL GOVERNMENT ExPENDITURE, SELECTED DEVELOPED
COUNTRIES, 2010 Q2–2013 Q4(Per cent of real 2010 Q2 GDP)
Source: UNCTAD secretariat calculations, based on Economist Intelligence Unit (EIU), CountryData database.
Note: Long-term trend is estimated by applying from 2010 Q2 onwards the average expenditure growth of the period 1997 Q1–2010 Q2.
-6 -4 -2 0 2
SwedenSwitzerland
FranceJapan
AustraliaGermany
NorwayFinland
RomaniaBelgiumCanadaBulgariaPoland
United KingdomNew Zealand
DenmarkHungary
Czech RepublicSlovakia
ItalyNetherlands
United StatesIrelandGreece
PortugalSpain
Compared with 2010 Q2Compared with long-term trend
Trade and Development Report, 201418
sheets regain strength and consumer confidencerecovers,especiallywhenemploymentlevelsarelow,aresumptionofproductiveinvestmentforthedomes-ticmarketseemsunlikely.Giventheseconstraints,anypossiblechanceofsuccessforthisstrategyrestsonstimulatingprivateinvestmentinexportsectors.
over theyears,TDRsandother studieshavearguedthatrelyingonanexport-ledrecoverycan-notbeasolutionforallatthesametime.Yet,inthecurrentcircumstancesofminimalglobalcoordina-tion,aggregation issuesarenotaprimaryconcernofpolicymakers;eachcountry,individually,expectsto becomeawinner.Accordingly, compressionofwageincomeshasbecomeakeycomponentoftheprevailing“structuralpolicies”aimedatincreasingcompetitiveness.itisbelievedthatsuchpolicieswillinduceinvestment,whileadepreciationintherealexchangerate,derivedfromrelativelylowerwages,willhelptogainmarketshares.Theseemingsuccess
ofahandfulofcountriesintranslatingimprovedcostcompetitivenessintoexportgrowthtendstoreinforcesuchbeliefs.Thereisalsotheaddedfearthatcoun-triesthatdonotjointhisraceriskbeingleftbehind.
Suchbeliefscallforadeeperexaminationoftheempiricalevidence.Thiscanbedonebytakingtheeuropean countries as a sample.This choiceofferstheadvantageofconcentratingontherecentperiodinwhichtherehasbeenconcurrentpressureinthesecountriestoreducelabourcostsinordertogainexportshares.Theadditionaladvantageoftak-ingeuropeasasampleisthatfeedbackssimilartothosefoundwithglobalaggregationcanbecapturedto a significant degree, since a fairly substantialproportionof tradeintheregionis internal tothismarket.Thecorrelationbetweenwagecompressionandexportgrowthintheshortruncannotbefullyignored,asreflectedinchart2.2A.Takingatwo-yearperiodstartingin2010,whenpoliciesshiftedaway
Chart 2.2
ChANGES IN REAL UNIT LABOUR COSTS AND ExPORTS, SELECTED EUROPEAN COUNTRIES, 2010 Q3–2013 Q4
(Per cent)
Source: UNCTAD secretariat calculations, based on Eurostat; OECD.StatExtracts; and UNCTADstat.Note: Countries included are Austria, Belgium, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary,
Ireland, Italy, Luxembourg, the Netherlands, Norway, Poland, Portugal, Slovakia, Slovenia, Spain, Sweden and the United Kingdom. In the first phase, data for real unit labour costs refer to the change between 2010 Q3 and 2012 Q1, while data for exports refer to the change between 2011 Q1 and 2012 Q3. In the second phase, data for real unit labour costs refer to the change between 2012 Q1 and 2013 Q2, while data for exports refer to the change between 2012 Q3 and 2013 Q4.
Exp
orts
Unit labour costs
A. First phase B. Second phase
y = -2.2539x - 3.6948 -30
-20
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-10 -8 -6 -4 -2 0 2 4 6
Exp
orts
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-30
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y = -0.1066x + 1.2719
Towards a Sustained Economic Recovery: Review of Policy Options 19
fromfiscalstimuliandtowardsacompetitiveracetogainexportmarketshares,thescatterplotshowsthat, despite great diversity of outcomes, exportsseemtohavebeeninverselycorrelatedwithchangesinrealunitlabourcostsamongtheselectedsampleof developed economies.However, inmost casessuchaneffectfadesovertime(chart2.2b).effortstowards achieving greater cost competitivenessthroughlabourmarketflexibilityandwagecompres-sionfaceknownconstraints:competitionbecomesharder,asthereisalimittohowmuchlabourcostscanbecutwithoutseriouslyaffectingsocialstabil-ityandproductivity.Whatismore,declininglabourincomesaffectrevenuesofhouseholdsthathaveahigherpropensity tospend, furthereroding, in theaggregate, consumption and investment demand.Thiseventuallyhasanadverseimpactonimports,andthusontheexportsofthewholesetofcountries.
Thesedynamicsarecapturedinchart2.3.Undernormalconditionsthatwouldallowsustaineddemandexpansion,realunit labourcostsshouldat leastbestableorrise,butstartingin2010,theindexofrealunitlabourcosts(weighted)contracted.Threeorfourquarterslater,realGDPintheseeconomiesstoppedgrowing, and as a result, import volumes deceler-ated sharply. in the aggregate, imports remainedflatthroughout2013,withasmallupturninthelasttwo quarters, largely in response to asset appre-ciations fuelling demand in themajor economies(seebelow).Therelevantpoint is that theratioofimportstoexportsdeclinedconsiderably.Hence,theapparent success of a net-export-oriented strategymostlyreflects,intheaggregate,anadjustmentontheimportside.inotherwords,astrategybasedonacompressionoflabourincomesalone,ifcarriedoutbyasignificantnumberofcountries, runs theriskofexacerbatingadeflationarytrapforallofthem.
(c) Declining labour-income shares and global imbalances
Further clarifications can be provided fromlongertermanalyses,as themostrecentevolutionofrealunitlabourcostsandGDPgrowthineuropesuggests some ambiguity about the relationshipbetweenthesevariables(chart2.3).Despiteaseem-ingpause inwagecompression ineurope, thoughnorealgrowthinwages,GDPseemstobegainingtraction.likewise, therewere periods in the pastwhenGDPgrowthindevelopedcountriesremained
relativelystrongeventhoughlabourincomesharesinGDPwerefalling,oronlymarginallyrising.Atleastfromtheearly1990s,therewasamarkedlong-termtendencyforwagesharestofall inanumberofdevelopedeconomies(seechart2.4,wherewagesharesare thenationalaccountsequivalentof realunit labour costs), though in a fewof them somestabilizationhastakenplaceinrecentyears.
Thesedatacanbecomplementedwiththehis-toricalinvestigationofPiketty(2014).Hisdetailedanalysisoftaxreturnsandotherdatasetsinanumberofcountriesandacrossdecades(and,inafewcases,centuries)hastheadvantageofshowingtheevolutionofincomenotonlyamongwageandprofit-earners,butalsoacrossthedistributionofhouseholds.Theresultspointtothecontinuingstagnationinearningoflow-andmiddle-incomegroupsinanumberofdevel-opedcountriesovertime,togetherwithadramatic
Chart 2.3
REAL GDP, REAL UNIT LABOUR COST AND RATIO OF IMPORTS TO ExPORTS
IN EUROPE, 2009 Q4–2013 Q4(Index numbers, 2009 Q4 = 100)
Source: UNCTAD secretariat calculations, based on Eurostat; OECD.StatExtracts; and UNCTADstat.
Note: Europe includes Belgium, Czech Republic, Denmark, Finland, France, Germany, Hungary, Ireland, Italy, the Netherlands, Poland, Portugal, Slovakia, Spain and the United Kingdom. Unit labour cost is weighted by imports.
92
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Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
2009 2010 2011 2012 2013
Unit labour cost
Ratio of imports to exports
GDP
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riseintheearningsofthetopdecile,andofthetoppercentileintheUnitedStates,butalsoinAustralia,Canada,France,Japan,theUnitedKingdomandmorethan20othercountries.5Theriseattheverytopofthedistributionofearnedincomesissostaggeringthat it is reasonable to suggest that such earningsshould actuallybe conceptualized as “rents” fromaccumulatedwealth.
Variousimplicationsofrelevancetothepolicydiagnosis of this chapter can be extracted fromPiketty’swork.First,aggregatestatisticsoflabourincomesharesbasedonnationalaccountsdonotfullycapturethetrueextentofdeteriorationoftheincomesofmiddle-andlow-incomewageearners.Removingtherisingproportionsofearnedincomeof thetopdecile,andespeciallythetoppercentileinmost,ifnotall,thedevelopedeconomies,andcharacterizingtheminsteadasprofitearnings,wouldsignificantlyaccentuate the declining trends of labour incomenoted above.6 Second, Piketty observes relativelyconstant patterns ofworsening distribution overconsiderably longperiods,measurable indecades,interruptedonlybywarsorseriouscrises.Theauthorargues that returnsoncapital tend to increaseatafasterratethanthegrowthofincomeandwages,par-ticularlyasGDPgrowthdeceleratesintheprocessofdevelopment.7Themorethatcapitalisaccumulatedatthetop,themoretheeconomicstructureislikelytobeshapedtofavourrentsandprofitsoverwageincome,whichthenreducestherelianceoftheown-ersofcapitalonfasterGDPgrowth.Policy-driveneffortstobringaboutwagecompetitivenesswiththeaimoftriggeringfastergrowthofGDPwouldexac-erbate,ratherthanreverse,thistrend.Third,Pikettyadvances a possible interpretation of the globalfinancial crisis of 2008-2009on this basis. in hisopinion,thelong-runtendencytowardsanincreaseinthewealth-to-incomeratio,togetherwiththeriseof cross-border capital, which presumably tookplaceaswealth-holderssoughthigherrentsthroughareallocationoftheirportfoliosinglobalmarkets,contributedtogreaterglobalfinancialvulnerabilityand,eventually,totheglobalcrisis.
Agrowingbodyofresearchhasshedlightonthe global implications ofworsening income andwealthdistributionongrowthandstability(baker,2009;Crippsetal.,2011;Galbraith,2012).basedonthis,itwouldseemthatthetendencytowardsdeclin-ingwagesharesmaynotrequireanexportboosttogeneratefastergrowtheverywhere;aslongasglobal
Chart 2.4
LABOUR INCOME ShARE IN GDP, SELECTED DEVELOPED COUNTRIES, 1990–2013
(Per cent)
Source: UNCTAD secretariat estimates, based on UN-DESA, National Accounts Main Aggregates database; European Commission, AMECO database; Eurostat, Annual National Accounts database; University of California at Davis and University of Groningen, Penn World Tables version 8.0; United States Bureau of Economic Analysis, National Income and Production Accounts; and United Kingdom Office for National Statistics, United Kingdom Economic Accounts.
1990 1995 2000 2005 2010
A. Core EU countries
United KingdomGermany
ItalyFrance
2013
1990 1995 2000 2005 2010
B. Periphery EU countries
SpainPortugalGreece Hungary
2013
20131990 1995 2000 2005 2010
C. Other developed countries
United StatesJapanCanadaAustralia
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50
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60
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70
45
50
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65
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Towards a Sustained Economic Recovery: Review of Policy Options 21
imbalancesareallowedtorise,adecliningwagesharecancoexistwithrisingdomesticdemandinanumberofeconomieswherecreditexpansioncancompensateforlowerhouseholdincomes.Thisisconfirmedbydevelopmentsinthe1990sand2000s,whichweredecadesoffairlystrongglobalgrowthinwhichwagesharesconsistentlydeclined(chart2.4).itisthecom-binationofthesepatternswhichbroughtaboutthelargemacro-financialimbalancesandthesubsequentcollapseintheformoftheglobalfinancialcrisis.8
Someauthorsstressamoredirectcausallinkbetweenwage compression and the formation ofcredit bubbles: as the relative erosion of labourincomescreatesinsufficientrealdemand,capitalismostlydivertedtowardsfinancialoperations,whichgenerate asset bubbles andvolatility.This in turnbecomes the source of temporary real economicexpansion(Foster,2010;Patnaik,2010).Thegrowingfinancialization of developed countries and “sub-ordinate”financialization in developing countries(epstein,2005;lapavitsas,2013)canbeexplainedintheseterms.Asaresult,economiesbecomemorepronetocrises,whichadverselyaffectemploymentandproductiveactivities,andalsoleadtogreatercon-centrationsofwealthandincome.TheresultingdragonGDPgrowthisamelioratedonlybyunsustainableepisodesofdebt-drivenconsumptionbooms.9
(d) Asset appreciations and real balance effects
From the above arguments, it seems clearthat the synchronizedfiscal contraction and slowgrowth of labour income acrossmany developedcountrieswilllikelyleadtoeitheroftwooutcomes:a protracted slowdown (secular stagnation), or atemporarygrowthspurtdrivenbyanunsustainableexpansionofdemandthroughgreaterindebtednessinafewmajoreconomies.Thelattersituationchar-acterizedthepre-crisisyears,and,toalesserdegree,ithasbeenrepeatedintherecentpast.Moreover,ithasbeenexacerbatedbythecreationofliquiditybycentralbanks,withadirectimpactonassetmarketsacrosstheworld.
elements of this situation appear to bemostprominentinAustralia,Canada,theUnitedKingdomand the United States. in these economies themechanismsatworkhavestrongcommonalities:theexpansionofliquidityhasgeneratedrecordhighsin
stockmarkets,andrapidpriceincreasesinrealestatemarkets,particularlyintheUnitedKingdomand,tosomeextent,inCanada.Asaresult,householdsarecontinuingtoexperienceapositiveshockontheassetsideof theirbalancesheetsandfeelmoreencour-agedtoreducetheirsavings.ifpreviouscyclesareanyguide,householdlendingcapacity(totalincomeminustotalexpenditure,includinginvestment)mayeventurnnegative,sothattheadditionalspendingwillbefullyfinancedbydebt.Theprocesscangoonforaslongasassetpriceskeeprisingandliquidityismadeavailableforthepurchaseofassets.
ThesemechanismsareillustratedempiricallyfortheUnitedStatesandtheUnitedKingdom(chart2.5).10Chart2.5AshowstheindicesofstockmarketandhousepricesintheUnitedStatessincetheearly1990s,andtracksthedot-comboom,therecessionof2001andthesubsequentexpansionleadinguptothefinancialcrisisof2008.Sincethen,inthewakeofanultraeasymonetarypolicy,stockmarketpriceshaveclimbedsignificantly, reaching unprecedented levels.Thespeculativenature of these patterns is highlightedinthechartbytheinclusionoftheNewYorkStockexchange(NYSe)“margindebt”series(margindebtbeing the dollar value of the securities purchasedwith funds borrowed from investors’ accounts attheNYSe),whichhavealsorisentounprecedentedlevels.ThehousingmarketintheUnitedStateshasstartedtorecover,buthasnotyetdisplayedtheexu-beranceofthemid-2000s.
Real holding gains11 of the household sectorhavefluctuatedconsiderablyoverthepastfewyears(chart2.5b).intheUnitedStates,balancesheetsofhouseholdsweresubjecttopositiveshocksequivalenttoabout25percentofrealGDPduringthefinancialboomyears,followedbynegativeshocksequivalenttoalmost100percentofrealGDPduringthecrisis.Assetpricesrecoveredquicklyinthewakeofpolicystimuliin2009−2010,butfellonceagainin2011inresponseto“risk-on,risk-off”fluctuationsinspecu-lativemarkets,presumablyreflectingchangesinthelevelofconfidenceinthefinancialsustainabilityofthepublicsectorandthebankingsectorintheUnitedStatesandelsewhere.Sincethen,therehasbeenacontinuous recovery of asset prices and, to someextent,realestatepricesfollowingquantitativeeasingprogrammes.Realholdinggainstowardstheendof2013canbeestimatedtoequalabout50percentofrealGDP,anon-negligibleincreaseinthenetworthofthehouseholdsectorasawhole.eventhoughthese
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Chart 2.5
Asset prices, chAnge in household expenditure, And household borrowing And net finAnciAl sAvings in the united stAtes And the united Kingdom
Source: UNCTAD secretariat calculations, based on BIS, Residential property price statistics database; Bloomberg; United States Federal Reserve, Financial Accounts database; United Kingdom Office of National Statistics and Bank of England databases.
Note: Real holding gains refers to capital gains due to changes in asset values, after discounting CPI inflation (3-quarter centred moving average). Net savings refers to total disposable income less total spending (including investment) of the household sector.
0
100
200
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1990 1995 2000 2005 2010
United States
House price index (Index numbers, 1990 Q2 = 100)Stock market index (Index numbers, 1990 Q2 = 100)NYSE margin debt (Billions of current dollars)
20130
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200
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1990 1995 2000 2005 2010
United Kingdom
House price index (Index numbers, 1990 Q1 = 100)Stock market index (Index numbers, 1990 Q1 = 100)
2013
A. House price and stock market indices, 1990–2013
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B. Holding gains and change in household expenditure, 2006–2013(Per cent of GDP)
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United States
Net borrowing from the financial sector
Net financial savings (right scale)
C. Net household borrowing from the financial sector and net financial savings, 2006–2013(Per cent of GDP)
Net financial savings (right scale)
Net borrowing from the financial sector
Towards a Sustained Economic Recovery: Review of Policy Options 23
holdinggainsarenotcash-flowincome,theriseinthe value of networthmay induce a proportionalincreaseinspendingthroughwealtheffects.Withamoderatelagofonetotwoquarters,thereisafairlystrong correlationbetweenholdinggains and realspending (chart 2.5b). in turn, the increments ofrealhouseholdspendingrepresentedacontributiontoGDPgrowthofabout1.6percentin2013,whichisabout60percentoftotalgrowth.
Assetappreciationsdrivenbyliquidityexpan-sions help to explain the recent recovery in theUnitedStates,despitethefallinfiscalspendingandlabour-incomeshares.However,thesepatternsalsojustifyconcernsaboutgrowthundersuchconditions.in theUnitedStates, net financial savings of thehouseholdsector,definedastotaldisposableincomeminustotalexpenditure(includingconsumptionandinvestment spending),12 peaked at 5.5 per cent ofGDP inmid-2009,but then fell sharply followingdrastic deleveraging after the crisis (chart 2.5C).Subsequently,netfinancialsavingsmovedbacktocloseto3percentofGDP,approachingwhatcouldbeconsidered the long-termnorm.However,overthelasttwoyears,ithasdroppedbelow2percentofGDP,withthetrendpointingdownwards.Atthesametime,householdnetborrowingfromthefinancialsec-torhasstartedtoclimbfromitsunusuallynegativelevelsatthetroughofthecrisis(chart2.5C).bytheendof2013,netborrowingbythehouseholdsectorhadnotreachedtheextremesexperiencedattheonsetofthecrisis,butthedirectionwasstillupwards.ApartfromtheNYSemargindebtplottedinchart2.5A,complementarydata(notshownhere)suggestthatconsumercreditaccountedforthelargerproportionof the increases in net borrowingsof households.Mortgagedebthasonlyrecentlystabilized,inaggre-gateterms,afteryearsofadjustmentsinthehousingmarket,butitislikelythatrisinghousepriceswilltriggeranotherdebtexpansion.
Asset appreciations, holding gains and debtdynamicsof theUnitedKingdomcanbeassessedusing the samemethodology (chart 2.5).Amoststrikingfeatureisthepatternofrealestateapprecia-tion,whichwashigherthanintheUnitedStatesandsteeperthantheappreciationinthestockmarket.butthecombinationofthesepriceswingscausedexcep-tionally high holding gains and losses during theboomsandcrises,respectively,showingasimilarpat-terntothatoftheUnitedStates.From2011onwardstherealnetgainsofthehouseholdsectoronaccount
ofassetpricesclimbedcontinuouslytoreachabout40percentofrealGDPby2013.Afteralag,thereseemstohavebeenaclearcorrelationbetweenrealholdinggainsofhouseholdsintheUnitedKingdomandtheirpatternofspending(chart2.5b).Despitethefactthatlabourincomesharesremainedbarelyflat,assetappreciationsappeartohaveledtoariseinhouseholdspendingamountingtoacontributiontoGDPgrowthofabout1.5percentperannumin2013.Further,theriseinhouseholdspending,totheextentthatitwaspartlyduetoholdinggains,wasmatchedbyafallinnetfinancialsavings(chart2.5C).Startinginthefirstquarterof2013,thehouseholdsectorintheUnitedKingdomshiftedtoanetdeficitposition:borrowing from thefinancial sector started to riseagain,thoughnottothesamedegreeasitdiddur-ingthepre-crisisboom.AsintheUnitedStates,theunderlyinggrowthdynamicsintheUnitedKingdompointtopatternssimilartothosethatprecededthefinancialcrisis.experienceindicatesthattheseareunsustainableprocesses,butitalsoshowsthattheycancontinueforafairlylongtime.Preliminaryinves-tigationofgrowthdynamicsinsomeothercountries,suchasAustraliaandCanada,suggeststhattheysharesomeofthesecharacteristics.
Therapidgrowthofhouseholddemandinthissubgroupofdevelopedcountriesprovides aboostfor the exports of other economies, particularlythose seeking recovery based on net exports.Atthisjuncture,theimpliedglobalmacro-imbalancesbetweensurplusanddeficitcountries,aswellastheinternalimbalancesbetweentheassetandliabilitysidesofhouseholdbudgetsindeficitcountries,maynotbealarming.butrelyingonthesepatternsisnota sustainable policy strategy, and a strategy fromwhich it is not easy to exitwithout an alternativegrowthagenda.
2. Policy stances in developing and emerging economies in a context of growing vulnerability to external shocks
(a) The role of domestic demand and incomes policies
Many developing and emerging economiescontinuedtosupportdomesticdemandafter2010,evenasdevelopedcountries’policystancesshifted
Trade and Development Report, 201424
towardsfiscaltightening.inthecontextofaglobaleconomy thatwas struggling to recover from thefinancialcrisis,suchsupporthelpedtomaintaintheirpaceofgrowth,whichturnedouttobesignificantlyhigherthanthatofdevelopedeconomiesdespitearecentdeceleration.Totheextentthatthesecountriesasagrouparebecomingincreasinglyimportantinglobaltrade,theirperformancecontributedtoglobaldemandaswell,providinggrowthopportunitiesfortheirtradingpartners.
UNCTADhas often insisted on the need forsurpluscountriestonarrowtheirexternalbalancesbyboostingdomesticdemandandincreasingtheirimportsatafasterpacethantheirexports,insteadofforcingdeficitcountriestoadjustandtorelyonthecompressionoflabourcostsinthehopethatthiswillleadtoanexport-ledrecovery.Netimportdemandfromsurpluscountrieswouldnotnecessarilymakethemmorevulnerable,particularlyiftheircontribu-tionsucceedsingeneratingnewsourcesofincome
indeficitcountries,therebyeventuallyliftingglobaldemand.
examiningmacroeconomic indicators of thedevelopingandemergingcountrymembersof theG20isilluminatinginthisrespect.Chart2.6AshowsthecumulativecontributionstorealGDPgrowthofcountrieswhichwereincurrentaccountsurplusin2010.Cumulativecontributionswerecalculatedforathree-yearperiod,fromend-2010toend-2013.inallthesecases,GDPgrowthwassignificant,andthemajordriverwasdomesticdemand,notnetexports.exceptfortheRepublicofKorea,whichcontinuedtorelyonexternaldemandasasignificantsourceofitsGDPgrowth,thissubsetofdevelopingcountriesmanagedtosustainthegrowthofglobaldemanddur-ingtheprocessofrecoveryfromthecrisis.Chart2.6bgroupscountriesthatwereincurrentaccountdeficitin2010. in thesecountries, thestandardapproachwouldbeto“adjust”byreducingspendinguntilbal-anceisachieved.but,exceptforTurkeyandMexico
Chart 2.6
CONTRIBUTION OF DOMESTIC DEMAND AND NET ExPORTS TO REAL GDP GROwTh, SELECTED COUNTRIES, 2011–2013
(Percentage points)
Source: UNCTAD secretariat calculations, based on UN-DESA, National Accounts Main Aggregates database and World Economic Situation and Prospects: Update as of mid-2014; OECD.StatExtracts; and EIU, CountryData database.
Note: Data refer to the 3-year cumulative contribution. The classification of the two groups of countries as surplus and deficit is based on their current account balance in 2010.
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Domestic demand Net exports
Towards a Sustained Economic Recovery: Review of Policy Options 25
(whichshowedarelativeimprovementintheirnettrade balances), the other countries’ trade deficitsincreasedbeyond2010.inmostofthesecountries,thestandardapproachwasnot followed,and theireconomiescontinued tobesupportedbydomesticdemand.butadditionalriskswereinvolved,asdis-cussedbelow.
onthebasisofthisdecompositionaloneitisdifficulttoassesswhetherthecountriesgroupedinchart2.6bwerefollowingsustainablegrowthstrate-gies.Asnotedearlier,insomecasesnettradegainsmaybetheconsequenceofcompetitivenessachievedbywagecompression,butthiscouldeventuallyleadtodemandandproductivitybottlenecks.Conversely,trade deficitsmaybe the result of an investment-driven strategyaimedat structural transformation,and,totheextentthatsuchdeficitsaremanageableinthemediumterm,theycouldresultinconsider-ableadvantages in termsof long-termgrowthanddevelopment.However,ifthetradedeficitsaretheconsequence of asset bubbles and excessive con-sumerborrowing,oftenaccompaniedorpromotedbyabonanzaofforeigncapitalinflows,theycouldhavehazardouseffectsandcreatetheneedforharshadjustmentmeasuresdowntheroad.
overthepastfewdecades,intheprocessofinte-grationintotheworldeconomy,manydevelopingandtransitioneconomieshaveadoptedpoliciestoattractinvestors and/or gainmarket shares by reducinglabour incomeshares(insomecasesfromalreadylow levels).However, inmore recent years theseprocessesseemtohavebeencontained,andinsomecasesreversed.basedonstatisticalinformationavail-able,thoughincomplete,13itisfoundthatherehasbeenvariedevolutioninthesharesoflabourincome(includingmixed income)14 inGDP (chart 2.7) indifferentgroupsofdevelopingcountries.TheaverageforSouthAmericapointstoasustainedincreaseinlabourincomesharesinGDPfromthemid-2000s,which reflects an improvement in labourmarketconditions and deliberate income redistributionpolicies.TheaverageforcountriesinAfricashowsasimilarpattern,albeitstartingmorerecentlyandfromalowerlevel,anditislesspronounced.evenso, in both regions, this has been insufficient toreachthelabourincomesharesachievedinthepast.Meanwhile,other regions in thedevelopingworldhavemanagedtocontainthedeteriorationoflabourincome shares.However, in some cases, such asWestAsia,afterasharpdeclineinthoseshares,the
trendhasnotsignificantlyreversed.Hence,despitesignificantprogressinseveralcountries,theshareoflabourincomeneedstoexpandsignificantlyifitistoprovidethebasisforaself-sustainingpathofgrowthanddevelopment.
(b) Challengesfromtheexternalfinancialand trade environment
Thevulnerabilitiesofdevelopingandemergingeconomieshavebeenheightenedbyweaknessesintheinternationalfinancialarchitecture.15itwashopedthattheglobalfinancialcrisiswouldgiverisetosuf-ficientpoliticalmotivationandintellectualstrengthtoaddresstheseweaknessesinamoredeterminedmanner.buteffortsinthisdirection,suchasthosepromoted by theUnitedNationsCommission ofexperts of the President of theUnitedNationsGeneralAssembly(UnitedNations,2009),havebeenstymiedbypressuresfromglobalfinancialinterests
Chart 2.7
LABOUR INCOME ShARE IN GDP, SELECTED DEVELOPING-COUNTRy GROUPS, 1990–2012
(Per cent)
Source: UNCTAD Secretariat estimates based on UN-DESA, National Accounts Main Aggregates database; Euro-pean Commission, AMECO database; and University of California at Davis and University of Groningen, Penn World Tables version 8.0.
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Trade and Development Report, 201426
seekingnewinvestmentopportunities,particularlyinemergingmarkets.Justificationsforresistingasys-tematicreformagendahavebeenwidespread.Theyinclude the view that adversefinancial conditionsinmajoreconomiesarenotnecessarilytransmittedto developing and emerging economieswhich arevirtually“decoupling”fromtherest(see,forexam-ple,iMF,2007;blanchardetal.,2010;leducandSpiegel,2013).
AsnotedinchapterViofthisReport,16devel-oping and transition economies have remainedsusceptibletothekindofboomandbustcyclesofcapi-talflowswhichwerecommonplaceduringtheperiodoffinance-drivenglobalization.intheperiodpriortothecrisismostcapitalflowsweretriggeredbycyclesofleveraginganddeleveragingbyprivatefinancialinsti-tutionsinthedevelopedeconomies.Thelastcyclethatstartedin2010beganwithanextraordinaryamountofliquiditycreationbythecentralbanksofthemajor
economies.SuchmonetaryinjectionsfuelledassetappreciationsnotonlyintheUnitedStatesandtheUnitedKingdom, as discussed above, but also inmanyotherstockmarkets,asmeasuredbytheMSCiglobalindex(seechart2.8).betweenmid-2010andthelastquarterof2013,thatglobalindexmorethandoubled,whilerealeconomicactivityremainedsub-dued.butinsomecases,ascanbeobservedbystockmarketreactionstoreleasesofemploymentdataintheUnitedStatesandelsewhere,goodnewsoneco-nomicactivitytriggeredafallinthestockmarket,reflectingtheanxietyofspeculatorsaboutreversalsoftheliquidityexpansionifeconomicactivityandfavourableemploymentconditionsweretoresume.
Unprecedentedly large volumes of liquidityare currently coursing through highly liberalizedcapitalmarkets.intheabsenceofacorrespondingincreaseofdemandforcreditforproductiveactivi-ties inmost developed economies,financialflowsarebeingdivertedtoportfoliooperationswithinandbeyondtheissuingeconomies.inafewexceptionalcases,policymakerswhoareawareofthepotentiallydevastatingeffectsofunfetteredcapitalmarketshavetriedtoputinplaceregulatorymeasurestoprotecttheirmacroeconomicenvironment.inmostemerg-ingand transition economies, however, thepolicyresponse has resembledmore of a revival of the“lawsondoctrine”,whichwas highly permissiveofprivatecapitalflowsandcurrentaccountimbal-ances.17 Provided that fiscal balances are kept incheck,thisdoctrinerecommendsagainstinterferingintheportfoliodecisionsofprivateagents.lendersandborrowers,theargumentgoes,arefullycapableofassessingthebenefitsandrisksoftheirfinancialdecisions.However,suchabeliefisatoddswiththeobservedhighlyhomogeneousandsynchronizedriskperceptionsofinternationalinvestorsaboutaquitevaried set of developing countries, as evidencedbythestrongco-movementsofeMbiGindicesinchart2.9.Thissuggeststhatinvestorsdonotunder-takesophisticatedanalysisspecifictoverydifferentcountries, including the performanceof their realeconomiesandtheirfinancialstructures.
Theevidenceconfirms thatmanydevelopingandtransitioneconomieshavebeensubjecttocon-siderablecyclicalfluctuationsofcapitalflows,beforeandafterthecrisis(chart2.10).Theseflowshaveinturninfluencedspeculativebehaviour,reflectedintherisesandfallsofstockmarketindices.Theflowseriesinthechartencompassportfolioflowstotheprivate
Chart 2.8
TOTAL ASSETS OF MAJOR CENTRAL BANKS AND GLOBAL STOCK MARKET INDEx,
Jan. 2009‒Dec. 2013
Source: UNCTAD secretariat calculations, based on United States Federal Reserve database; European Central Bank database; Bank of Japan Accounts database; IMF, International Financial Statistics and World Economic Outlook databases; and Bloomberg.
Note: Major central banks includes the Bank of England, Bank of Japan, European Central Bank, People's Bank of China and United States Federal Reserve.
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Towards a Sustained Economic Recovery: Review of Policy Options 27
bankingsectors,includingFDiintheformofprivateequitychannelledthroughdomesticfinancialinstitu-tions.Theydonotincludecredittothepublicsectorsofthesecountries,whichwasrelativelyminorduringtheperiodunderobservation.Withvariations,inflowsreachedapeakbeforethecrisisandcollapsedatitsonsetin2008.Theyresumedsharplyafter2009,insomecasesreachingnewhighs,18presumablyreflect-ingthevastincreaseingloballiquidityincomparisonwithpreviouscycles.Aroundthesecondquarterof2013,with thefirstannouncementsof taperingbytheFederalReserve,andbeforeanytaperingactu-allytookplace,investorsbegantopulloutfunds,tovaryingdegrees,fromthesecountries.
Thespecificsofcountryexperienceshavebeenwelldocumentedandanalysedelsewhere.19Generalpatternscanbeidentifiedthroughboththeupswingsanddownswingsofthecycles.Thoughtheinflowspersearenotmotivatedmainlybytheperformanceoftherealeconomy,itisknownthattheycanhavetheeffectofalteringexchangerates,priceformation,spendingbehaviour,financialbalancesofinstitutionsandpolicymakers’ room formanoeuvre. it is alsoknownthatdrasticcapitalreversalscantakeplaceforreasonsthat,again,havemostlytodowithchangesinthefinancialconditionsofthecreditorcountries.buttheseoutflowsleavebehindseriousdislocations.Usually,capitalreversalshaveanimmediateeffectontheexchangerate,makingtheservicingofthedebtor repayment ina foreigncurrencymoredifficult.They also have knock-on effects on asset prices,significantlyerodingbalancesheets.Manyofthesecasesmaywellrepresentsystemiccrisestotheextentthatthesectorsmostaffectedarecorporationsandfinancialinstitutions,withbalancesheetswhichcanbegreater thanacountry’sGDP.Forexample,by2013,thevalueofassetsofthebankingsectorsintheRepublicofKorea,SouthAfricaandThailandwereestimatedtobeclosetothreetimesthesizeoftheirrespectiveGDPs,whileinbrazil,ChileandMalaysia,bankassetsrepresentedabouttwotimestheirGDP.Underthesecircumstances,publicsectorinstitutionsareoftenforcedtocometotherescue.eventually,publicsectorswhicharenotthemselvesbeneficiariesoftheinflowbonanza,tendtoassumetheburdenofbaddebtsoncecrisisconditionsemerge,oftenleadingthemtoadoptdamagingfiscalausterityprescriptions.
Finally,policymakersshouldbeawareofpos-siblenegativeshocksoriginatingfrominternationaltrade,particularlyincountriesthatrelyonexports
of only a few primary commodities or low-skill,labour-intensivemanufactures.AsfurtherdiscussedinthisReport(seeparticularlychapterV),proactiveindustrialpoliciesneedtoaimatdiversificationandupgradingofexports.indeed,diversificationoftheirproductiveandexportactivitiesremainsapendingtaskformanytransitionanddevelopingeconomies.inasampleofrelativelyopendevelopingeconomiestheindexofexportconcentrationincreasedfromtheearly2000s(beforethecommodityboom)to2012(table 2.1).Admittedly, inArgentina,China andMexicotheincreaseintheconcentrationindexwasminorandthelowvalueoftheirrespectiveindicesby2012suggeststhattheseeconomiesremainquitediversified, though the basket of their export rev-enuesisslightlymoredependentonfewerproducts.Meanwhile,dependenceonasmallersetofexportproductshasclearlyincreasedincommodityexport-erssuchasColombia,Chile,ecuador,thebolivarianRepublicofVenezuelaand thegroupof transitioneconomiesasawhole.
Chart 2.9
SOVEREIGN BOND yIELD SPREADS, SELECTED DEVELOPING AND TRANSITION
economies, 2007 Q4‒2014 Q2(Basis points)
Source: Bloomberg; JP Morgan Emerging Markets Bond Index Global of sovereign dollar denominated bonds (EMBIG).
Note: Data refer to the last value of the quarter and reflect the spread to comparable United States Treasuries.
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Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2
2007 2008 2009 2010 2011 2012 2013 2014
Brazil ChinaIndonesia Russian FederationSouth Africa Turkey
Trade and Development Report, 201428
Chart 2.10
CAPITAL INFLOwS TO ThE PRIVATE BANKING SECTOR AND STOCK MARKET INDICES, SELECTED DEVELOPING AND TRANSITION ECONOMIES, 2005 Q1–2013 Q4
Source: UNCTAD secretariat calculations, based on IMF and World Bank, Quarterly External Debt Statistics database; and Bloomberg.Note: The stock market index refers to the end-of-period price of the dollar-denominated MSCI index, except for the Republic of
Korea, where it refers to the dollar-denominated KOSPI index. Capital inflows refer to 3-quarter centred moving average of the changes in the gross external debt position of the banking sector (except for India and Mexico where they refer to the sum of the banking and “other [private] sectors”).
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Towards a Sustained Economic Recovery: Review of Policy Options 29
A complementarymeasure of the degree towhich countries are better prepared towithstandtradeshocks,usingtheUNCTADMerchandiseTradeSpecializationindex,producessimilarresults.20Thedetailed examination of the indices acrossmaincategoriesofproductsover theperiod1995−2012confirms that, despite the rapid rate of growth oftradeinmanydevelopingeconomiesoverthepasttwodecades,thedegreeofspecializationintheexportstructureofmostdevelopingeconomieshasnotvar-iedsignificantly.onlyinafewcountries,mostlyineastAsia,includingChina,Malaysia,theRepublicofKoreaandSingapore,hasthisstructureprogressedinthesensethattradebalancesofmanufactures,andparticularly of productswith higher skill content,improvedduringthisperiod.elsewhere,inWestAsia,AfricaandlatinAmerica,therehavebeenfew,ifany,improvements,andinsomeevenacleardeteriora-tion,particularlyinAfricaandamongoilexporters.
3. Current policies and outcomes from a global perspective
The review of economic policies proposedabovesuggeststhatthereisneedforcautionininter-pretingcurrentdevelopments.Contrarytotheviewsofsomeobservers,thereisnoconvincingevidencethattheworldeconomyisinfactbeginningasus-tainedrecovery.Thebeliefthatgrowthindevelopedeconomieshasfinallypickedupisoverlyoptimistic;itonlyservestoclaimsuccessforpro-marketreformsand to support arguments for awithdrawal of theprecautionarymeasuresandstimulithatstillremain.Thiscouldhavegraverepercussions.Forexample,the recommendation that developing countriesshouldpursuefiscalandlabourmarketadjustmentssimilartothosepursuedindevelopedcountriesisofparticularconcern.inthelightofthediscussionintheprevioussubsection,developingcountriescouldinsteadconsiderstrengtheningincomespoliciesthatstillhaveconsiderablepossibilities todeliver, andcould also introducemore effective precautionarymeasurestomitigatetheeffectsofglobalfinanciali-zation and enhancepolicies aimed at diversifyingtheireconomies.
leadersfromdevelopedanddevelopingcoun-triesdeservecredit for thepolicies theypromotedin2009−2010.However,changesofpolicystances
after2010,particularlyindevelopedcountries,whichprimarily includeflexibilizationof labourmarketsandrestrainedpublicspending,arefactorsthathavedelayedrecovery.if,atpresent,thereisasenseofagrowthrevivalinsomeofthesecountries,thenewgrowthpatternsshouldratherbeinterpretedasreflect-ingstructuralproblemsofthekindalreadyapparentin theyears thatpreceded theglobalcrisis.Undertheseconditions,economicgrowthseemstohingeagainonexcessiveliquidityinthecontextofassetappreciations,whichmaydriveupprivateexpendi-tureforawhile.Aslongasthiscanlast,growthofconsumerdebtindeficitcountriescouldfuelexportdemandincountriesthatareeitherleadingexport-ersoroptedmorerecentlyforpromotingexportstoexitfromthecrisis.However,bynowit isknownthat such processes are unsustainable.Continuingonsuchapath,inthehopethatthingswillworkoutdifferentlythistimeappeartobeshort-sightedatbest.itseemsworthwhileaiming,instead,foradifferentstrategy,asubjecttowhichthenextsectionturns.
Table 2.1
ExPORT CONCENTRATION INDEx, SELECTED COUNTRIES, 2003–2012
Change between 2003–2008
average and 2012 (Per cent)
Index average for 2011–2012
Colombia 18.7 42.0Chile 10.0 37.1Ecuador 9.1 50.0Hong Kong, China 8.3 20.0Brazil 7.1 15.8South Africa 5.2 16.9Indonesia 4.8 17.1India 4.4 17.8Bolivarian Republic of Venezuela 3.9 67.4Peru 2.1 25.2Mexico 1.7 15.0China 1.3 10.0Argentina 1.1 15.4
Memo item:Transition economies 10.2 33.0Major oil and gas exporters 2.2 55.6
Source: UNCTAD secretariat calculations, based on UNCTADstat.Note: The index ranges from 0 to 100 (maximum concentra-
tion).
Trade and Development Report, 201430
Theprevioussectionexaminedthemainpolicystanceswhichhavehelpedshapethecurrentworldeconomic situation. in somecountries policymak-ershaveaimedatboostingglobaldemand;but,forthemostpart,macroeconomicpolicieshaveeitherexhibiteddeflationarytendenciesorfavouredshort-termgainsthatleadtoheightenedrisksinthelongterm.Therearevariousreasonswhytheeconomicpolicylandscaperemainsdisappointing,includingageneralmistrustinthefeasibilityofmoreproactiveandinclusivepolicyapproaches.Theaimofthissec-tionistoshowthatadifferentsetofpoliciescoulddeliver better results, taking into account possibleconstraintsandfeedbacks,bothdomesticandinter-national.Alternativepolicyscenariosfortheglobaleconomy are examined using theUnitedNationsGlobalPolicyModel(GPM).21
1. Policies and outcomes
ThescenariosproducedwiththeGPMconsidera“baseline”,representingacontinuationofthepolicystances described in sectionA, and an alternative“balanced-growth”simulation.Thebaseline isnotintended tobea forecastand thebalanced-growthsimulationisnottheonlymeasurablecombinationofpoliciesandoutcomesthatcouldbringaboutthedesiredresults.Moreimportantly,thescenariosarehighly stylized and contingent, for reasons givenbelow.Their value resides in demonstrating,withrigorousempiricalbacking,thedirectionofchangethatcouldbeexpectedfromthetwosetsofpolicyassumptions.As such, their aim is to encouragepolicymakerstoconsideradifferentcourseofaction.
(a) The baseline scenario
Thebaseline,whichisaprojectionoverthenext10years,assumesacontinuationofexistingpolicies
andnoexogenousshocks.inparticular,itdoesnotinclude a financial crisiswhich, as the previoussectionargues,couldresultfromthecurrentpolicystances.Admittedly, from thecurrentcombinationofpolicies it ispossible tohighlight thestructuralflawsthatcouldeventuallycauseacrisis.butitisnotpossibletodetermineinadvancethetimingofacrisisofthisnature,theconcretemeasurementofitsmacroandglobalimplications,andthenatureoftherecoverythatmayfollow.Thisisbecausesuchacrisisisusuallytriggeredbyasuddenshiftinmarketconfidence,resultingfromnews,orevenrumours,aboutsignsofheightenedfinancialfragilityorlossesof a relatively important institution. likewise, arecoveryfromsuchacrisisistriggeredbyanevenmorecomplexcombinationofchangesinthe“stateofconfidence”.22
Therefore,thebaselineisaprojectionofcurrentpoliciesandtheirimpliedoutcomes,assumingawaytheoccurrenceofacrisis,thetimingandproportionsofwhich are unknown.Accordingly, the baselinealsoassumesawaythepossibilitythatpolicymakerswilldecidetochangecourseinordertoavertacrashbeforeitistoolate.Theconcretequantificationoftheoutcomesofthebaselineandhowtheyarerelatedtotheassumedpolicystancesarediscussedbelowin conjunctionwith those of the balanced-growthscenario.
(b) The balanced-growth scenario: Policy assumptions compared with the baseline
Thebalanced-growthscenario isproposedasadeparturefromthepoliciesdiscussedinsectionAofthischapter.itfocusesonthefollowingaspects:
• incomespoliciestosupportgrowthofdemandonasustainablebasis,
• Growth-enhancingfiscalpolicies,
B. Economic policies for a sustained global recovery
Towards a Sustained Economic Recovery: Review of Policy Options 31
• industrialpoliciestopromoteprivateinvestmentandstructuraltransformation,
• Regulationoffinance and capital controls tostabilizeglobalfinancialmarkets,and
• Development-orientedtradeagreements.
The latter two aspects aremostly qualitativeinnatureandcontemplatevariedmodalities.inthemodel, regulation of finance and capital flows isimputed as exogenous conditions (usually called‘add-factors’) to allow smooth adjustments ofexchange rates and international prices of tradedgoodsandservices.23likewise,development-orient-edtradeagreementsareimputedasadd-factorsthatreplicateanexpansionoftheGeneralizedSystemofPreferences(GSP)betweenhigherincomeeconomiesontheonehand,andlowerincomeeconomiesontheother.24Amongdevelopingcountries,thesimulationsimputeanexpansionofexistingSouth-Southtradeagreements.Togetherwiththeothersetsofpoliciesproposedinthescenario,theresultisanincreaseinexportsofmanufacturesinlow-andmiddle-incomecountriesby50−75percentin10yearscomparedwiththebaseline.bycontrast,trade-relatedaspectsin the baseline aremodelled as a continuation ofexistingconditions,mostlydeterminedbybilateraltradeagreementsandprevailinginvestmentpatterns.AsshowninsectionA,undertheseconditions,tradespecialization does not improve, and the exportconcentrationofveryopeneconomiesindevelopingcountriesincreases.
Theotherthreesetsofpolicyassumptionsaresummarizedintable2.2.Thefirstcolumnsshowtheevolutionofthelabour-incomeshareasapercentageofGDP(labourshare,forshort)forbothscenarios(baselineandbalanced-growth).Thesimulationperi-odisrepresentedbyfive-yearaverages(2015−2019and2020−2024),whilethehistoricperiodisrepre-sentedbytwopointsintime:1990and2012.25Asnotedearlier,therewasacontinuousfallinthelabourshareformostregionsuntilrecently,withsomeindi-cation that the trendwasbottomingout inseveralregions.Fortheworldasawhole,thelaboursharefellfromabout59percentofGDPin1990toabout52percentin2012.Thebaselineassumesthatinallthe25countriesandcountrygroupsconsideredinthemodel,incomesofemployeesandself-employedinformalworkerswillcontinuetoremaindepressedataroundtheirprevailinglowlevels.bycontrast,the
balanced-growthscenarioassumesthatpolicymakersinallcountrieswillintroduceincomespoliciesaimedat improvingthefunctionaldistributionof incomeclosertothelevelsoftheearlyormid-1990s.26Thisdegreeofimprovementseemsessentialforbringingaboutarobustgrowthofconsumption,and,conse-quently, of private investment. it should be notedfromtheoutsetthattheassumptionthatallcountriesproceedatasimilarpaceofimprovementprecludesunfair gains in competitiveness in exportmarketsbasedonseekingadvantageoflabourcostsbyafewfree-riders.27
The other sets of columns in table 2.2 showthegrowthpatternsofgovernmentexpenditureongoodsandservicesandofprivateinvestment.Thehistoricperiodissummarizedbyanaveragefortheperiod1990−2014,andtheprojectionsbyaveragesfor twofive-year periods.Regarding governmentexpenditure,theprojectedbaselineshowsagrowthpatternsimilartotheaverageforthepast25years.Thismeansthat inmostdevelopedcountries,pro-tractedfiscalausterityisassumedtoimplyaweakornegligiblegrowthofexpenditure,whileinmostdevelopingcountriesthefiscalstanceisassumedtobemoderatelyexpansionary.bycontrast,thebalanced-growth scenario assumes amore proactive fiscalpolicyinallcountries,withamoremarkedincrease,comparedwiththebaseline,indevelopedcountries.The assumed patterns of growth of governmentexpenditureofmostcountriesturnouttobecloselyalignedwiththepatternsofgrowthofGDP(discussedbelow).28itisalsoshownthattheseassumptionsdonotimplygreaterfinancialvulnerability.
Thelastcolumnsoftable2.2showthatprivateinvestmentisassumedtotakeonagreaterrolethanpublicspending indevelopedcountriesduring theprojected baseline, leading to growing financialimbalancesintheprivatesector.Privateinvestmentin developing countries, on the other hand, is notexpectedtogrowatasimilarlyfastpaceasthehis-toricperiod.Thisispartlybecausedemandstimulusremainssubdued,butalsobecausealargeproportionofinvestmentisrelatedtoexportstodevelopedcoun-tries,whichareexpectedtoremainrathersluggish.AnothermajorreasonfortheslowdowninprivateinvestmentistheassumedcontinuationofChina’spolicy shift, aimed at strengtheningother sourcesofgrowththanprivate investment(whichrecentlyaccountedforabout40percentofGDP).bycontrast,the combined assumptions of proactivefiscal and
Trade and Development Report, 201432
industrialpoliciesinthebalanced-growthscenarioforallcountriesareconsistentwithafastergrowthofprivateinvestmentthanthatofthebaselineinallregions.29Suchanaccelerationofprivateinvestmentindeveloping countries is an essential componentofastrategyofstructuraltransformation,whichisrequired both for sustainedwelfare aswell as forfullerintegrationintotheglobaltradingsystem.
(c) Main outcomes of the simulations
Table2.3showsasummaryofeconomicgrowthoutcomes under both scenarios. in the baselinescenario,GDPgrowth, both globally and inmostcountriesindividually,ismarginallyfasterthanthehistoric average.30 Since crises in the projectionperiodareruledoutbyassumption,asnotedearlier,
Table 2.2
MAIN ASSUMPTIONS OF ThE MODEL SIMULATIONS IN SELECTED REGIONS AND COUNTRIES, 1990–2024
Labour-income share in GDPGovernment spending on goods and services Private investment
(Per cent) (Average annual percentage growth)
Scenario 1990 2012
Average 2015– 2019
Average 2020– 2024
1990–2014
2015–2019
2020–2024
1990–2014
2015–2019
2020–2024
Developed economies Baseline 60.5 56.1 55.5 55.2 2.0 1.1 1.1 1.1 3.0 3.2Balanced growth . . 57.9 60.1 . 2.8 3.5 . 3.7 4.8
of which:United States Baseline 56.1 53.2 53.3 53.5 2.4 1.8 2.2 2.0 3.6 4.0
Balanced growth . . 55.4 58.2 . 4.9 3.9 . 3.8 4.4
CIS Baseline 71.5 57.3 55.9 54.6 1.8 0.9 1.5 4.6 -0.7 1.7Balanced growth . . 61.1 63.4 . 2.8 4.8 . 0.3 6.6
Developing Asia Baseline 55.2 48.8 50.6 50.8 6.7 6.3 6.1 7.7 3.9 4.6Balanced growth . . 53.2 55.9 . 7.9 7.2 . 4.3 5.7
of which:China Baseline 61.0 49.7 52.6 53.4 10.3 7.7 7.0 12.4 4.2 4.8
Balanced growth . . 55.1 58.1 . 9.0 8.1 . 3.7 5.0
India Baseline 51.0 44.7 46.2 46.0 6.7 5.7 6.5 7.2 5.1 5.6Balanced growth . . 50.0 53.4 . 8.4 7.8 . 6.1 7.4
Africa Baseline 47.5 43.8 44.6 44.7 4.3 4.5 4.8 4.8 2.0 3.1Balanced growth . . 46.4 47.0 . 6.4 7.0 . 5.2 7.7
Latin America and the Caribbean Baseline 51.8 49.6 49.8 49.1 4.3 2.3 2.5 3.2 1.7 2.9
Balanced growth . . 51.8 53.1 . 4.7 5.6 . 3.4 7.0
Source: UNCTAD secretariat calculations, based on GPM.Note: CIS includes Georgia.
Towards a Sustained Economic Recovery: Review of Policy Options 33
theimplicationisthatstructuralimbalanceswillkeepgrowing.Therefore, the baseline scenario, even ifshowingamoderaterateofgrowth,isincreasinglyvulnerabletoshocksandfinancialinstability.Giventhatfinancial institutions, households andgovern-mentsinmanycountrieshavenotyetsucceededinregainingfinancialstrength,suchabaselinesuggestsintolerable risks forweak institutions.The longersuchimbalancesremainunresolved,theharshertheconsequenceswillbefortheworldeconomy.
The balanced-growth scenario, on the otherhand,showsconsiderableimprovementsingrowthrates.The averagegrowth for theworld economy(estimatedinPPPterms)issignificantlyfasterthan
itisunderthebaselinescenario.ThispartlyreflectsaneffectofthePPPadjustments,sincedevelopingandemergingeconomiesshowagrowthdifferencecomparedwiththebaselinewhichisnearlydoublethatofdevelopedeconomies.31Moreimportantly,thefastergrowthratesforallregionsaretheresultnotonlyofpolicystimuliineachcountryindividually,but also of the strong synergy emerging from thecoordinationofpro-growthpolicystancesamongallregions.Finally, improvementsingrowthratesfordevelopingcountries,especiallyinAfrica,comparedwiththoseofdevelopedcountries,confirmthestronggrowth-convergencecharacteristicofthebalanced-growthscenario.Thisisamostdesirableobjectivetosupportdevelopmentandwelfareobjectives.
Table 2.3
GDP GROwTh IN SELECTED REGIONS AND COUNTRIES, 1990–2024
AverageannualgrowthofGDP a(Per cent)
Scenario 1990–2014 2015–2019 2020–2024
world Baseline 3.3 3.4 3.6Balanced growth . 4.7 5.5
Developed economies Baseline 1.9 1.8 2.0Balanced growth . 2.8 3.5
of which:United States Baseline 2.5 2.3 2.6
Balanced growth . 3.3 3.7
CIS Baseline 2.7 2.0 2.1Balanced growth . 3.3 4.9
Developing Asia Baseline 6.3 5.5 5.4Balanced growth . 6.7 7.2
of which:China Baseline 9.8 7.1 6.7
Balanced growth . 8.1 8.3India Baseline 6.3 5.8 6.0
Balanced growth . 7.5 7.9
Africa Baseline 3.8 3.9 3.9Balanced growth . 6.1 7.0
Latin America and the Caribbean Baseline 3.1 2.9 3.0Balanced growth . 4.5 5.7
Memo item:World (based on market exchange rates) Baseline 2.7 2.8 3.0
Balanced growth . 3.9 4.7
Source: UNCTAD secretariat calculations, based on GPM.Note: CIS includes Georgia.
a Data refer to PPP in constant 2005 international dollars, except in the memo item.
Trade and Development Report, 201434
Table2.4shows themost relevantaspectsoffinancialstabilityresultingfromthebalanced-growthscenario,comparedwiththebaseline.Thefirsttwosetsofcolumnsconcentrateonfinancialconditionsinthepublicsectorandtheothersetsonprivatesec-torfinancialbalancesandthecurrentaccount.itwasarguedinsectionAofthischapterthatmanycoun-tries,especiallydevelopedcountries,havetightenedtheirfiscalstanceinordertoimprovefinancialsta-bility.However,baselineresultsshowthatreducingfiscaldeficitsbycuttingspendingisatortuouspathwithlikelyunsatisfactoryresults.Unlesspoliciesareeffectiveinenhancinggrowth,andthuspublicrev-enues,fiscaldeficitswillremainhighandreductionsinpublicdebtwillbeslow.indevelopingcountries,the relativelymoderategrowthofpublicspendingassumedinthebaselineforindiaandlatinAmericadoesnotleadtoanimprovementinthegovernment’sfinancialpositioneither.inAfrica,aslightlyfastergrowth of public spending in the projected base-linethaninthehistoricperiodleadstolargerfiscaldeficitsandpublicdebtratios.Thisillustratesthat,particularlyforcountrieswherefiscalpolicyspaceislimited,fiscalpoliciesaimedatimprovinggrowthandstabilitycouldbemoreeffectivewhenaccompaniedbyother,complementarypolicies.
ontheotherhand,fiscaldeficitsanddebtratiosinthebalancedgrowthscenarioaresmallerthaninthebaselinescenario.32Thisisnotsurprising,evenifacriticalingredientofthepolicymixisassumedtobefastergrowthofpublicspendingongoodsandservices.Fiscalsustainabilityistheresultofvariousconvergingpolicies,suchasthoseproposedabove.Totheextentthatfiscalsupportintheformofspendingonsocialprotectionandinfrastructuredevelopmentiscomplementedbyindustrialpromotionpoliciesandbyincomespolicies,positivesynergiesarecreated.Asaresultofsuchsynergies,consumption,privateinvestment,andamorebalancedgrowthoftradehelptogeneratemoregovernmentrevenues.inaddition,inordertoensurethattheassumedimprovementsinthefunctionaldistributionofincomearenet(i.e.aftertaxes),greaterprogressivenessindirecttaxcollectionispursued,thusimprovingdomesticresourcemobi-lization.This in turnwouldcontributetoreducingfiscaldeficitsandalleviatingdebtburdens.
The baseline results shown in the last twocolumnsoftable2.4confirmthatprivatesectorbal-ances, aswell as external balances of the variousregionsmove in diverging directions.Developed
countries as awhole, and particularly theUnitedStates(butalsotheUnitedKingdomandafewothermajoreconomies)tendtopursuepoliciesthatresultinacontinuingdeclineofnetfinancial savingsoftheprivatesector(whichalsoleadtoheavierdebtburdens).33This in turn translates intoworseningexternaldeficits,which,bytheendofthesimulationperiod,showsimilarmagnitudesasthoseoftheprevi-ouspeakjustbeforetheonsetofthefinancialcrisis.Meanwhile,anumberofothercountries, typicallythosewhich accumulated large external surplusesduringthepre-crisisperiod,showsimilarpatternsintheprojectedbaseline,astheywillcontinuetorelyonarecoveryoftheirnetexportsandarelativeincreaseinnetfinancialsavings,mostlybytheprivatesector.bycontrast,thebalanced-growthscenarioshowsasignificantreductionofexternal imbalances.Moreprecisely,thereareincreasesinthenetfinancialsav-ingsoftheprivatesectorwhereoriginallythereweredeficits,andreductionsofprivatesurpluseswherethesewere too large. indeed, the proposedpolicystimulitriggerrobustgrowthofpublicandprivatespending,madepossiblebyincreasedincomesandenhancedbyimprovementsintheregulationofthefinancialsystemandofinternationaltransactions.inaddition,tradeimbalancesoflow-andlower-middle-incomecountriesimproveasaresultoftheassumedpro-developmenttradeagreements.
2. Summing up: The need for policy consistency and macroeconomic coherence
The globalmodelling exercise synthesizedabove offers an evaluation of the favourable out-comesthatcanbebroadlyexpectedfromabreakwithcurrentpolicystances.Clearly,theseresultscannotbeachievedbymeansofmarket-drivenadjustments.Theyrevealtheneedforexplicitpolicytriggersthat,estimatedonahistoricalbasis,areshowntoyieldmorerobustandstablegrowthpatterns,particularlyifpoliciesworldwidearecombinedinacoordinatedfashion.However,theuseofthismodellingtooldoesnotmeanthatsuchpolicychoiceswillactuallybeundertaken.itrequiresacarefulexaminationofwhatpolicy space is available, thepossible constraints,andthepoliticalwillofcountries’leaderstobreakwithmostofthecurrentapproaches,allofwhichisdiscussedmorethoroughlyinthechaptersthatfollow.
Towards a Sustained Economic Recovery: Review of Policy Options 35
Tabl
e 2.
4
FIN
AN
CIA
L VA
RIA
BLE
S FO
R S
ELEC
TED
REG
ION
S A
ND
CO
UN
TRIE
S, 1
990–
2024
(Ave
rage
in p
er c
ent o
f GD
P)
Pub
lic s
ecto
r bal
ance
Pub
lic d
ebt
Priv
ate
sect
or b
alan
ceC
urre
nt a
ccou
nt b
alan
ce
Sce
nario
1990
–20
1420
15–
2019
2020
–20
2419
90–
2014
2015
–20
1920
20–
2024
1990
–20
1420
15–
2019
2020
–20
2419
90–
2014
2015
–20
1920
20–
2024
Dev
elop
ed e
cono
mie
sB
asel
ine
-4.0
-4.0
-2.7
79.2
96.2
89.8
3.2
2.5
0.2
-0.5
-1.2
-2.1
Bal
ance
d gr
owth
.-3
.3-2
.8.
91.2
79.7
.2.
31.
7.
-0.7
-0.8
of w
hich
:U
nite
d S
tate
sB
asel
ine
-4.3
-4.5
-3.1
71.1
87.1
78.7
1.4
0.3
-3.1
-2.9
-4.2
-6.2
Bal
ance
d gr
owth
.-3
.6-3
.0.
83.1
72.5
.0.
80.
7.
-2.8
-2.3
CIS
Bas
elin
e-0
.61.
93.
057
.722
.722
.24.
32.
54.
33.
84.
47.
3B
alan
ced
grow
th.
1.3
2.0
.26
.627
.2.
1.5
0.9
.2.
72.
9
Dev
elop
ing
Asi
aB
asel
ine
-2.2
-1.3
-1.2
40.1
44.5
48.7
4.2
3.6
4.3
2.0
2.8
3.5
Bal
ance
d gr
owth
.-1
.2-1
.2.
43.6
43.9
.2.
52.
3.
1.7
1.3
of w
hich
:C
hina
Bas
elin
e-1
.80.
71.
916
.329
.032
.45.
12.
73.
83.
33.
45.
8B
alan
ced
grow
th.
-0.2
-0.0
.28
.829
.3.
1.7
1.5
.1.
51.
5
Indi
aB
asel
ine
-7.7
-7.0
-6.5
76.0
77.6
80.3
7.2
5.1
5.4
-0.5
-2.0
-1.1
Bal
ance
d gr
owth
.-3
.9-3
.0.
69.4
62.2
.2.
42.
9.
-1.4
-0.1
Afr
ica
Bas
elin
e-2
.1-3
.8-4
.059
.159
.664
.32.
60.
30.
40.
3-3
.6-3
.6B
alan
ced
grow
th.
-2.8
-1.9
.57
.855
.9.
-0.0
0.4
.-2
.8-1
.5
Latin
Am
eric
a an
d th
e C
arib
bean
Bas
elin
e-3
.0-4
.3-3
.551
.454
.553
.51.
11.
71.
9-1
.9-2
.6-1
.6B
alan
ced
grow
th.
-3.0
-2.4
.51
.048
.2.
0.7
1.5
.-2
.4-0
.9
Sour
ce:
UN
CTA
D s
ecre
taria
t cal
cula
tions
, bas
ed o
n G
PM
.N
ote:
C
IS in
clud
es G
eorg
ia.
Trade and Development Report, 201436
intherealmofpolicymaking,whatthesemodelsimulationsunderscoreistheneedtoensurepolicyconsistencyandmacroeconomiccoherenceinordertoobtainoutcomessimilartothosepresentedabove.Policyconsistencyreferstopreventingpolicyinstru-ments fromoperating at cross purposes.Currentinconsistencies in the configuration of fiscal andmonetarypoliciesofmanyeconomiesafter2010hasbeencolourfullydescribedas“drivingtheeconomiccarwithonefootonthebrakeandonefootonthepedal”(White,2013:1).instead,monetaryexpansionshouldbeaccompaniedbyfiscalexpansiontopreventliquiditybeinghoardedorchannelledtospeculativeuses;employmentpromotionprogrammesshouldbeaccompaniedbyincomedistributionpoliciessothataggregatedemandissustainedbyrisinghouseholdincomesratherthandebt;andpoliciestargetinginfla-tionshouldbeaccompaniedbypoliciesthataddressthecausesofinflation,whichinturndrawsattentionto incentives todomesticproductionanddemand.Thesearebutafewexamplesofpolicyconsistency.
Pro-growth and rebalancing policies need toensuremacroeconomic coherence by addressingprimarilytherootproblemsthatimpedeasolidandsustainedglobalrecovery.Untilveryrecently,andevennowinmanydevelopedeconomies,policymak-ershaveseemedtobeexcessivelyconcernedwithfightingthethreatofinflationandhavebeenignoringthe realityofdeflation.likewise,policymakers inmanycountrieshavebeenadvocatingharshadjust-mentsintheirgovernments’fiscalbalancesbuthavebeenneglectingtoconsiderthepotentialeffectsonhouseholdsandenterpriseswhichwouldfinditmoredifficulttorebuildtheirbalancesheetswhenaggre-gatedemandandincomearedepressed.
ifthemainproblemsofthepost-crisisperiodhavetodowithinsufficientaggregatedemandandfinancialinstability,theappropriatepolicyresponseshouldbenottoinjectmoreliquidityperse,buttoencouragecreditflowsthatgenerateproductiveactiv-ity,whileboostingaggregatedemandanddesigning
incomepoliciestomakeuseofsuchcreditflowsinasustainablemanner.
Thereisanotheraspectofmacroeconomiccoher-encethatmayeasilybeoverlookedbypolicymakerswhen considering their options. in an increasinglyinterconnectedglobaleconomy,policieshave tobeconsistentfortheworldasawhole.Thereareseveralexamplesofwhythismatters,buttwoarediscussedhere.First,aftertakingintoaccountrealandfinancialfeedbacks, it should be clear that a sustained andstabledemand-ledgrowthpathhastostartdomesti-cally,ratherthaneachcountryindividuallypushingfor competitive reductions of costs and imports inorder togenerateanet-export-led recovery.Robustdomesticactivityinasufficientnumberofcountries−aprocessinwhich,admittedly,surpluscountrieshavemuchmoretocontribute−istheonlytrulysustainablebasisfortherecoveryofglobaltrade.Second,intheabsenceofatrulygloballyinclusivefinancialarchi-tecture,unfetteredglobalfinancialmarketswithoutadequateregulatorycontrolcanbepernicious,asthe2008financialcrisishasamplydemonstrated.Thecontinuing inadequacy of institutions andmecha-nismsforinternationalcoordinationofpolicyactionsaffectstherulesofthegameinfundamentalways,forcingpolicymakers to adopt strategies thatmayappeartobeconvenientforthemoment,butwhichareeffectivelyself-defeatinginthemediumterm.itisessentialtocontinuewitheffortstodeviseamoreeffective set of globally inclusive institutions toregulatemarkets,helpcorrectunsustainableimbal-anceswhentheyemerge,andbetterpursuetheaimsofglobaldevelopmentandconvergence.Thismaybeanambitiousundertaking,forwhichagreatdegreeofperseveranceandvisionisrequired.butaschap-ter iVhighlights,historyshows thatdeep reformsofglobal scopesimilar to theonesmentionedherewereseriouslycontemplatedinthepast.Meanwhile,farmoremeaningfuleffortsareneededtocoordinatenationalpolicystrategies,toconsidertheimplicationsoftheirinteractionsinaglobalsetting,andtomanageinternationaltransactionsandflowsaccordingly.
Towards a Sustained Economic Recovery: Review of Policy Options 37
1 Thetrendisestimatedfromthemid-1990sonwardstoavoidgivingexcessiveweighttotheboomyearsprecedingthecrisis,whichweredeemedunsustain-able,aswellastotheimmediatepolicyresponsesduring theglobal crisis,whichwereclearlymoreexpansionarythanthenorm.
2 Atthetimeofwriting,theUnitedKingdom’sofficeforNationalStatisticswasintheprocessofrevis-ing its annualGDP statistics (inUnited Kingdom National Accounts − The Blue Book, 2014 edition),andpreliminary reports suggest that by 2013 thelevelofrealGDPmaybemarginallyabovethepre-crisislevel.
3 StateandlocalgovernmentsintheUnitedStatesarerequiredbystatutorylawtobalancetheirprimarybudgets,which in practice imposes expenditureadjustments relative to tax collection and otherrevenues.
4 Thisterm,whichwasusedbyKeynesinhisGeneralTheory,referstoaburstofoptimismthataffectsthemoodofprivateinvestors.
5 This confirms earlierwork on theUnited States(PikettyandSaez,2003)andacrossalargepoolofcountriesinbothdevelopedanddevelopingregions(see, for example,Cornia, 2004; andMilanovic,2005).
6 Fromadifferentmethodological perspective, andusingindustry-leveldatasets,otherempiricalstudiessuggestthatagreaterproportionofcapitalaccumula-tionvis-à-viswage-earnersandtheself-employedimplies, when properly estimated, a tendencytowards a sharper deterioration of labour income(Arpaiaetal.,2009).
7 WhilethereisbroadagreementontheimportanceofPiketty’sempiricalfindingsaboutlong-termtrendsofinequality,histheoreticalexplanation,whichvali-datesneoclassicalgrowththeory,hasbeensubjectedtorigorouscritiques(Patnaik,2014;Taylor,2014).
8 Similarconclusionswithvariations,dependingonunderlyingeconomicstructuresofdifferentcoun-tries,havebeenprovidedbyanalyticalandempiricalevaluations of the “wage-led” versus “profit-led”debate (Storm andNaastepad, 2012;lavoie andStockhammer,2012).
9 See earlierTrade and Development Reports; alsoTurner,2008.
10 Thesetwocasestogetheraccountforasignificantshare of global consumption, and could thereforehave at least some influence in reigniting globalimbalances.Whileotherrelativelylargeeconomiesseemtoshowsimilarpatterns,theinvestigationonthesetwocountriesisfacilitatedbytheavailabilityofdetailedbalancesheetsandassetcompositionsoftheirhouseholdsectors.
11 Thisisanaccountingtermthatreferstoapositiveshocktothenetwealthofassetownerswhenassetpricesrise.Theshockcanbeestimatedbyimput-ingthepricechangesofthedifferentassetstotheunderlyingstructureofthebalancesheet.byfurtherdiscountingconsumerpriceinflation,ameasureofrealholdinggainsisobtained.Seeizurieta(2005)foraformalmethodologicaljustificationandearlierempiricalestimates.TheFinancialAccountsoftheFederalReserveoftheUnitedStatespublishestheseriesofholdinggainsinnominalterms(seetableR.100)beforediscountedbyinflation.ThenominalseriesgeneratedhereshowaveryclosematchwiththoseoftheFederalReserve,withonlynegligibleerrorsduetotheaggregativenatureoftheassetpricesused.Thisallowscheckingagainstsuchexistingdatatheestimationmethodologyappliedfurtherbelowto the case of theUnitedKingdom,which doesnotpublishholdinggainsofthehouseholdsector.itshouldbeemphasizedthattheseareaccountinggains,ratherthanthegainsactuallyrealizedthroughassettransactions.
12 “Netfinancialsavings”,attributedtoTobin(1982),istheequivalentofthemoreknownconceptofsurplusordeficit,commonlyusedinreferencetothepublicsectorandtheexternalsector(thecurrentaccount).itsformalnameinnationalaccountsis“netlending”(or“netborrowing”whennegative),butthistermisnotusedinthetexttoavoidconfusionwiththealsocommonlyused“lending”or“borrowing”inrelationtothebankingsector.
13 Theseries,whichonlyrunupto2012,werecompiledbycombiningnationalaccountsstatisticswithsurveydataandimputedtrendsfromtheevolutionofwage
Notes
Trade and Development Report, 201438
oragricultural incomeswhenavailable.However,alargemarginoferrorispossible,particularlyforcountrieswhere theproportionof informal/mixedincomesislarge.
14 Mixedincomein thenationalaccountscomprisesincomesearnedfromtheself-employedaswellasall incomes earnedby unincorporated enterprisesandthoseclassifiedas“non-marketoutput”.
15 SeealsoTDR 2001;Akyüz,2002;D’Arista,2007;Ghosh andChandrasekhar, 2001; Singh, 2003;Stiglitz,1999.
16 SeealsoAkyüz,2013and2014;Ghosh,2014;TDR 2013;UNCTAD,2011.
17 Seelawson(2011),andalsoobstfeld(2012)foramoregeneralappraisalofsimilarviews.
18 Ukraine,wherecapitalinflowsroseonlymarginallyafter2009,isanexampleofhowashocklikethefinancial crisis can hit vulnerable sectors causingsystemic threats that requiremore lasting adjust-ments,oftenexacerbatedbysocialtensions.
19 See,forexampleChandrasekharandGhosh,2013and2014;lee,2013;McKenzieandPons-Vignon,2012;Chang, 2013;Kang et al., 2011; Ffrench-Davis,2012.
20 Thisindexisavailableat:http://unctadstat.unctad.org/wds/TableViewer/tableView.aspx?Reportid=30953.itmeasures, product byproduct, the evolutionof(normalized)balancesovertime,whilecontrollingforre-exportingactivities.Thedatasetisverydis-aggregated anddetailed, allowing a fullmappingacross thestandardindustrialclassification,anditalso specifies categories by the degree of labourskillswithinthemanufacturingsector.
21 TheGPMisafullyendogenousmodellingframe-work based onwater-tight accountingwithout“black-holes” andwithout unexplained residuals.behaviouralrelationsthatdeterminethemacroeco-nomic adjustments are estimated econometricallyusingpanel(124countries)andtimeseries(period1980to2012).Themodelcovers25countriesandcountrygroups,andconsidersGDPinmainsectors;public, private andfinancial institutions; employ-ment; international trade (fivemain categories)andfinance; andfiscal,monetary and industrial/tradepolicy (seeTDR2013, annex to chapter i).Foramoretechnicaldiscussion,seewebsite:http://unctad.org/en/Publicationslibrary/tdr2014_GPM_TechnicalDescription.pdf.
22 As stated byKeynes (1936: 149), “The state ofconfidenceisrelevantbecauseitisoneofthemajorfactorsdeterminingtheformer[therateofinvest-ment],which is the same thingas the investmentdemand-schedule.Thereis,however,notmuchtobesaidaboutthestateofconfidenceapriori.ourconclusionsmustmainly dependupon the actualobservationofmarketsandbusinesspsychology.”
Keynesfurthermadeacrucialobservationtostresshowmuchmoredifficultitistoknow,apriori,abouttheconditionsthatenablearecoveryafteracrisis(1936:158), “Thuswemust also takeaccountoftheotherfacetof thestateofconfidence,namely,theconfidenceof the lending institutions towardsthosewho seek to borrow from them, sometimesdescribedasthestateofcredit.Acollapseinthepriceofequities,whichhashaddisastrousreactionsonthemarginalefficiencyofcapital,mayhavebeendueto theweakeningeitherof speculativeconfidenceorofthestateofcredit.butwhereastheweakeningof either is enough to cause a collapse, recoveryrequirestherevivalofboth.”
23 inthisparticularcasethereareonlysmalldifferencesofdegreewiththebaseline.initsconstruction,inordertoavoidcrisisconditions,asexplainedabove,thebaselineimposesceilingsandfloorsonexchangerates and commodity priceswhichwould haveresultedfromtheimbalancesdiscussedinsectionA.
24 in theGPM, thesepreferences apply to countrieswithapercapitaincomelowerthan$2,000dollarsin2012.
25 Thehistoricperiodrunsupto2014,butthelatestverifiablefiguresfortheshareoflabourincomearenotavailablebeyond2012formostcountries.
26 incomespoliciesareassumedtobecomparativelystronger in theUnitedStates, bringing its labourshareclosertopre-1990levelsandclosertothelev-elsofotherdevelopedeconomies.Moreimportantly,householdsintheUnitedStateshaveaccumulatedserious financial imbalances over time, and theassumedimprovementinthefunctionaldistributionofincomeisrequiredinordertogenerateasustainedgrowthofprivateconsumptionwithoutincreasinghouseholds’financialvulnerabilities.
27 TDR 2013proposedanalternativesimulationthatassumedthatalldevelopingandemergingeconomieswouldengageinproactiveincomespolicieswhiledeveloped countrieswould continue to seek netexportadvantagesbycompressingwageshares.Themodelshowedthatthiswouldresultinanetbenefitfordevelopedcountriesattheexpenseofdevelopingandemergingeconomies.inthissituation,thelattersetofcountrieswouldnaturallyexerciseconsider-ablecautioninadoptingsimilar incomespolicies,which,consequently,wouldresultinaweakerimpactongrowthanddistribution.
28 intheUnitedStates,andtoalesserdegreeinindia,growthofgovernment spending isassumed toberelativelystronger thaninthehistoricperiod,anditalsoturnsouttobemarginallystrongerthanthegrowthofGDPinthefirstfiveyearsoftheprojec-tions.This is because, as discussed earlier, debt-drivenspendingoftheprivatesectorwasgrowingatafastrate,andtoachieveafinanciallystablepath
Towards a Sustained Economic Recovery: Review of Policy Options 39
offastGDPgrowththepublicsectorhadtomakealargercontributionthantheprivatesector.
29 AnexceptionisChina,wherethepolicyshiftawayfrom investmentgrowth towards fastergrowthofhousehold incomes and consumption is assumedtobestrengthenedduringthefirstfewyearsofthesimulation.Undertheseassumptionsprivateinvest-ment inChinawould tend to stabilize at around25percentofGDPtowardstheendofthesimulationperiod.
30 An exception isChina,where a deceleration ofgrowthisexpectedbypolicydesign,andformanyoftheperipherycountriesofeuropewhichcontinuetobeunderpressurebydeflationarypolicies,aswellasformanyoftheoil-exportingcountrieswhichwillnotbenefitfromacontinuingriseinoilpricesofthemagnitudeexperiencedoverthepasttwodecades.
31 Thebalanced-growth scenariohas apro-develop-mentbias(withoutdisregardinggrowthindevelopedcountries), and it is also known that the growth
potentialofdevelopingandemergingeconomiesisgreaterthanthatofdevelopedeconomies.Regardingmeasurement,thePPPweights(base2005inthesesimulations)arenotre-scaledeachyear,resultinginagreaterweightofdevelopingeconomiesinglobalGDPalongtheentireperiodoftheprojection.
32 exceptionsincludemembersoftheCommonwealthof independentStates (CiS) andChina.TheCiSeconomies, instead of accumulating larger fiscalsurplusesover time,wouldbenefit from reducingsurplusesinordertoenhancetheprocessofstruc-turaltransformation.AndinChina,moreemphasisisplacedonstrengtheningsocialprotectioninordertopromotethegrowthofhouseholdconsumption.
33 Notalldevelopedcountriesencouragedebt-drivenprivatesectorspending.ForexampleGermanyandJapansignificantlyincreasetheirexternalsurplusesinthebaseline.Thus,thegroupofdevelopedcoun-triesasawholedoesnotshowastrongpatterninonedirection.
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