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With global demand for imports waning, it is time to re-think the export-led growth economic model foisted onto developing countries in recent decades. Development strategies should instead focus on domestic markets, says a report by the UNCTAD Trade and Development Report 2010.

UNCTAD calls for a reorientation of macroeconomic policies to create jobs and reduce poverty - United Nations Conference on Trade and Development (UNCTAD)

Unctad calls for rethink on export-led growth for developing countries - Larry Elliot, The Guardian

Link to full report: UNCTAD Trade and Development Report 2010 - Employment, Globalization and Development

17th September 2010

UNCTAD calls for a reorientation of macroeconomic policies to create jobs and reduce poverty

14th September 2010 - United Nations Conference on Trade and Development (UNCTAD)

A sustained expansion of domestic demand growth through increasing mass purchasing power and through spurring fixed investments and technological innovation are needed to create employment and combat poverty, the Trade and Development Report 2010 (TDR) contends. But it adds that strengthening domestic demand this way calls for shifting the focus of macroeconomic policies and also requires strategic institution-building to enable sustained growth of labour incomes in line with productivity growth.

The Trade and Development Report 2010, subtitled "Employment, globalization and development," was released today. It reviews the experience of developing countries with export-oriented growth strategies over the past 30 years, especially with regard to their abilities to generate sufficient decent jobs to absorb the labour surpluses that are typical for developing countries.

Many of these countries have become overly reliant on exports, but not all of them can succeed with export-led development strategies at the same time, UNCTAD warns. The organization´s economists suggest that more attention than in the past be given to domestic forces of growth and job creation. This is considered all the more important as the recent financial and economic crisis has pushed unemployment in many countries to the highest levels of the past 40 years, while the scope for export-led growth is now shrinking as the United States will no longer serve as the main market for exports and other major economies are unlikely to assume this role in the near future.

In the development strategies that have dominated for the past 30 years, keeping wages low was the main recipe for enabling the export sector to gain a competitive edge in world markets. Persistently high unemployment was blamed on labour market rigidities that kept wages from falling to market-clearing levels. This approach, which is based on microeconomic reasoning, neglects the important macroeconomic role of wage increases for spurring the growth of domestic demand and boosting employment to satisfy that demand, the report says. Moreover, it is the expectation of rising demand and favourable financing conditions, rather than a reduction in unit labour costs, that drives investment in productive capacity, UNCTAD economists contend.

"A promising strategy for rapid employment generation could be to focus more on investment dynamics, and to ensure that the resultant productivity gains are distributed between labour and capital in a way that lifts domestic demand," UNCTAD Secretary-General Supachai Panitchpakdi writes in the overview to the report.

To strengthen the contribution of domestic demand to employment creation, the principles and objectives of monetary and fiscal policies need to be redefined, the TDR says. These areas of macroeconomic policy also need to be combined with what the report calls an "incomes policy" -- a set of instruments and institution-building measures that would ensure that mass incomes in real terms rise along with average productivity growth.

During the recent global crisis, countercyclical fiscal policy to stabilize aggregate demand has been rediscovered by most governments. Such a policy orientation is also essential for stabilizing aggregate demand in less dramatic times, the report says; and so is the provision of infrastructure and State services to enable profitable investment in productive capacity. An employment-friendly monetary policy would keep credit costs for investment in fixed capital low and would protect the international competitiveness of domestic firms by preventing currency appreciation.

An incomes policy should ensure that productivity gains are distributed in such a way that the wage share in total national income does not fall as it has in many countries over the past four decades, the TDR advises. A policy aimed at a sustained increase in wages in line with productivity growth raises consumption at the same rate as productivity, thereby generating employment opportunities. At the same time, it serves as an instrument to control inflation. As labour costs are the most important determinant of the overall cost level in most economies, adjusting wages to productivity prevents both increases in production costs and demand growth in excess of the supply potential and also widens the room for investment-friendly monetary policy.

Incomes policies can be helped by institutional arrangements for collective bargaining among workers´ and employers´ associations, the report notes. Centralized negotiating mechanisms and prudent tripartite arrangements -- which may include government recommendations for wage increases -- have in the past helped some countries to achieve steady expansions in domestic demand. In the absence of, or as a complement to, such institutional arrangements, a legal minimum wage and its augmentation over time -- in line with productivity growth -- may also contribute to ensuring that domestic demand and the domestic supply potential rise approximately in parallel.

In many developing countries, including the poorest, public employment schemes are potentially important instruments of fighting unemployment and poverty, the TDR notes. In addition to reducing unemployment directly, they also generate purchasing power that will have indirect employment effects on the rest of the economy, and they set an effective floor for earnings and working conditions, especially in sectors outside formal manufacturing and services. In many countries where the share of informal employment and self-employment, especially in agriculture, is high, such instruments of incomes policy need to be complemented by measures to raise the incomes of agricultural producers in line with overall productivity growth, as has been the practice in most developed countries for decades.

"All these measures taken together would provide considerable scope for demand management to combat unemployment while keeping inflation in check and reducing export dependence," concludes Secretary-General Supachai in the overview to the report.

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Unctad calls for rethink on export-led growth for developing countries

14th September 2010 - Larry Elliot, The Guardian

The United Nations tonight called for a re-think of the export-led growth economic model foisted onto developing countries in recent decades as it warned that austerity programmes risked a deflationary spiral and a deeper jobs crisis.

In its annual report, the UN conference on trade and development (Unctad) said higher wages and stronger domestic demand were the necessary ingredients for sustained growth. "The global upturn from what is considered the worst economic and financial crisis since the 1930s remains fragile, and a premature exit from demand-stimulating macroeconomic policies aimed at fiscal consolidation could stall the recovery," said Unctad secretary-general Supachai Panitchpakdi.

"A continuation of the expansionary fiscal stance is necessary to prevent a deflationary spiral and a further worsening of the employment situation."

The report said that after a contraction of 2% in 2009 – the fastest fall in global output since 1945 – the world economy would grow by about 3.5% in 2010, spearheaded by the three leading developing countries of China, India and Brazil. Africa's growth rate is expected to be 5%, with even faster expansion of 6% pencilled in for sub-Saharan Africa.

Unctad expressed scepticism about the idea that countries could compensate for fiscal belt-tightening by selling more goods and services overseas.

"It is becoming clear that not all countries can rely on exports to boost growth and employment: more than ever they need to give greater attention to strengthening domestic demand. This is especially true today, because it is unlikely that the United States' former role as the global engine of growth can be assumed by any other country or countries."

With global unemployment estimated at 210 million people, Unctad said tackling joblessness was "the most pressing social and economic problem of our time, not least because, especially in the developing countries, it is closely related to poverty". Unemployment rates in many countries were already high before the financial crisis of 2007 and many were now facing the highest jobless rates of the past 40 years.

In developed and developing countries, economic policy in recent decades has been based on demands to boost international competitiveness by squeezing wages. "Past experience and theoretical considerations suggest that a sustainable growth strategy requires a greater reliance on domestic demand than has been the case in many countries over the past 30 years," Unctad said. "In such a strategy, job creation for absorbing surplus labour would result from a virtuous circle of high investment in fixed capital leading to faster productivity growth with corresponding wage increases that enable a steady expansion of domestic demand. Especially for developing countries, this may call for a re-thinking of the paradigm of export-led development based on keeping labour costs low."

The report said the shift towards a more restrictive fiscal policy could hinder recovery since in most developed countries, especially in western Europe, private demand had so far only partly recovered from its trough. "It would therefore make countries overdependent on exports for their growth and could lead to the re-emergence of current account imbalances of the kind that contributed to the build-up of the financial and economic crisis in the first place. In any case, if too many big countries rely on higher exports, they cannot all be successful."

In a separate report released today, The Food & Agriculture Organisation of the United Nations said the number of people who suffer chronic hunger is 925 million, with a child dying of hunger every six seconds because of undernourishment related problems.

The Fairtrade Foundation said inadequate agriculture funding by African countries and the donor community was a big factor. "Earlier this year the FAO stated only nine African governments have met the target of allocating 10% of national budgets to agriculture despite promising to do so seven years ago.

Furthermore, the share of overseas aid from rich countries spent on agriculture has fallen from 19% in 1989 to about 5% today."

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