TRADE AND DEVELOPMENT REPORT, 2014unctad.org/en/PublicationChapters/tdr2014ch2_en.pdf16 Trade and Development Report, 2014 To many observers, the improvement, albeit small, of the

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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


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


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

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y = -0.1066x + 1.2719


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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2009 2010 2011 2012 2013

Unit labour cost

Ratio of imports to exports

GDP


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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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


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.

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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


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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Indonesia RussianFederation

Argentina Republic ofKorea

A. Selected current account surplus countries

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B. Selected current account deficit countries

Domestic demand Net exports


(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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Africa East and South AsiaMexico and Central AmericaSouth America West Asia

2012


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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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


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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Stock market (Index numbers, average 2007 = 100) Capital inflows to private banking sector ($ billion) (right scale)


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).


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


• 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


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.


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


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


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.


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.


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

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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

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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.


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.


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


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


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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