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September 2013

UNCTAD: now the real news. Don't expect it to be good

By Peter Hulm

If you're tired of the low-science/no-science (Chicago School) global economic analysis practised by the World Bank and such, take a look at UNCTAD's trade and development report published on 12 September 2013.

Applying a mainstream economists' (Keynesians') view of today's dire situation, the United Nations Conference on Trade and Development warns developing countries not to expect to improve their living standards by exporting cheaply, because of the downturn in rich country demand for imports. In 2012 these were still below 2007 levels.

After trade

Now that we can no longer count on trade with the rich world to be the motor for developing country growth, says UNCTAD in its flagship report, the best solution is for developing countries to focus on raising wages, improving the social safety net, and encouraging investment, to be paid for by better tax collection systems, including higher taxes on multinational corporations.

The overview is blunt: "Competition among economies based on low unit labour costs and taxes leads to a race to the bottom, with few development gains but potentially disastrous social consequences."

Reaching limits

The separate introduction, appearing under the name of the retiring Secretary-General Supachai Panitchpakdi, declares: "Export-led growth strategies are reaching their limits" and export strategies are leading to beggar-my-neighbour competition.

"Developing counes may need to take a more comprehensive and longer term perspective, involving a shift in development strategies that gives greater weight to domestic demand as an engine of growth," UNCTAD argues.

Economics for chumps

It's a sign of how far fantasy economics has taken over the political landscape that even much of the summary is written like Economics 101, spelling out the obvious: " A move towards a more balanced growth path," says Panitchpakdi, "could compensate for the adverse impact of slower growing exports to developed countries. Moreover, this more balanced growth strategy could be pursued by all developing countries simultaneously without beggar-thy-neighbour effects. "

What the world needs is 'would' not 'could', i.e. what are the conditions under which this would compensate for the slower demand for their exports in rich countries.

Publlic spending increases demand

The report gives the answer: remember that public spending increases domestic demand, which can lead to a bigger tax base, and along with investment can help grow the number of citizens entering the middle class (i.e., surprize surprize, those who have surplus disposable income).

The overview by the secretariat pulls fewer punches. The world economy is in "disarray" five years after the outbreak of the crsis,

it declares. "The dominance of finance over real economic activities persists, and may even have increased further. Yet financial reforms at the national level have been timid at best, advancing very slowly, if at all."

There has been "a structural shift" in the global economy which makes it impossible to go back to a system based on "unsustainable global demand and financing patterns".

But shifting to local-focused growth is no straightforward solution for poor states. "This will be a formidable challenge for all developing countries, though more difficult for some than for others," the secretariat warns.

Down with "wage flexibility"

The introduction points out that previous versions of structural reform have usually meant increasing "wage flexibility".

It comments, in a refreshing challenge to standard international monetary recipes that have dominated the world scene for the past 20 years: "A strategy aimed at strengthening the competitiveness of economies by reducing labour costs completely neglects the fact that wages are usually a major source of domestic demand."

The report is contemptuous of monetary authorities for their failures to deal with the crisis or live up to their promises of international reform.

They have done little to find ways to stimulate demand or employment. At the same time, "several countries with large current account surpluses could probably do much more to help revive the world economy."

Probably vs maybe

The 'probably's and 'maybe's don't deceive anyone. 'Probably' is U.N. speak for certainly. I'm not sure who they think they are deceiving, except themselves, confusing mealy-mouthed phrasing with academic language.

However, the UNCTAD secretariat does take the International Monetary Fund to task for its reluctance to allow countries to impose capital controls to protect countries against an investment-drain crisis.

It says controls should only apply when a balance of payments crisis is already blazing and monetary/fiscal measures have failed.

"The problem with such an approach is that it does not recognize the macroprudential role that control of capital inflows can play in preventing such a crisis from occurring in the first place," Panitchpakdi's introduction points out.

Monetarist failures

The introduction also aims two barrels at the monetarists for the failures to stimulate demand through credit:

"The current experience in major developed countries shows that massive money creation by central banks has had little, if any, effect on the expansion of credit to the private sector.

This suggests that, contrary to the monetarist approach, policymakers should focus more on the volume of bank credit than on money creation for promoting financial stability."

Low-cost finance

The remedies in general are well known: accelerating the pace of capital accumulation, ie. "the provision of reliable and low-cost finance to producers for productive investment through appropriate monetary and credit policies, as well as access to external sources of finance", as the final section puts it.

It tells countries what to do, but not how to do it.

Many countries have little access to international capital markets, the report admits.

And the market mechanism cannot be relied on to control how banks give credits that enable businesses to finance their expansion.

In lieu of market stimulus, governments must adopt credit policies, and perhaps give lower-rate loans to SMEs and exempt investment loans from credit ceilings. Lessons here for the Woorld Bank and IMF.

Exaggerated fears

Banks in developing countries have an exaggerated fear of a run on their deposits, the UNCTAD report notes.

Governments might need to force them to give longer-term loans, while providing credit and deposit insurance.

Financial institutions could also become involved in non-financial sectors, following examples like that of the Bank of England pre-1914 and after, which bought an equity stake in some key sectors and even managed them.

The UNCTAD flagship report also questions the tougher new Basel III rules on capital holdings should be applied to developing countries, noting that few U.S. institutions were required to follow earlier rules, and few of the developing country banks are major international players.

Skewered

As neat a skewering of international hypocrisy in financial matters as you could wish from a U.N. body.

It's been usual for rich world institutions to treat developing countries as basket cases, unreliable school children or rivals to the rich world club (Japan/Latin America/China).

But the share of global trade achieved by developing countries has doubled since 1990 to 36%, most after 2004.

Meanwhile, South-South trade is now more than 40% and manufacturing usually accounts for much more than trade with the richer world - "testimony to the potential developmental role of South-South trade."

What we don't know

But the report makes it clear we don't have essential knowledge about how economies work.

For example, how much increased government spending impacts on incomes, and how much increased income raises the demands for imports rather than homegrown goods (page 99).

The reliance on middle-class spending and tax revenues to grow economies doesn't seem realistic.

What that discretionary spending is likely to go on is bigger televisions, radios, refrigerators, other household appliances and cars. And how many of these come from local production?

More people in McDonald's and KFCs do not improve local economies. Instead it expresses the pious hope that local and regional suppliers will know better than multinationals what middle-classes want, ignoring the history of Coca Cola and Nestlé products.

Bureaucratic difficulties

We won't even talk about tax collection from the tax-avoiding middle classes and the rich. UNCTAD does acknowledge the difficulties many poor countries face in putting together an effective bureaucracy.

Whether mulitnationals will go along with being taxed more is a moot question, when beggar-thy-neighbour policies on tax (think Switzerland and Luxembourg) are common in Europe.

The UNCTAD report seems to dismiss the potential of lower-income households, who are likely to choose local products because imports will be too expensive. And many of these goods may come from micro-enterprises rather than small businesses.

A recipe for disaster

In fact, the prescriptions, laudable thought they are, can easily be patched into a disaster scenario:

Sounds just like today. But you couldn't wish for a better summary of how badly the rich world has behaved in the financial crisis than this report on how bad life could become and actually is for the developing countries.

Sources

UNCTAD report (pdf)

Press release

Guardian article

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