12 Sep 2013
Five years after the onset of the global financial crisis the world economy remains in a state of disarray.
- Strong expansionary monetary policies in the major developed economies have not succeeded in fostering credit creation and strengthening aggregate demand.
- Fiscal austerity and wage compression in many developed countries are further darkening the outlook, not only for the short term, but also for the medium term. The burden of adjustment of the global imbalances that contributed to the outbreak of the financial crisis remains with the deficit countries, thus
- strengthening deflationary forces in the world economy.
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. In 2008 and 2009, policymakers of several economically powerful countries had
- called for urgent reforms of the international monetary and financial system. However, since then, the momentum in pushing for reform has all but disappeared from the international agenda. Consequently, the outlook for the world economy and for the global environment for development continues to be highly uncertain.
Some developing and transition economies have been able to mitigate the impact of the financial and economic crises in the developed countries by means of
- expansionary macroeconomic policies. But with the effects of such a response petering out and the external economic environment showing few signs of improvement, these economies are struggling to regain their growth momentum.
Prior to the Great Recession, exports from developing and transition economies grew rapidly owing to buoyant consumer demand in the developed countries, mainly the United States. This seemed to justify the adoption of an export oriented growth model. But the expansion of the world economy, though favourable for many developing countries, was
- built on unsustainable global demand and financing patterns. Thus, reverting to pre-crisis growth strategies cannot be an option. Rather, in order to adjust to what now appears to be
- a structural shift in the world economy, many developing and transition economies are obliged to review their development strategies that have been overly dependent on exports for growth. It is not a new insight that growth strategies that rely primarily on exports must sooner or later reach their limits when many countries pursue them simultaneously:
- 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.
At the present juncture, where growth of demand from developed countries is expected to remain weak for a protracted period of time, the limitations of such a growth strategy are becoming even more obvious. Therefore,
- a rebalancing of the drivers of growth, with greater weight given to domestic demand, is indispensable.
This will be a formidable challenge for all developing countries, though more difficult for some than for others. In any case, it will require a new perspective on the role of wages and the public sector in the development process. Distinct from export-led growth, development strategies that give a greater role than in the past to domestic demand for growth can be pursued by all countries simultaneously without beggar-thy-neighbour effects, and
- without counterproductive wage and tax competition. Moreover, if many trade partners in the developing world manage to
- expand their domestic demand simultaneously, they can spur South-South trade.