Crisis shows limits of export-led growth strategies

Report underscores need to balance domestic and external demand

Geneva, 14 September 2010 -- Developing countries should rethink their policies in support of sustained economic progress if their current strategies for achieving growth and creating employment count heavily on expanding exports, UNCTAD´s Trade and Development Report 2010 (TDR) warns. It says export-led growth ambitions will meet with increasing constraints now that the debt-financed consumption boom in the United States has ended.

The US economy will no longer serve as an engine of growth for the global economy, the report says, and neither China nor the Euro area nor Japan is likely to assume this role in the foreseeable future. Policies for sustainable economic growth, job creation, and reductions in poverty should be based on establishing a balanced mix of domestic and overseas demand, the study advises.

The Trade and Development Report 2010 (1), subtitled "Employment, globalization, and development", was released today.

The TDR 2010 argues that, first, not all countries can succeed with export-led strategies at the same time -- some nations, after all, have to be net consumers of exported goods. Second, global export markets are likely to grow much more slowly than during the years preceding the global recession, making the pursuit of such strategies increasingly difficult. And third, competing for export success by keeping labour costs low leads to a "race to the bottom" in wages that is counterproductive for reducing poverty and creating jobs. Instead, countries should try harder than in the past to create a virtuous circle of high investment in fixed capital that leads to faster productivity growth and corresponding wage increases. This would enable a steady expansion of domestic demand with attendant rises in employment. Development strategies need to strike a balance between strengthening domestic demand and export orientation, the study urges.

In the United States, a downward adjustment of consumption seems inevitable, the TDR warns. With the collapse of that country´s housing market, households were forced to reduce fairly high levels of debt, and Americans became less profligate consumers. Before the crisis, US consumer spending had absorbed about 16% of worldwide output. Furthermore, the country has to deal with the problem of 8 million crisis-related job losses at the same time as government fiscal stimulus measures peter out over the course of 2010. Under these circumstances, the United States is very unlikely to reassume its former role as the locomotive of global demand. It is also unlikely that other countries will jump in to assume that role, UNCTAD economists add.

In China, shifting the main sources of growth and employment creation from fixed investments and exports to consumption is now an official policy objective. Chinese imports already have risen sharply, and the current-account surplus is bound to shrink significantly in 2010. Yet household consumption in China is still only about one- eighth that of the United States, and the composition of consumption favours more domestically produced goods. Thus, China is far from having the potential to become the sole new driver of global growth. "The net effect of United States and Chinese adjustments taken together would be deflationary for the world economy, while they would not be sufficient to unwind the large global imbalances," UNCTAD Secretary-General Supachai Panitchpakdi remarks in the overview to the TDR.

The key for worldwide rebalancing is expansionary adjustment in the industrialized economies that have the largest surpluses, the report argues. In both Japan and Germany, there is considerable scope for a rise in household consumption based on wage increases. However, the recovery from the recession has not been driven so far by an expansion of domestic demand in those countries. Rather, as before the crisis, the driving force of their recovery has been strong export growth. The emphasis on fiscal austerity in the Euro area further dampens the prospects of a substantial demand stimulus materializing from this side, the report notes.

Hence, developing and emerging market economies, which often depend heavily on external demand, may have a special need to strive for growth and employment strategies that rely on domestic demand more than in the past, the TDR suggests. Export-led growth based on wage compression is not sustainable for a large number of countries over a long period of time, the report says. This is because not all countries can succeed with this strategy simultaneously and because there are limits to how far the share of labour in total income can be reduced. In countries that pursued such a strategy, employment problems often persisted because exports either did not grow as expected or productivity gains were used to lower export prices rather than increase wages that could have generated new employment by raising domestic demand.

In Latin America between 1980 and 2002, per capita GDP virtually stagnated, unemployment increased, and average productivity declined. In Africa, more than 20 years of orthodox macroeconomic policies and policy reforms have had limited success in creating conditions for rapid and sustainable growth, particularly in sub-Saharan Africa. "By the end of the 1990s, the production structure of the subregion was reminiscent of the colonial period, consisting overwhelmingly of agriculture and mining," the report observes. Even in Asia, where GDP and productivity have grown rapidly for many years, there is a need to strengthen domestic forces of employment creation to provide decent jobs for a large share of the labour force, the study says.

From 2003 until the eve of the crisis in 2008, growth and income improved significantly in all developing regions. This was partly due to a reorientation towards more expansionary macroeconomic policies, but mostly because of the supportive effects of a booming world economy. It is unlikely that the external environment for developing countries will be as favourable in the years to come, the TDR warns. That punctuates the need to focus growth strategies on domestic demand.

However, "a refocus on strengthening domestic demand as an engine of employment creation and relying less on exports for growth than many countries did in the past should not be viewed as a retreat from integration into the global economy," Secretary-General Supachai Panitchpakdi suggests in the overview to the report. Developing countries need to earn foreign exchange to finance their required imports, especially of capital goods. Moreover, international competition among firms can spur innovation and investment by producers in their tradable goods industries.