30 June 2006

World Economic and Social Survey 2006 Calls for more Initiative by Developing Countries in Charting Own Reform Path

GENEVA, 30 June -- Developing nations should take more initiative in determining country-specific economic policies and charting their own reform path, the United Nations contends in a new report out today.

The conventional strategy since the 1980s for closing the income gap between the developing and developed worlds -- giving more space to the global market -- was only partially effective, the United Nations report finds.  Outside of China and East Asia, which for decades maintained active industrial policies, developing and transition countries either failed to make significant headway towards parity, or more often fell back.

And in contrast to the first three post-Second World War decades, the final two decades of the twentieth century were characterized by the sudden appearance of "growth collapses" -- periods of five years or longer during which a country experienced no per capita income growth or a decline.  On the other side of the same coin, incidences of sustained strong national economic growth in 1980-2000 were considerably less than in 1960-1980.  As a consequence, international inequality -- which measures income disparities between countries -- has increased strongly since 1980.

"Both economic successes and collapses have tended to cluster in time and in space", Under-Secretary-General Jose Antonio Ocampo said, at the launch of the UN World Economic and Social Survey 2006 in Geneva today.  "To stave off collapses such as those felt in the developing world in 1996-1998 and 2000-2002, countries should adopt policies tailored to their national situations, breaking free of lockstep approaches to policy making."

Progress on Productivity

Industry typically makes a more dynamic contribution to economies than other sectors because of its higher productivity.  More broadly, beneficial structural change in developing countries entails the ability to generate new activities that add value and strengthen economic linkages within the countries.

Such transformations are clearly visible in Eastern and Southern Asian economies.  But in Latin America, in the countries of the former Soviet bloc and in the Middle East, growth has congealed in low-productivity services and agriculture, while economies experienced overall de-industrialization.

Along with more dynamic production structures, successful development depends on trade.  The Survey qualifies that "it is a matter not of how much countries export, but rather what they export".  Strategic items would be not only products with greater growth potential, such as in the high-tech sector, but also those which help strengthen productive links within the rest of the domestic economy.

Many low-income countries may lack adequate infrastructure and human capital to enter the global market full force in high productivity sectors.  But strategies can be devised for value-added processing of raw materials and entering into light manufacture.

The vaunted role of foreign direct investment (FDI) in jump-starting growth and development is similarly directly dependent on how well it can usefully absorb and deploy in strengthening domestic economic linkages.

Macroeconomic instability has been an important cause of a lack of long-term investment in the development of the poorer economies.  Macroeconomic policies are in part to blame.  Not for a lack of focus on stability, such as trying to keep inflation down, but perhaps due to excessively stressing that objective.  The study of the United Nations shows that macroeconomic policies in developing countries have become excessively pro-cyclical, that is spending more when the economy is doing well and cutting strongly when the economy is down.  This has exacerbated the volatility brought on by financial markets and commodity prices.  Countries that were able to conduct more counter-cyclical macroeconomic policies, generally also were able to sustain higher economic growth rates, the UN argues.

Economic instability and pro-cyclical fiscal adjustment often have also been detrimental to spending on infrastructure and human development.  Particularly, public investments in infrastructure have been strongly cut in fiscal austerity programmes.  This in part explains diverging growth performances.  The UN study finds, for instance, that lagging infrastructural development likely accounts for as much as one third of the income gap between East Asia and Latin America.

Policy Implications

Countries investing in domestic infrastructure, human capital and entrepreneurial capacity have been able to leverage FDI for rapid escape from poverty traps -- Singapore and Ireland being two notable examples.  Conversely, there is limited scope for long-term benefit from FDI when it is arrives only to take advantage of tax incentives or trade policy distortions (such as textile quotas).

"Trade liberalization has been the main policy trend in recent decades", the UN report summarizes.  "In most parts of the world, this has led to an expansion of export volumes, but not necessarily to higher economic growth.  Countries able to diversify and change the structure of production to encompass activities of higher productivity have seen more visible growth gains."

An assertive but flexible agenda for national development could utilize some of the following elements, according to the UN:

-- Active trade and production sector policies to encourage diversification of developing country economies -- the space for conducting such policies has narrowed in the light of multilateral trade agreements, but has not disappeared completely;

-- Improving the trade environment -- not just through freer market access and reduction of rich country farm subsidies, but also by giving developing countries better opportunities to participate in world service markets, including those that entail mobility of low-skilled labour;

-- Open up more space for counter-cyclical macroeconomic policies, striking a better balance between fiscal and monetary prudence and flexibility and putting economic growth and employment creation more to the forefront, rather than a mere and narrow focus on macroeconomic stability;

-- Ensuring sustained levels of public spending to make the necessary investments in infrastructure and human development investing in infrastructure, which will require in most developing countries an increased tax collection effort, increased efficiency of public expenditures, improved governance and, for the poorest countries, additional development assistance.

'Big Bang' Not Needed for Credible Governance Reform

The United Nations report also weighs in against two current policy misapprehensions.

The importance of strong institutions and good governance for economic growth is now widely recognized.  But contrary to some prescriptions, immediate institution of large-scale reform is not a necessary condition for growth, or even sometimes beneficial in the short run.  The experience of China and Viet Nam indicates that incremental reforms, if credible and perceived as steps along the way to further change, can be highly effective in shepherding strong and sustained growth.

World Economic and Social Survey 2006 also engages the current policy debate concerning official development assistance (ODA).  Official development assistance effectiveness in supporting growth, investment and poverty reduction has been under attack from some quarters.  But the UN finds international assistance to be an historically positive force for long-term development.  Survey analysis supports the idea of a renewed push for development, fuelled by rising ODA levels and country situation-driven policies.

For more information, contact Marie Heuze of the UN Information Service in Geneva, tel: 41-22-917-2300, e-mail: ; or Rob Vos, UN Department of Economic and Social Affairs, tel: 1-212-963-4838, e-mail: ; or visit .

World Economic and Social Survey 2006 (Sales No. E.06.II.C.1, ISBN 92-1-109151-9) from United Nations Publications, Two UN Plaza, Room DC2-853, New York, NY 10017, USA, tel: 800-253-9646 or 212-963-8302, fax: 212-963-3489, e-mail: ; or Section des Ventes et Commercialisation, Bureau E-4, CH-1211, Geneva 10, Switzerland, tel: 41-22-917-2614, fax: 41-22-917-0027, e-mail: ; Website: . (Price: $60)

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