TRADE AND DEVELOPMENT REPORT 2014

Global governance andpolicy space for development

http://unctad.org/en/PublicationsLibrary/tdr2014_en.pdf

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The contents of this presentation and the related Report must not be quoted or summarized in the print,

broadcast or electronic media before

10 September 2014, 17:00 GMT 

The world economy in 2014: still in the doldrumsOutput growth, selected country groups, annual percentage change, 2010–

2014

Developed countries: insufficient demand

• Advanced countries avoided a great depression, stabilized their financial markets and gained back most of the output lost to 2008-2009 crisis

• But continued weak employment conditions, stagnant wages, high household indebtedness and low real investment cannot be accepted as “new normal”

• Reliance on monetary expansion spurs asset price bubbles, while fiscal austerity and wage containment dampen demand

The roots of the crisis are not addressed

There is an alternative

• Breaking with the protracted period of low economic growth requires stronger aggregate demand, especially in surplus developed economies, through:

– Reflation (fiscal and credit policies)

– Regulation (ring fence bank activities and control of capital flows)

– Redistribution (form profits to wages and from creditors to debtors)

The main developing regions are set to maintain their recent growth performance …

Output growth, selected developing regions, annual percentage change, 2010–2014

… but risks are in the horizon:Developing country exports and developed country imports remain far from their pre-

crisis dynamismVolume of export and imports, selected country groups, 2005–2014 (index numbers,

2005–100)

Export-oriented policiesare becoming less effective …

GDP and import volume growth, developed economies, 2001–2013 (Annual average percentage change)

… commodity prices are likely to remain high but unlikely to

grow as prior to 2007 …0

100

200

300

400

500

600

All commoditiesAll commodities (in euros)Minerals, ores and metalsCrude petroleum

0

100

200

300

400

FoodTropical beveragesVegetable oilseeds and oilsAgricultural raw materials

2002 2004 2006 2008 2010 2012 2014

2002 2004 2006 2008 2010 2012 2014

The main challenge for commodity producing

countries remains appropriating a fair

share of the resource rents and using the revenues to reduce

income inequality and spur manufacturing

… and financial instability remains a real threat

Capital inflows, 2007 Q1–2013 Q3 (Billions of current dollars)

• The global financial cycle is driven mainly by developed countries’ policy decisions guided by the needs of their own domestic economies

• Given their volume and instability, international capital flows frequently have disruptive effects on developing countries’ macroeconomic variables and financial systems, and should be managed according to prudential and developmental goals

Developing countries need new growth drivers …

• Developing countries recovered from the financial crisis faster than developed countries, by supporting domestic demand with counter-cyclical policies and in some cases helped by rising commodity prices. But they have not decoupled and vulnerabilities remain:

– Countercyclical policies and gains from terms of trade are important but insufficient to drive a development process

– Developing countries need to rebalance growth strategies with less emphasis on exports to developed countries and a greater role of domestic and regional demand (TDR 2013)

– Structural transformation is the big challenge everywhere

… which will require greater policy ambition …

• Addressing structural weaknesses and ensuring inclusive growth, in a less favourable external economic environment, will need:

– Industrial policies – supported by macroeconomic policies – to stimulate productive investment, develop local markets and diversify the economy

– Public investment in infrastructure and human capital

– Stable and long-term capital inflows

– Greater fiscal space to finance more ambitious policy agenda

… and greater policy space

• Skilful use of policy space that remains under existing trade and investment agreements to pursue proactive policies with a view to fostering structural transformation and rebalancing growth strategy– Refocus on multilateral agreements which recognize

the legitimate concerns of developing countries

– Eliminate pro-investor-biased mechanisms embedded in International Investment Agreements that reduce policy space

– Carefully consider loss of policy space when engaging in bilateral and regional trade and investment agreements

– Joining global value chains should not simply mean aligning policy measures to interests of lead firms

Need for policy space in trade agreements

• Policy space to ensure food security and other crucial national objectives

• Policy space is needed to induce investment innovation and employment growth– Sector-specific modulation of applied tariffs– Applying preferential import duties– Providing long-term investment financing through

development banks– Using government procurement to promote local

suppliers

Managing the capital account

• A global financial cycle is driven by developed countries’ economic conditions and decisions; resulting capital flows not necessarily aligned with developing countries needs and may have disruptive economic effects

• Capital account management measures are needed for managing amount, composition and direction of foreign capital flows; they should be considered normal instruments in the policymakers’ toolkit, not exceptional devices to be employed only in critical times

• Multilateral rules allow governments to manage their capital accounts, but some bilateral trade and investment agreements introduce commitments to financial liberalisation that may impede such regulations

Policy space needs matching fiscal space

• Governments need to finance the investment and other public spending required for development: mobilizing domestic fiscal revenues is key

• “Tax optimisation” (now part of normal business practices) and tax competition have constrained fiscal revenues

• Foregone revenue difficult to assess but probably big number:

– 8–15 per cent of the net financial wealth of households is held in tax havens, resulting in a loss of public revenue amounting to $190−$290 billion per year ($66−$84 billion in developing countries)

– The main vehicle for corporates’ tax avoidance or evasion is the misuse of “transfer pricing” and “thin capitalization” for shifting accounting profits to low- (or no-) tax jurisdictions; developing countries may be losing over $160 billion annually

– Tax competition and privatizations in the 1990s reduced the share of natural rents captured by many primary exporting economies; between 2004 and 2012, 17–34 per cent of the rents generated in extractive industries dominated by private firms; but much higher where public firms dominate

A taxing challenge at national and international levels

• Rising commodity prices allowed governments – from developed and developing countries – to renegotiate or cancel existing contracts, increased tax or royalty rates and changed the degree of State ownership of extractive projects

• Recent efforts for improving transparency are positive steps, but bigger role for developing countries and better surveillance of private companies is needed

• A possible UN-led multilateral framework could include: (i) an international convention against tax avoidance and evasion; (ii) rules of unitary taxation of TNCs, making the firms pay taxes in the countries where they generate their profits (iii) making mandatory and extending international initiatives such as the Transparency Initiative in Extractive Industries (EITI)

• Yet, governments can also apply measures at the national level, including a general anti-avoidance rule in legislation and preventing the misuse of transfer pricing

Key points• Need for greater policy ambition in both rich and

poor countries to get global economy out of the doldrums and moving towards a more inclusive and sustainable future

• Current policy mix in the developed economies combining monetary expansion with fiscal austerity and wage restraint is ineffective – it just produces slow growth with weak employment and asset bubbles

• Developing countries need sufficient policy space to advance post-2015 development agenda in a less favourable external economic environment

• Greater policy ambition needs greater public resources; need to reduce fiscal haemorrhaging via tax havens and transfer mispricing, as well as tax competition

Thanks for your attention!