UN trade body Unctad has warned that slow growth in developed countries is having a knock-on effect and sparking protectionism. 

The United Nations Conference on Trade and Development’s (Unctad’s) Trade and Development Report 2016: ‘Structural Transformation for Inclusive and Sustained Growth’ has described the world economy as “in a fragile state”, growing at a rate below 2.5%, while global trade has slipped to around 1.5%, risking a return to protectionism.

“Policymakers around the world face a difficult combination of sluggish investment, productivity slowdowns, stagnant trade, rising inequality and mounting levels of debt,” said the report. Trade is becoming increasingly politicised, mega-trade deals such as the Transatlantic Trade and Investment Partnership (TTIP) and Trans-Pacific Partnership (TPP) are failing to provide a solution, and protectionism is returning as a foreign policy tool.

The recently issued report said the economic slowdown in developed countries is the primary drag on global growth, which is having knock-on effects on developing countries – exacerbating negative net capital flows, increasing risk of deflationary spirals and increasing corporate debt.

Unctad’s report underlined the need for “bolder macroeconomic policies, strengthened regulation of finance and active industrial policies”. Regarding macroeconomic policies, “advanced economies [must] combine proactive fiscal policy, including on infrastructure spending, with supportive monetary policy and redistributive measures”, Unctad said.

Developing nations must use regulation to protect themselves from the risks of financialisation in their domestic contexts. The report said decades of financial deregulation have failed to boost productive investment. Despite rising profits, corporations are “not reinvesting into production capacity, jobs, or self-sustaining growth”, but rather on short-term investments and, among developing nations, rent-based sectors of small importance for catching up.

The report called for changing corporate governance, recovering public investment, closing corporate tax loopholes and promoting fiscal and regulatory measures that encourage long-term, productive investment. Regarding “much-needed” industrial policies, it said developing countries lacked the sufficient manufacturing capacity key to structural transformation.

As well as expansion, manufacturing linkages and spillover to the rest of the economy should be strengthened. Though still important, export-led growth was more difficult due to weaker global demand and increased competition. The report’s authors said developing countries should focus on domestic and regional markets, and promote strategic policies that would penetrate developed-country markets.

This article is sourced from fDi Magazine
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