The external environment for development continues to be determined by the growth performance, cyclical and structural changes as well as the economic policy decisions of developed countries. In recent years, fast and sustained growth in the two developing countries with the largest populations, China and India, has added another dimension to this aspect of interdependence.

However, although the growth dynamics of these two large Asian economies are increasingly exerting an influence on other developing countries, they themselves depend to a large extent on cyclical and structural changes in the industrialised countries.

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The extent to which China’s output and import growth and its export drive influence the external environment for other developing countries in the coming years will depend not on China alone, but also on the way in which global imbalances are corrected. In addition to the evolution of demand from the industrialised countries and the impact of China’s and India’s growth, the overall external environment is shaped by structural changes in other areas, such as international trading arrangements, and external debt and finance.

These are areas in which the contribution of developed countries to the global partnership for development finds expression.

One factor that has inhibited investment and growth in many developing countries has been their debt overhang. Recognising the constraining and systemic nature of the debt problem, international financial institutions and bilateral donors have launched various initiatives to address the problem, partly through the provision of debt relief.

Development aid

Progress has been achieved in the area of debt relief, especially under the Heavily Indebted Poor Countries (HIPC) Initiative of the World Bank and International Monetary Fund, and its relationship with recent trends in official development assistance (ODA). While ODA remains a key element in the global partnership for development, it is smaller than both private capital flows and migrants’ remittances. The latter have been gaining importance as a source of foreign exchange for several developing countries, exceeding ODA flows by an increasing margin and prompting questions about the potential impact they could have on development in the receiving countries.

FDI flows

Another important feature of the world economy in recent decades has been the growth of FDI and related internationalisation of production by transnational corporations (TNCs). Several developing countries and economies in transition have been recipients of these increased flows and are progressively participating in international production networks. A few of them are also assuming an increasingly important role as sources of FDI for other developing countries.

Consequently, FDI and the internationalisation of production present new opportunities for developing countries and economies in transition, which they need to consider in their development strategies. But there are also new challenges for policymakers in terms of balancing private sector interests with national economic objectives and development priorities.

The review of some structural elements that have shaped the global environment for development in the first decade of the new millennium gives a mixed picture. In several respects there have been improvements in the external environment, but not all initial promises or expectations have been fulfilled, and in some areas new constraints have emerged.

External conditions for export growth in developing countries are shaped mainly by import demand from the developed countries, resulting from income growth and shifts in the structure of domestic production. But the extent to which such income growth translates into higher exports of developing countries also depends on market access conditions in developed countries, as well as the evolution of market entry conditions and the use of non-tariff measures.

While better market access conditions in developed countries can provide lasting improvements in developing countries’ export opportunities, there have been very few improvements in such conditions for developing countries since the conclusion of the Uruguay Round. Indeed, market access conditions in developed countries continue to be biased against developing countries.

Moreover, the link between changes in these conditions and the actual export opportunities of developing countries appears to be relatively weak compared with their dependence on the growth of demand from their main trading partners. The potential gains from growing import demand for developing countries’ exports are likely to be much larger, but this demand also has a strong cyclical component, and depends on improved global macroeconomic management, especially with regard to correcting the global imbalances that have built up in recent years.

Although preferences were expected to improve export earnings and promote diversification in the preference-receiving developing countries, especially the poorest ones, these countries have not been able to reap large benefits from them. The main reasons for the underutilisation of preferences and their limited benefits are the uncertainty of the schemes, restrictive rules of origin, the often limited product coverage, and supply capacity constraints.

Similarly, the export gains that can be expected to result from the Doha Round appear to be relatively modest when compared with other sources of foreign exchange, such as expected ODA inflows or migrants’ remittances. The decline in tariffs has in recent years been accompanied by an increase in the use of non-tariff measures, particularly in the form of technical barriers to trade and anti-dumping measures.

The latter have emerged as the most widespread impediment to international trade in the past 25 years, and there is the danger that increasing recourse to such measures will erode the predictability and non-discriminatory application of trade policies that have been achieved through successive rounds of multilateral trade negotiations.

Debt mountain

The progress achieved under the HIPC Initiative and additional bilateral debt relief, as well as faster GDP growth and higher budget revenues have alleviated developing countries’ external debt burden in recent years. However, despite an overall improvement, many low and middle-income countries remain severely indebted.

Indeed, 10 years after the launch of the HIPC Initiative, only 29 of the 42 eligible countries have reached the decision point at which countries qualify for interim debt relief, and only 19 countries have reached the completion point, which qualifies them for the full amount of debt relief possible under the initiative.

In the spirit of a global partnership for development, it is therefore imperative to mobilise additional efforts at the national and international level to enable more expeditious implementation of the HIPC Initiative and the Multilateral Debt Relief Initiative, so that all eligible countries can benefit from the debt reductions.

Commitments to multilateral debt relief and considerably increased bilateral ODA could improve the prospects for the poorer developing countries to achieve the Millennium Development Goals and reduce the income gap with the more advanced economies. For these countries to avoid falling back into unsustainable debt situations, it will also be essential to ensure that the pledged rise in ODA is additional to debt relief, and that increased official financing is made available, in particular for social and humanitarian purposes, in the form of grants.

Bolder debt reductions for middle-income countries could also be envisaged under the Paris Club’s Evian terms.

Remittance power

Large-scale outward migration is one of the symptoms of slow progress in development, low expectations of employment and higher living standards at home. Nevertheless, for many developing countries, remittances from migrants working abroad have become an important source of foreign exchange. They are private income and a means to improve the living conditions of many poor households in the receiving countries.

While the ultimate policy objective must be to remedy the root causes of the migration through output and productivity growth and job creation in the home countries, remittances are to some extent a potential contribution to the external financing needs of the migrants’ home countries. A challenge for policymakers is to use this potential within the framework of a broader development strategy and channel the remittances, as far as possible, to productive uses. Developed countries can support efforts to maximise the developmental impact of migrants’ remittances by reducing the cost of remittance transfers and making the transfer channels more efficient.

Labour repatriation

Home and host countries could also co-operate to create incentives for talented migrants to return home after several years of work abroad, with the aim of using the experience and skills acquired abroad to strengthen the local human resource base. Managing international labour mobility, especially between the developed and the more advanced developing countries, on the one hand, and the poorer countries or economies with large amounts of excess labour, on the other, could constitute a key element of the global partnership for development.

In contrast to migrants’ remittances, FDI flows are the outcome of a global assessment of profit opportunities. If well managed, FDI, especially in the manufacturing sector, can help recipient developing economies seize opportunities presented by globalisation. From the point of view of developing countries with a small domestic market or excess labour, FDI offers one possibility to participate in international production networks.

Accordingly, in recognition of this potential, many countries have liberalised the entry of TNC affiliates and stepped up efforts to attract FDI by offering fiscal, financial and material incentives.

More FDI does not automatically result in higher domestic income, enhanced productive capacity or faster growth, though. Its impact depends in large part on the extent to which the investment actually adds to existing productive capacity and increases productivity, and on the sectors in which the investment is made. It also depends on whether the profit motives underlying TNC investment decisions can be brought in line with the broader national economic and development objectives of the host countries. This requires appropriate macroeconomic and sectoral policies to create an environment that is conducive to private investment in general and to entrepreneurial risk-taking in sectors that are strategically important for domestic structural change and beneficial integration into international trade relations.

Increasing FDI should not be regarded as an objective in its own right or as a yardstick for successful integration into the globalising world economy. Rather, it is an instrument that can help achieve successful integration, and success should be measured against the benefits accruing in terms of higher per capita income.

There is considerable scope for further improvements in the external environment, especially in the areas of trade and aid, and strengthened global economic governance that takes into account the needs and specificities of different developing countries. The various factors that have shaped the changing external environment for development since the mid-1980s, some of which are examined in this chapter, can contribute to faster growth and poverty alleviation by providing new opportunities for trade and sectoral development, or by alleviating financial constraints.

Income growth

Even though there have been improvements in the external environment as a result of a strengthened global partnership for development or other factors, such as the rise in primary commodity prices, the challenge for developing countries is to translate these positive developments into faster growth of domestic output, employment and income.

Meeting this challenge will require more than a reliance on market forces complemented by a stronger focus on social policies. There is a greater likelihood of obtaining long-term benefits for growth and poverty alleviation from existing and possible future improvements in the external environment by the adoption of a development strategy that incorporates good macroeconomic and sectoral policies in support of investment, productivity growth and technological change.

Text taken from Trade and Development Report 2006: Global Partnership and National Policies for Development, published by the United Nations Conference on Trade and Development.