Developing countries must continue to diversify, Unctad report urges

Developing countries should continue to focus on economic diversification and sustained industrialisation, particularly with regard to value-added activities and agroprocessing, despite the current windfalls being experienced as a result of strong demand and prices for natural resources, a new United Nations (UN) report asserts.

The United Nations Conference on Trade and Development's (Unctad's) 200-page 'Trade and Development Report 2008', which was released on Thursday, acknowledged that many developing countries had seen improvements in their terms of trade. But it stressed that they remained vulnerable to a possible prolonged global economic slowdown and an end to the commodity boom.

For a number of these developing countries, higher prices of net food and energy imports had already created a heavy burden, jeopardising progress towards the meeting of the Millennium Development Goals (MDGs) set by the UN in 2000.

The report also warned that possible restrictive monetary policy responses to increasing pressures on the overall price index from higher commodity prices could well lead to a further deceleration of growth in developed and developing countries alike.

However, it was still anticipated that growth in developing countries would remain robust (at more than 6%), compared with developed countries, where Gross Domestic Product growth was expected to fall by 1,5%. This robust growth was as a result of "the relatively stable dynamics of domestic demand in a number of large developing economies".

Also highlighted by Unctad was the experience from several fast-growing developing countries, showing that, from a macroeconomic angle, sustained industrialisation did not always require a current account deficit, or a net capital inflows. However, it did appear to depend on whether domestic monetary policy and the local financial system offered a favourable environment for long-term financing of private firms.

In many developing countries this required a stronger focus on improving the conditions for reinvestment of the company profits and for an enhanced role of the banking sector in financing investment. However, a number of poorer countries, which were unable to boost export earnings, owing to structural constraints, continued to rely on foreign capital inflows to finance imports of essential capital goods.

The report also called for official development assistance, or aid, to be further increased - not only with a view to filling the existing financing gap to help meet the social and human development objectives of the MDGs, but also to help to generate higher per capita income growth and employment for sustained development beyond the MDG deadline of 2015.

The report noted that an adjustment of some of the current account imbalances that have shaped the world economy for years was now under way.

However, a continuation of this trend relied on a slowdown of the US economy and a depreciation of the dollar, while the adjustment process could only be painless for the world economy as a whole if the domestic spending and imports in the surplus economies rose, added the UN.

However, not all surplus countries had the same scope for increasing domestic demand. In China, for example, this was viewed as much more difficult than elsewhere, as private consumption was already rising fast, and the economy was close to overheating. The appreciation of the yuan might nevertheless contribute to the global adjustment of trade balances.

On the other hand, in Western Europe (especially in Germany) and Japan there was a much greater scope for domestic demand to expand. "Overall, there was a strong likelihood of a sharp and prolonged downturn of the world economy as long as policy makers did not agree on ways to tackle global imbalances through coordinated and concerted action," stated the report.