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close this bookGlobal Economic Trends and Social Development (United Nations Research Institute for Social Development , 2000, 64 p.)
View the document(introduction...)
View the documentAcronyms
Open this folder and view contentsSummary/Résumé/Resumen
View the documentI. Introduction
View the documentII. The Financial Crises and the Global Economy in 1995 and 2000
View the documentIII. Economic Development in the South in the 1990s: A Long-term Perspective
Open this folder and view contentsIV. Economic Growth, Unemployment, Poverty and Income Inequality
View the documentV. Changing Historical Conjuncture and the Development Policy Debate
View the documentVI. World Economic Integration under Liberalization and Globalization
View the documentVII. The Asian Economic Model and the Crisis
View the documentVIII. The Washington Consensus
View the documentIX. Meeting the Copenhagen Targets in the New Millennium
View the documentX. Conclusion
View the documentBibliography
View the documentTables

IX. Meeting the Copenhagen Targets in the New Millennium

The analysis of sections III and IV concluded that, in order to achieve and maintain meaningful full employment in developing countries with modestly rising productivity and real wages, developing countries would need to achieve a trend increase in their annual growth rates to 5-6 per cent. The discussion of the last three sections has indicated why it would be difficult for them to do so in the new millennium under the present institutional arrangements of liberalization and globalization.

It is important to reflect on the fact that the main constraints to faster long-term growth in developing countries, particularly those in Asia and Latin America, do not currently lie on the supply side. After all, these countries did achieve such growth rates in the pre-1980 period (and in the case of the Asian countries, subsequently, until the current financial crisis). Most of them are better prepared now - in terms of infrastructure as well as human capital - than before to be able to use the latecomers’ advantage of catch-up. The situation may be different in sub-Saharan Africa where years of slow growth may have led to considerable deterioration in infrastructure, but even many of these countries are likely to possess better human capital now than before 1970 when African countries were growing at a respectable rate of about 5 per cent per annum.

However, all countries are faced today with slow-growing and fluctuating aggregate demand. This is due, in part, to a range of factors connected with liberalization and globalization that have been explained before. As noted in that analysis, in a regime of unregulated capital movements there are important structural reasons why developing countries are likely to be subject to stop-go cycles of variable aggregate demand so as to be able to maintain the level of the current account balance expected by the market. In a fresh analysis of external constraints on developing countries, UNCTAD (1999) suggests that, contrary to the expectations of the proponents of liberalization and globalization, today, these countries can achieve sustainable current account balances only at much lower growth rates than before. UNCTAD economists ascribe this phenomenon to the much greater increase in the propensity to import than in the corresponding propensity to export for developing countries following trade liberalization. These countries are, therefore, much more dependent on external capital inflows to achieve desired rates of growth. However, for most countries, under a regime of unregulated capital flows, the required inflows are either not available or subject to wide fluctuations.

So, from the perspective of developing countries, what is required is fast growth of real aggregate demand as well as more stable demand (compatible with a sustainable current account balance). One way of achieving greater demand is through application of the orthodox prescription of labour market flexibility. This may, however, help increase demand in a single country through reduced wages and prices - but there is a fallacy of composition in the view that this proposition is valid for all countries. For if each country tries to improve its competitive position by reducing wages the net result may be the kind of competitive devaluation that occurred in the 1930s - and hence even greater instability for the international economy. Such a strategy would also lead to a competitive erosion of labour standards and would be socially divisive. If implemented by both industrial and developing countries, it would pit First World workers against each other as well as against Third World workers.

It is true that under certain conditions greater labour market flexibility may reduce fluctuations in aggregate demand. However, by definition, this will be at the expense of greater fluctuations in labour market outcomes, which may be socially unacceptable in themselves. A better method for reducing these fluctuations would be to maintain capital controls.

Similarly, instead of labour market flexibility, a better way to increase the equilibrium (i.e. compatibility with the country’s sustainable current account balance) rate of growth of aggregate demand in developing countries would be to increase exports through greater access to advanced country markets. However, in view of the current high unemployment rates in many industrialized countries, such a proposal may not be practical. An alternative proposal - feasible as well as Pareto superior - is for industrialized countries to increase the trend rate of growth of real demand in their economies through co-ordinated expansion. This would increase employment and/or real wages in industrialized countries and also lead to an increase in exports and sustainable growth of demand in developing countries. It has been suggested earlier that, because of the powerful new ICTs, whose potential is very far from being realized, the growth of industrialized countries is also unlikely to be constrained on the supply side. Indeed, a faster rate of growth of aggregate real demand would lead to a greater and deeper use of the new technology in various sectors of the economy. This should result in a virtuous circle of increased demand, increased growth of output and increased productivity - as is normally the case with the introduction of technological innovations.

However, as emphasized in the introduction to this paper, industrialized countries cannot effect a trend increase in the rate of growth of real aggregate demand by simply using normal fiscal and monetary policies. In order to be effective and not lead to further payments disequilibrium between leading industrialized countries, it would be necessary for the demand expansion to be co-ordinated. Moreover, past experience suggests that there will still be some need for restrictive institutional mechanisms at the national level, so that an increase in aggregate monetary demand translates itself into an expansion of real demand, and is not simply dissipated by a rise in wages and prices. Thus, despite the recent price stability in the industrialized countries, pay co-ordinating mechanisms may be necessary to ensure that increased aggregate demand does not lead to rising prices.

To put it another way, even if one accepts the labour market flexibility doctrine and the notion of a negatively sloped demand curve for labour, what is being suggested here is that a right-ward shift of the curve is a Pareto superior alternative from which both rich and poor countries gain. However, to achieve this expansion in the rate of growth of demand in real terms and on a long-term basis, important institutional changes (either new mechanisms or renewal of and re-dedication to existing ones) will be required.38

38 These institutional mechanisms have been discussed more fully in Singh (1995b; 1997).

Paradoxically, for the reasons outlined earlier, the implementation of this alternative policy programme (which would permit developing countries to restrict trade as well as capital flows to the desired levels) may also promote greater integration of the world economy, particularly through expansion of trade, than under liberalization and globalization. This is mainly because the rate of growth of world demand and world production would be greater in the former case than in the latter.