IT’S THE END OF THE EXPORT-LED GROWTH MODEL, SAYS UNCTAD

Geneva, Sep 15, 2010 (IPS) - While the recovery from the financial and economic meltdown remains fragile in especially the developed world, the outlook for Africa inspires optimism, according to UNCTAD. The agency also believes the crisis might be the death- knell for the export-led economic growth model - especially African countries should leave it behind.

With the major industrial countries not being able to consume as much as before, export-led growth – mainly by encouraging investment in cheap labour-intensive industries - has no future.

Developing countries, especially in Africa, should therefore boost domestic consumption and allow wages to increase in line with productivity growth, according to UNCTAD (United Nations Conference on Trade and Development).

The findings are contained in the agency’s Trade and Development Report 2010, entitled "Employment, Globalisation and Development, which went public on Sep 14. Export-led growth prescriptions are associated with the neoliberal capitalist Washington Consensus.

The global economic and financial crisis has marked the end of the model of export-led growth for everybody, since "there must be somebody who imports and somebody who exports", Dr. Supachai Panitchpakdi, UNCTAD secretary general, stated at the presentation of the report in Geneva.

Now that the debt-financed consumption boom in the U.S. has ended, the U.S. economy will no longer serve as an engine of growth for the global economy. China, the euro area and Japan are unlikely to assume that role in the near future.

"Domestic demand in China is only one-eighth of that in the U.S.," Panitchpakdi continued.

"Therefore, even if the Chinese economy tries to increase domestic spending, it cannot compensate for the loss of demand from the U.S. We advice developing countries to stay away from total export-led growth involving compressing domestic wages, because this will lead to less demand domestically and less employment creation."

It has been demonstrated that keeping wages low is not correlated with employment creation, Panitchpakdi argued. "We have to look at wages and income as a source of demand and with the lifting of wages, in line with productivity growth, demand could increase and lead to more investment."

To the question of how wages can be increased in a global environment where multinational companies pull out of countries and reinvest in others with more docile labour laws and lower wages, the response is that "it depends on a country’s economic policy strategy", declared Dr. Heiner Flassbeck, director of the UNCTAD division for globalisation and development strategies.

"If you believe that a flexible labour market is the best thing in the world, you will not strive to create institutions that could stabilise domestic demand. This has been the paradigm of the last 20 to 30 years and that is why such institutions do not exist."

There is a need for a paradigm shift, Flassbeck said, and UNCTAD, together with the financial institution the International Monetary Fund, should be able to convince governments about the need of establishing tripartite agreements to discuss national strategies. "This is a totally different approach for many countries, in particular for developing ones", he added.

Tripartite agreements involve the government, capital and trade unions.

The International Labour Organisation has cautioned countries about the fragility of the global economic recovery, since jobs have been created mainly in the informal sector.

UNCTAD believes that sustainable policies for wage increases need to cover both formal and informal labour markets and there needs to be a linkage between the two of them. An example would be guarantees on farming income as established by some countries.

This is particularly true for Africa, where "more than 20 years of orthodox macroeconomic policies have had limited success in creating the conditions necessary for rapid and sustainable growth", the report states.

By the end of the 1990s, according to the report, Africa’s "production structure was reminiscent of the colonial period, consisting overwhelmingly of agriculture and mining".

There is not a shortage of employment in absolute terms in African countries, but a lack of productive and decent jobs, states the report. Agriculture still absorbs more than 60 percent of the labour force and there has been a rise in employment, mainly informal, in urban services and small-scale commerce.

Formal wage jobs account for only 13 percent of employment and 60 percent of the employed are working poor.

Panitchpakdi pointed out that, "today, as shown by the recently released UNCTAD World Investment Report 2010, we are seeing an emergence of a different kind of investment policy, a mix between liberalising measures and more rules and regulations, particularly in developing countries."

Governments understand that investment left to its own devices could lead to dislocation of industries. Thus states are starting to again guide direct investment to specific geographic, social and economic areas. China, for example, is reorienting its investment policy from cheap labour-based to technology-based industries.

"UNCTAD is concerned with fragile and uneven recovery," Panitchpakdi stated. "There is real risk for some governments if they withdraw their support for the recovery too early. The pressure put on some countries, particularly industrialised ones, to try and balance their budget so early could dampen earlier stimulus measures and lead to weak growth."

But Flassbeck added that UNCTAD is "optimistic about Africa. The continent has not experienced such a dramatic drop in production in 2009 and we have seen a rebound of growth in many countries. In our view, Africa could have a continuation of 4,5 percent GDP (gross domestic product) growth in 2010."

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