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After the financial crisis:

New challenges for international economic governance

and development strategies

Detlef J. Kotte

Head, Macroeconomic and Development Policies, UNCTAD

• Global macroeconomic interdependence:changing demand patterns

• Development strategy:domestic demand

• Institutional reform: exchange-rate system

Macroeconomic interdependence Macroeconomic interdependence --rebalancingrebalancing ? ?

•• Large middleLarge middle--income countries have led income countries have led the recovery the recovery -- China, India and Brazil China, India and Brazil

•• Insufficient domestic demand growth in Insufficient domestic demand growth in Europe and JapanEurope and Japan

PrematurePremature exit exit fromfrom expansionaryexpansionarymacro macro policiespolicies leadsleads to to overrelianceoverreliance on on exports for exports for recoveryrecovery, , shiftingshifting the the burdenburden of of demanddemand stimulus stimulus to to otherother economieseconomies

Current risk:Current risk:

Sustained growth throughexport orientation?

• Global demand is likely to grow more slowly– Slower demand growth in the United

States– Insufficient acceleration of demand

growth in other countries – despiteadjustments in China

• Not all countries can rely on exports simultaneously

Thus:

Growth and development will have to rely more on expansion of domestic demand

Development strategies: Importance of domestic demand

• Higher fixed investment requires

– access to investment finance – low interest rates

• Higher domestic consumption requires

– faster wage growth - in line withproductivity growth

Development strategies: Development strategies: GrowthGrowth--oriented monetary policyoriented monetary policy

•• to keep the cost of investment finance low to keep the cost of investment finance low and at avoiding currency appreciationand at avoiding currency appreciation

•• combined with fiscal policy to stabilize combined with fiscal policy to stabilize demand and public investment to demand and public investment to complement private capital accumulationcomplement private capital accumulation

Development strategies:Development strategies:InvestmentInvestment--friendly financial policiesfriendly financial policies

•• Financial policies to favour investment creditFinancial policies to favour investment credit

– Financial sector development needs to go hand in hand with increasing regulation and supervision

– Public support for investment credit

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Development strategies:Development strategies:InvestmentInvestment--friendly financial policiesfriendly financial policies

• Dismantling all obstacles to cross-border private capital flows is not the best recipe for accelerating fixed investment.

• Surging capital inflows are not necessarily a sign of strength, but a potential source of instability, with grave repercussions for macroeconomic stability and trade.

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Domestic demand growth:Domestic demand growth:Consumption and wagesConsumption and wages

•• In the past: heavy (excessive?) reliance In the past: heavy (excessive?) reliance on exports for growth and employment on exports for growth and employment creationcreation

•• International wage competitionInternational wage competition

•• BUT: Not all economies can create BUT: Not all economies can create employment on the basis of low wagesemployment on the basis of low wages

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Declining wage share: 1980Declining wage share: 1980--20082008

•• Chart 5.1Chart 5.1

Incomes policyIncomes policy to strengthen domestic to strengthen domestic demand and control inflationdemand and control inflation

–– To ensure that mass incomes grow with To ensure that mass incomes grow with rising productivity and generate higher rising productivity and generate higher demand demand

–– To To avoidavoid a a riserise in unit labour in unit labour costscosts

–– PreventsPrevents a drop in the a drop in the wagewage shareshare and and stabilizesstabilizes the the priceprice levellevel

Institutions fostering Institutions fostering a wagea wage--growth nexusgrowth nexus

•• Collective bargaining Collective bargaining

•• Productivity adjusted minimum wages Productivity adjusted minimum wages

•• Public employment schemesPublic employment schemes

•• Support of agricultural incomesSupport of agricultural incomes

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International economic governance

• Encourage active capital-accountmanagement

• Alternative reserve medium ?

• Multilateral rules for exchange-rate management: reduce volatility and avoid misalignment

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Reform of exchange-rate system

• Multilaterally agreed framework for the management of flexible exchange rates

• Objective: stability of real exchange rates at a level that is consistent with a sustainable current-account position.

• Means: automatic adjustment of nominal exchange-rates to differentials in unit labour costs or interest rates

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Exchange rate management accordingto the stable real exchange-rate rule

• Curbs excessive currency speculation of the carry trade type

• Prevents unsustainable current account deficits and currency crisesby excluding long-lasting currency overvaluation resulting from speculation or deliberate policy

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Thank you for your attention

Controlling inflation more effectively through Controlling inflation more effectively through an incomes policy an incomes policy

•• Chart 5.3Chart 5.3

AnnualAnnual growthgrowth rates of unit labour rates of unit labour costscosts and inflation rates, 1970and inflation rates, 1970--20082008

Controlling inflation more effectively through Controlling inflation more effectively through an incomes policy an incomes policy

•• Chart 5.3Chart 5.3

AnnualAnnual growthgrowth rates of unit labour rates of unit labour costscosts and inflation rates, 1970and inflation rates, 1970--20082008

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Intraregional exports are usually more intensive in Intraregional exports are usually more intensive in manufactures than exports to the rest of the worldmanufactures than exports to the rest of the world

Composition and direction of trade, selected regions, 2003Composition and direction of trade, selected regions, 2003--20072007

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Intraregional exports are usually more intensive in Intraregional exports are usually more intensive in manufactures than exports to the rest of the worldmanufactures than exports to the rest of the world

Composition and direction of trade, selected regions, 2003Composition and direction of trade, selected regions, 2003--20052005