THE WORLD ECONOMY in 2016 is in a fragile state, with growth likely to dip below the 2.5 per cent registered in 2014 and 2015. The mediocre performance of developed countries since the 2008-2009 economic and financial crisis is set to endure, with the added threat that the loss of momentum in developing countries over the past few years will be greater than was previously anticipated.
Without a change of course in the former, the external environment facing the latter looks set to worsen, with potentially damaging consequences for both their prosperity and stability in the short to medium term.
Growth in the United States this year is likely to slow down, as the momentum that was built through the quick detoxification of its banking system and a more aggressive use of monetary policy loses traction. Moreover, given its weak underlying employment rate, the number of distressed households with high levels of debt and exporters already struggling with a strong dollar, there are no guarantees that the economy will enjoy a robust period of growth any time soon.
Export surpluses can certainly benefit countries that achieve them, but are ultimately a beggar-thy-neighbour response in a world of insufficient global demand. In the absence of concerted recoveries in the developed economies, international trade is in the doldrums for the fifth straight year.
To date, protectionist tendencies have been kept in check, but risk surfacing if the real causes of this slowdown are not tackled effectively.
The major problem is weak global demand due largely to stagnant real wages. The slowdown of trade has stalled growth in many developing countries, particularly commodity exporters, and recent growth spurts have relied largely on capital inflows. As capital begins to flow out, there is now a real danger of entering a third phase of the financial crisis which began in the US housing market in late 2007 before spreading to the European sovereign bond market.
The commodity cycle is in its second year of a sharp downturn, and the commodity price index is well below the level it was at when the financial crisis hit. Developing countries have greatly increased their share in global exports of manufactures, which grew from around ten per cent in 1980 to nearly 45 per cent by 2014. About one quarter of that trade is South-South, reflecting in part how global value chains have extended the reach of international production networks in some key tradable sectors of the global economy.
These developments, and the trade liberalisation that facilitated them, are widely viewed as a promising indicator of the potential for globalisation and trade to support industrialisation and speed up development. Today’s policymakers can no longer rely on export-led manufacturing alone to generate the kind of growth achieved by the East Asian late industrialisers. This is not to say that countries should stop seeking export markets; rather, they should recognise that a much more nuanced and strategic approach is needed.
They need to be more pragmatic in their choices of products and overseas markets, while also paying closer attention to building domestic and regional markets and to fostering the variety of production, technology and income linkages that an expansion of these markets will require.
Mukhisa Kituyi is Secretary-General of the United Nations Conference On Trade and Development.