The Trade and Development Report 2008, subtitled "Commodity Prices, Capital Flows and the Financing of Investment” highlights the paradox that the “capital poor” developing world is exporting capital to the “capital rich” developed countries.

This "puzzle", which defies mainstream economic theory, is all the more intriguing as many capital-exporting countries have been achieving higher rates of investment and growth than those that continue to rely on net capital imports. Against this background the Report suggests to shift the focus in financial policies from households "putting more money aside" and imports of "foreign savings", to the reinvestment of profits and credit creation through the domestic banking system. As shown by an increasing number of countries in recent years, dependence on foreign capital inflows can often be avoided by policies aiming at a "competitive" exchange rate.

In other cases, however, large increases in official development assistance are indispensable not only to foster the achievement of the Millennium Development Goals by 2015, but also to improve infrastructure and increase productive capacities, a condition for sustained growth, employment generation and poverty reduction beyond that date.

In its analysis of global economic prospects, the Report says that uncertainty and instability in international financial, currency and commodity markets are contributing to a gloomy outlook for the world economy and present considerable risks for the developing world. The situation would be exacerbated if monetary policy becomes more restrictive in response to the price effects of commodity imports, rather than providing an expansionary stimulus to counter the recessionary tendencies.

Download Trade and Development Report 2008

PDF format, 4.1MB, 231Pages.

Report by the secretariat of the
United Nations Conference on Trade and Development
UNITED NATIONS
New York and Geneva, 2008

Visit Trade and Development Report 2008 Website

OVERVIEW:

Since 1999, many developing countries have registered strong improvements in their external balances, and their aggregate current account has swung into surplus. As a result, as a group they have become net exporters of capital to developed countries. Many of them, particularly a number of fast growing exporters of manufactures, owe this situation to their successful global integration and to a reorientation of their macroeconomic policies towards a greater focus on competitive exchange rates. In other countries, substantially increased earnings from primary commodity exports have also led to stronger current-account positions.

But the situation is fragile: uncertainty and instability in international financial, currency and commodity markets, coupled with doubts about the direction of monetary policy in some major developed countries, are contributing to a gloomy outlook for the world economy and could present considerable risks for the developing world. Many developing countries that have seen improvements in their terms of trade in recent years remain highly vulnerable to a possible prolonged global slowdown and an end to the commodity boom. For a number of them, higher prices of their net food and energy imports have already created a heavy burden, particularly for the poorer segments of their populations, seriously jeopardizing progress towards meeting the Millennium Development Goals (MDGs) set by the United Nations in 2000.

This is why development policies need to continue to focus on diversification and sustained industrialization based on higher investment in new productive capacities, especially in agriculture and manufacturing, and on the provision of adequate, reliable and cost-effective financing of such investment. Recent experience in several fast growing developing countries has shown that, from a macroeconomic angle, this does not always require a current-account deficit – that is, a net capital inflow – provided that domestic monetary policy and the local financial system offer a favourable environment for long-term financing of private firms. In many developing countries this requires a stronger focus on improving the conditions for reinvestment of company profits and for an enhanced role of the banking sector in financing investment.

However, a number of poorer countries that are unable to boost export earnings owing to structural constraints continue to rely on foreign capital inflows to finance imports of essential capital goods. This implies that official development assistance (ODA) will need 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 generate higher per capita income growth and employment for sustained development beyond the MDG deadline of 2015. ...

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