UNCTAD’s Trade & Development Report, 2012: time for a rethink on the economics of austerity?

Against the backdrop of continued global economic gloom in the global North, UNCTAD’s latest annual report, Trade and Development Report 2012: Policies for Inclusive and Balanced Growth, published today, has worrying news for high growth developing countries who had, the report suggests, largely recovered ground since the onset of the global financial crisis (GFC) in 2007-08.

Continued (and growing) instability in the Eurozone and other areas is still as contagious as ever, threatening the ability of developing nations to sustain their own levels of growth. The report comes on the back of similar analysis from the OECD at the start of the month. Hardly surprising that Africa is susceptible to shocks in the global, and especially European, system, of course. With 62.4% of all Mozambique’s exports, 36% of Malawi’s and almost 30% of Ethiopia’s (to name but three countries)  exports going to the EU, recession there will inevitably hit these markets hard.

However, the impact of contagion is only one aspect of the danger to developing economies. Interestingly, the UNCTAD report highlights the destabilising influence of what it terms ‘flawed’ structural reform policies being undertaken in the global North (and especially Europe). ‘Those reforms are all too often coded language for labour market liberalisation including wage cuts, a weakening of collective bargaining and greater wage differentiation across sectors and firms.’ [iv]

Bad news, of course, for the British government which relentlessly pursues Plan A in the face of increasing criticism and calls for a more nuanced approach than cut, cut, cut. UNCTAD’S prescription largely follows the outline of the various Plan Bs which call for the state to play a heightened counter-cyclical role.

There are a number of interesting areas covered by the UNCTAD recommendations, interesting not least because they have a certain resonance with recent events and debates.

Pay me my money down

Firstly, the issue of income inequality. Speaking to the Stock Exchange earlier this month, Ed Milliband launched a new Labour theme: pre-distribution. Horrible word, but in essence, this argues for addressing inequality through policies designed to reduce the need for post-taxation redistribution: such as access to education from early years, access to health services, and perhaps most importantly efforts to increase wages.

For UNCTAD, raising incomes is important for addressing growing levels of income inequality. The report calls on governments to pursue an income policy, as well as employment, fiscal, monetary, productive, etc policies. Such a policy would, it suggests, see wages rising in line with average productivity, and adjusted for inflation (importantly, income policy would be forward looking to projected productivity and inflation targets, not solely based on the previous period). Legal minimum wages should be established (and at meaningful levels).

Public spending to support access for essential goods and services would also be a key feature. ‘Well targeted social transfers and the public provision of social services’, it argues, ‘can serve to reduce inequality of disposable income’. [xiv]. So governments should spend money on education, but also make sure there are increased job opportunities for school leavers; public employment schemes address both unemployment and wider income through establishing a minimum wage floor; and concessional lending to small urban and rural producers which can help boost productivity.

The importance of wage levels have been brought home over the summer months through a series of strikes by public sector workers, such as those by teachers and medical professionals in Tanzania and Kenya. The potential outcome of growing income inequality was perhaps most tragically seen in the terrible events at Marikana, where low wages fuelled the anger that undermined trust in the National Union of Miners and the rise of the Associated Mining and Construction Union as a new representative voice of some, at least, of South Africa’s miners.

The banker man grows fatter

Another issue from the report which has become more prevalent over the past year or so in international development debates, is that of taxation. The report calls for the taxation of ‘rentier incomes and incomes from capital gains at a higher rate than profit incomes from entrepreneurial activity’ [xiii]. It also suggest that the policy of offering tax concessions to foreign direct investment is ultimately counter-productive. Certainly, there is good evidence that offering tax concessions to encourage investment has a significant impact on national economies: Odd-Helge Fjeldstad at the International Centre for Tax and Development, suggests tax exemption of this type in Tanzania represents a loss of around 6% in GDP.

In a section designed to make those heading international mining companies nervous, the report also calls for governments of resource-rich countries to take ‘their fair share of commodity rents, especially in the oil and mining sectors’ [xiii]. In other words, governments should increase royalties and taxes from international mining companies to ensure national citzens benefit from the current commodity price boom. Expect some strong counter-claims as to why this is either not possible, not advisable, or pleas that the extractive industries sector is already paying its fair share. But with new oil and gas discoveries seemingly being made every day, the rush to exploit African natural resource wealth would in reality be unlikely to be seriously slowed by the prospect of higher rents (no matter how much some companies may threaten such outcomes).

A chance to make it good somehow?

Whilst the report is unlikely to keep British Chancellor George Osborne up at night (I’m not sure UNCTAD’s criticisms will have the same impact as, say, the IMF – which has similarly called for greater public spending to boost the economy), it does cut against the current pro-private sector / pro-market approach of Coalition Government international development policy. Andrew Mitchell adopted a much stronger pro-private sector approach within DFID, seeing the private sector as the key engine of economic growth and job creation. For example, giving evidence to the Select Committee on Economic Affairs in January 2012, Mitchell said:

… we are very clear that the private sector, wealth creation and economic growth are the engine of development. After all, 90% of all the jobs created around the world are created by the private sector, so that has been our priority. [249]

Freeing up the trading system’ will lead to increased economic growth, wealth creation and ‘lift people out of poverty’. [228]. The ‘right economic policies’ for development, according to DFID, are focused on liberalising policies, such as introducing ‘competitive markets’.

DFID is not alone in looking to the kinds of structural reform identified as potentially destabilising by UNCTAD upon aid recipient governments. Whilst many, including DFID, have encouraged increased public investment in some areas, donor have also pushed hard for reforms that may be holding back pro-poor growth, increasing inequality, and as a result heightening aid dependency.

There is unlikely to be much, if any, roll-back of the current pro-private sector approach by DFID under the new minister. But with yet another report questioning certain aspects of the approach, surely the time for a re-think is here.


About Mike Jennings

I am Reader in International Development and Head of the Department of Development Studies at the SOAS, University of London. I research, teach and write on Africa, and the history and politics of international development in sub-Saharan Africa. Research areas include: - The history of development in Africa, from the late nineteenth century to the current day - Politics of East Africa (Kenya, Tanzania and Uganda) - the role of non-state providers (NGOs, FBOs and self-help groups) in welfare service provision - Social aspects of health, including HIV and AIDS, and malaria
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