Policy Briefs

UNCTAD Trade and Development Report 2024: New solutions needed to foster growth and development

The United Nations Conference on Trade and Development (UNCTAD) brought out its much-awaited 2024 Trade and Development Report entitled ‘Rethinking development in the age of discontent’. The report posits that a new way of thinking is required for the world at a time when global growth and global trade are both on a lower trajectory and developmental inequalities are being exacerbated.

UNCTAD avers that the current global growth slowdown has restricted growth options for developing economies, which are increasingly contending with weak investments, rising debt, volatile energy prices and high expectations for health and social services. Although the report notes certain opportunities in energy transition and trade, it contends that developing economies would need to institute strategic policies to leverage these opportunities.

The report focuses on five themes:

• • A new, low normal for the global economy
• • The changing structure of trade and trade policies
• • The rising service economy
• • Financialization in a new commodity cycle
• • The Global South and its quest for long-term development finance

In her foreword to the report, Rebeca Grynspan, Secretary General of UNCTAD notes that ‘important shifts in geopolitics and economic thinking – including the return of industrial policy, multipolar trade patterns and new technological innovations – signal that globalization itself is at an inflection point.’ She states that ‘there are clear opportunities for sustained per-capita growth for the developing world, particularly in renewable energies and critical minerals, South-South trade and the strategic use of new generation industrial policies.’

A new, low normal for the global economy

While developing economies such as India, Rwanda and Viet Nam are growing rapidly, others such as Bangladesh, Cote d’Ivoire and Indonesia are also registering robust growth. Global growth is slated to stand at 2.7% in 2024 and 2025, which is lower than the average of 4.4% achieved during 2004-2007 or 3% in 2011-2018. The three major economies of China, United States and European Union are leading this deceleration, and the Global South economies too achieved only 2.8% average over the past decade.

Developing economies as a whole also saw higher general government gross debt levels, coming in at 68% of GDP in 2023 as compared to 55% in 2019. This constrains their ability to institute expansionary fiscal policies for future growth.

At the same time, inflation has subdued household purchasing power in advanced as well as developing countries. The recent trends of trade tensions, protectionism, home-shoring and securing supply chains reflect social discontent with globalization, according to UNCTAD.

The policy priorities for growth outlined by the report are given below:

• • Addressing jobless growth through structural diversification, social protection and inclusive growth strategies;
• • Reducing the costs of finance and lowering public debt in development countries;
• • Adopting a gradual approach to inflation to give time for demand growth to incentivize investments.

The report states that three factors need to be considered for a higher growth trajectory – first, higher growth will raise demand for exports from developing countries; second, foreign investment will no longer be attracted by low-cost labour; and third, price volatility in new energy technologies and transportation will affect trade.

Developing countries should therefore institute modern industrial policies with a focus on climate conscious models.

The changing structure of trade and trade policies

UNCTAD projects global trade in goods and services to expand by about 2% in 2024, led by merchandise trade. Domestic priorities, climate commitments and new industrial policies are shaping global trade, and services trade is growing more robustly than goods trade.

Following the global financial crisis in 2008, global trade as a percentage of global GDP has fallen from its peak of 25% and was further disrupted due to the pandemic, affecting the development prospects of countries reliant on trade. In 2023, global merchandise trade contracted even as global growth rose, the first time in the last four decades that these two indicators diverged. However, trade in services grew and can be expected to emerge as a new growth engine.

At the same time, manufacturing employment has largely fallen in developing countries, with rising informality and worsening productive capacity. According to UNCTAD, these trends imply that manufacturing-led exports growth as a key driver of growth has weakened.

Within this scenario, the policy prescriptions include firstly, coordinated policy responses at both national and international levels. Secondly, developing countries could reduce their vulnerabilities by strengthening domestic industries and investing in renewable energy. International agreements should prevent trade conflicts and guarantee access to global markets and financing for developing countries. Third, South-South trade can help developing countries which should negotiate favorable trade and financing arrangements.

To manage the risks of protectionist policies in advanced economies, the World Trade Organization needs to reform rules in industrial subsidies and trade barriers and encourage South-South trade.

The rising service economy

With the centrality of manufacturing as a growth driver moderating over the years and its role in climate change gaining attention, services-led exports are rising faster than goods exports. However, the rise in investments in intangible assets such as brands, designs, patented technologies and supply chain knowledge could accentuate asymmetries between the North and the South economies.

Global firms increasingly rely on intangible assets for supply chain participation and these investments have surged in the last 15 years to USD 6.9 trillion in 2023 compared to USD 4.7 trillion investments in physical assets. Creative services are dominated by advanced countries with 80% of exports of USD 1.4 trillion in 2022.

The report states that current trade in services will be unable to generate quality jobs in developing countries and therefore, a three-pronged strategy would include, firstly, encouraging lower-skill job creation by larger firms in non-tradable services; secondly, supporting smaller enterprises in investments for building their productivity; and thirdly, looking for technologies which would not supplant low-skilled workers in services sectors.

Financialization in a new commodity cycle

New commodities are in demand due to the energy transition process and the prices for minerals such as lithium, cobalt and nickel are subject to strong price volatility, depending largely on geopolitical tensions. Countries exporting these critical minerals aim to securitize their production and have imposed export restrictions. Due to the rising demand for critical minerals, developed countries too are strengthening domestic exploration and looking for sources in emerging economies. At the same time, countries dependent on coal and petroleum exports are likely to face challenges in expanding exports as demand for oil and gas is decreasing.

With the rising importance of financial cycles in determining commodity prices, emerging economies will find increasingly vulnerabilities that they must guard against. UNCTAD suggests that resource-dependent emerging economies should focus on long-term diversification and redistribution and a comprehensive framework of financial regulation. Second, they must work to balance the growth of extractive sectors and financialization by promoting domestic revenues and raising oversight of multinational corporations.

The Global South and its quest for long-term development finance

The report points out that only 22 developing countries have investment grade ratings and all of them suffer from an inability to raise adequate capital for financing development. It states that the global financial architecture has not changed in the last 80 years since its inception, and as advanced countries are turning to reindustrialization and green transition, capital for developing countries is being restricted. Hence, it calls for reforming of financial markets to meet the financial needs of developing economies. The Global South faces the risk of a development crisis, given the rising debt service imperatives.

UNCTAD has previously recommended many actions for institutional reform of the global financial architecture. These relate to timely and flexible liquidity, debt relief, sovereign debt restructuring and a wider scope for development lending. Such reforms are increasingly urgent and without these, the world will suffer from a declining propensity for growth.

Key actions would include enhancing domestic revenue sources, expanding tax revenues from cross-border activities, tackling illicit financial flows related to trade, and international tax cooperation. A comprehensive platform for global tax governance would address issues such as base erosion and profit shifting, tax avoidance and illicit financial flows.

The policy recommendations for long-term development finance include effective policy cooperation within the Global South along with dialogues with the Global North; two, inclusiveness and transparency in global institutions; three, international tax reforms and reforms of the global financial architecture; and four, addressing arbitrage and inequalities and risks of differential tax regimes.

To conclude, the UNCTAD report reflects several new trends that are visible in the global economy and are accentuating inequalities. With emerging economies facing increasing developmental risks and restrictions from these trends, there is need for the world to come together to avert crisis situations that will place the entire global economy at risk of subdued growth. The G20 would play a key role in driving such dialogues and reforms.

Read the full report here.