Global Economic Prospects and the Developing World

This article argues that a large group of developing countries did relatively well during the Great Recession, thanks to the broader room for countercyclical macroeconomic policies, and that the world economy will continue to be more dependent on the developing world than any we have known in history. However, it also claims that major emerging economies cannot serve in the immediate future as a strong enough alternative engine of world economic growth to the old industrial centers. It also raises major questions related to the future of the world trading system, both in relation to its future dynamics and the transformation of its ‘center–periphery’ character. Given the problems underlying world trade, it argues that the best scenario for the world is one in which major economies focus on their domestic demand growth. Finally, it raises a series of questions related to global imbalances and risks associated with the pro-cyclical pattern of capital flows to developing countries. These problems call for major reforms of the international financial architecture (some now under way), notably reforms of the global monetary system, effective mechanisms of macroeconomic policy coordination and improved regulation of finance, including of cross-border capital flows.

Policy Implications

  • Developing countries should be provided with the appropriate room for maneuver to undertake countercyclical macroeconomic policies.
  • However, policies of self-insurance that have been increasingly used in recent decades, though useful from the point of view of individual countries, can generate adverse global effects, and should be replaced by a better functioning global financial safety net, including fairly automatic balance of payments financing facilities during crises.
  • Under current circumstances, export-led growth by large industrial or developing countries is a major threat to the world economy.
  • Rather than focusing on trade as such, major economies should pursue a strategy of growth as an engine of trade, in which the focus should be on how to encourage dynamic domestic markets, rather than following the trade as an engine of growth’ strategy that was in vogue in previous decades.
  • Running current account deficits should be supported by the international community. However, generating these current account deficits the way they are now being pushed by financial markets, through massive pro-cyclical capital flows, runs the risk of generating future crises.
  • Major reforms of the international macroeconomic and financial architecture are called for, notably reforms of the global monetary system, effective mechanisms of macroeconomic policy coordination and improved regulation of finance, including of cross-border capital flows.
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