In an uncertain global economy, poor countries must innovate in 2015

8 January 2015
Comment

Developing countries have achieved unprecedented economic progress since the millennium. Driven by a buoyant global economy, the number of people living in extreme poverty fell by 700 million between 1990 and 2010. Although more than a billion people continue to live in extreme poverty, this exceptional progress suggests that ending such deprivation is within our grasp.

But risks to the global economy are threatening that vision. The recovery from the financial crisis of 2007 is anaemic, brittle and fraught with uncertainty. Termed by the IMF the ‘new mediocre’, the economic outlook is – at best – for continued stagnation in advanced economies. In China, a key export market for poor countries in the last decade, the economy is rapidly slowing. High levels of unemployment and underemployment, growth in inequality to levels unprecedented since the 19th century, and the impact of environmental degradation and climate change are threatening political and social stability.

For developing countries, becoming increasingly integrated into the global economy has been key to progress in alleviating poverty over the past 15 years. Integration offered access to buoyant international trade and positive financial flows. But for today’s poor countries, the ‘new mediocre’ is blocking their ability to replicate this integrationist path.

Given this, what strategies can poor countries now use to continue reducing poverty?

Firstly, export growth remains vital. No country – ever, in four centuries of economic history – has seen significant economic development without export growth.

Equally important is productivity growth, the basic driver of rising incomes. This growth needs to be achieved in agriculture but also in the manufacturing and service sectors.

But innovation is needed if export and productivity growth are to be achieved in the new economic environment. What are the innovative strategies that might be successful?

Certainly they should include a focus on growth in regional trade. Currently this is low, particularly for the world’s poorest regions of sub-Saharan Africa and South Asia. Increasing regional trade could generate significant growth – without the product development and transport infrastructure costs that more remote markets present.

The rise of new middle-income countries – especially China – may also offer opportunities. Sub-Saharan Africa and South Asia could develop more low-skill manufacturing as wage inflation in middle-income countries elsewhere makes them relatively attractive locations for global companies and supply chains. The new middle classes are also driving increasing demand for new consumer products and services, and these offer alternative export markets to advanced economies.

At the national and global level, policies need to reflect the new realities, guarding against the risks that are building and supporting long-term stable, sustainable economic growth.

Developing countries need to avoid boom-bust cycles and build strong institutions that serve their people. Equally, advanced economies should take responsibility for reforming financial and political institutions so that they are accountable and serve the needs of all of the global community, not just their elites. All countries need to recognise the role that fiscal policy can and should play in managing stable, long-term growth and employment.

As 2015 starts, economic uncertainty and risk have never been higher. But there are opportunities to continue the trend towards eliminating extreme poverty, the first of which is the annual meeting of the World Economic Forum later this month. Rich countries’ concerns about risk and uncertainty must not overshadow the priorities of poor countries where poverty remains concentrated. This means continued reform of the international financial system and trade opportunities for developing countries.

The Forum offers an opportunity to progress this agenda. Let’s seize that opportunity and make sure that the integrationist path remains open for the benefit of all.