Contemporary Issues in Development Economics

Timothy Besley

• Publisher: Palgrave Macmillan
• Year: 2016
• Print ISBN: 9781137579447, 9781137529732
• eBook ISBN: 9781137529749
• Topic: Business
• Subtopic: International Business
• Index: Business

This IEA volume brings together a set of essays written by leading authors on themes relevant to the study of economic development. The book covers a range of topics many of which are relevant to policy issues. The contributors bring new insights from empirical research in a range of economies with chapters including discussions of the UN development agenda, fiscal policy in Latin America, poverty data in Africa and Jordan, and monetary policy in South Africa.

Contemporary Issues in Development Economics is an essential read for researchers, scholars and policymakers interested in economic development in low- and middle-income countries.

1

World Economic Outlook and the Challenges to the UN Development Agenda Beyond 2015

Pingfan Hong¹

1.1 Strengthening the global recovery

More than five years after the eruption of the global financial crisis, the world economy has not recovered to running at full capacity. According to the latest update of the World Economic Situation and Prospects by the United Nations (United Nations, 2014a), the world output is expected to grow in 2014 and 2015 at the rates of 2.8 per cent and 3.2 per cent respectively. These rates are far from sufficient to close the output gap and recuperate the job losses caused by the financial crisis.

Developed countries: a secular stagnation?

On a positive note, for the first time since 2011, all major developed economies in North America, Europe and developed Asia seem to have aligned together on the same upward growth trajectory in 2014–2015. Hopefully, this could generate a virtuous cycle to reinforce the economic recovery in these economies.

In the United States, the growth momentum built in the second half of 2013 faltered in the first quarter of 2014, but mainly because of the extremely cold and prolonged winter. Growth is expected to pick up going forward. Both private consumption and business investment are expected to increase at a stronger pace than in the past two years, along with a continued improvement in the labour market and the housing sector. Despite the phasing out of quantitative easing (QE), monetary policy is expected to remain highly accommodative during 2014 and into 2015. Fiscal policy in 2014–2015 will be less restrictive than in previous years. GDP is expected to grow in the range of about 2.5–3.0 per cent in 2014 and 2015.

In Japan, the fiscal stimulus package introduced in 2013 has supported growth, but this stimulus is set to fade out. In April 2014, the government increased sales tax. Although the government also injected a supplementary budget spending, the magnitude is not enough to offset the negative impact of higher taxes. The QE in Japan has ended deflation by pushing the inflation rate towards 2 per cent. However, wage growth has been limited and may not provide sufficient support to keep inflation close to the target of 2 per cent in future. The QE has also led to a significant depreciation of the Japanese yen vis-à-vis other major currencies, but has so far had limited effects on boosting exports. Public debt remains extremely relative to GDP. Japan’s economy is expected to grow by 1.4 and 0.9 per cent in 2014 and 2015, respectively.

Western Europe emerged in mid-2013 from a protracted recession. Systemic risks and financial tensions in the region have subsided significantly, but not disappeared completely. A number of countries in the euro area, which were mired in, or on the brink of sovereign debt, have returned to capital markets to issue bonds at the relatively low costs that were present before the crisis. Fiscal austerity programmes have lessened in intensity and become less of a drag on economic growth. However, the recovery remains weak in the euro area, and fragilities remain in both the banking sector and the real economy. The inflation rate is at extremely low level, triggering concerns about the risk of deflation. The unemployment rates remain elevated in many of the euro economies. GDP in Western Europe is expected to grow by 1.5 per cent in 2014 and 1.8 per cent in 2015.

The recovery in the new European Union States’ members is also firming against the backdrop of stronger activity in Western Europe. This group of countries is expected to grow by 2.4 per cent in 2014 and by 2.9 per cent in 2015.

Economies in transition: suffering from geopolitical tensions

Among the economies in transition, the growth projections for the Commonwealth of Independent States (CIS) have been reduced notably, mainly because of the political crisis in Ukraine and the associated geopolitical tensions in the region. For example, Ukraine is already in a recession. Growth for the Russian Federation is expected to be less than 1 per cent for 2014.

The economic sanctions the United States and Europe have targeted on the Russian Federation, as well as Russian retaliations, have so far had limited direct impact, but had notable indirect impact through market confidence and capital flows.

Depreciation of the Russian ruble added to inflation, undermining private consumption, and the increases in the policy interest rates further curb private investment. By contrast, growth in the CIS members in Central Asia is expected to continue at about 5 per cent. For example, in Kazakhstan, high fiscal spending to offset the impact of currency devaluation on household consumption and improved competitiveness should sustain the economic momentum.

For the transition economies in South-Eastern Europe, growth is projected to accelerate to 2.0 per cent in 2014 and to 3.1 per cent in 2015, but these growth rates are still below pre-crisis growth levels and are insufficient to address the region’s structural needs of reindustrialization and high unemployment rates, especially among the young.

Developing countries: shifting to a low gear

The economic situation has also deteriorated recently in a number of developing countries. Growth in developing countries is expected to be 4.7 per cent and 5.1 per cent for 2014 and 2015, respectively. Developing countries as a whole will continue to contribute a large proportion of global growth. However, this growth trajectory is lower by 2 percentage points than that registered by the developing countries for a number of years prior to the global financial crisis.

As demonstrated in the two recent episodes of financial turbulence in mid-2013 and early 2014, a number of developing countries are vulnerable not only to the international spillovers from the adjustments made to monetary policies by major developed countries but also to quite a few country-specific challenges, including structural imbalances, infrastructural bottlenecks, increased financial risks, incoherent macroeconomic management and political tensions.

Among developing countries, Africa will continue to see solid growth of 4.2 per cent in 2014, and 5.1 per cent in 2015. But political problems in a number of African countries have led to a downward revision in their growth projections. In Libya, for example, disruptions to oil output and exports will be a major drag on growth, underpinning a significantly lower growth rate for North Africa than previously forecast. Growth in many African countries is insufficient to resolve severe labour market problems, such as high unemployment rates, widespread underemployment, low earnings and gender disparities in earnings and employment opportunities. Export growth is expected to rise after slower growth in 2012 and 2013, while import growth will continue to remain strong, propelled by large infrastructure projects.

East Asia is expected to grow at 6 per cent for 2014 and 2015, still the highest among developing regions. China’s growth rate is expected to moderate further over the next few years, with GDP projected to expand by 7.3 per cent in 2014 and 7.1 per cent in 2015, down from 7.7 per cent in 2013, and notably lower than the 10 per cent China registered in the past three decades. A pace of growth at about 7 per cent will become the new norm for China for the medium term. China has entered a new stage of development, facing a number of new challenges for making its economy more inclusive, balanced and sustainable. To do so, the government has launched a new round of institutional reforms for the next decade, not only in economic, but also in social, political and environmental institutions (Xinhua, 2013). The results of these ongoing reforms remain to be seen. In East Asia, the only economy for which we have recently lowered the growth projection is Thailand, because of the continuing political unrest.

South Asia is expected to grow by 4.6 per cent in 2014 and 5.1 per cent in 2015, after remaining at a near two-decade low in 2013. India’s economy is forecast to grow by 5 per cent in 2014 and 5.5 per cent in 2015, slightly up from 4.8 per cent in 2013. The outcome of the latest election has removed some policy uncertainties, but we need to monitor closely the policy and reform initiatives of the new government. Several economies in South Asia, including India, have seen lower inflation, stronger external balances and more stable currencies recently. These are expected to support recovery in business investment and household consumption. The strength of the recovery in South Asia will, however, continue to be restricted by structural impediments, including energy and transport constraints, political unrest and violence. Sri Lanka remains the fastest growing economy in South Asia, with annual growth forecast to stay above 7 per cent in the outlook period.

In Western Asia, internal instabilities and lower oil exports continue to shape the economic outlook. GDP in the region is expected to grow by 3.6 per cent in 2014 and 4.4 per cent in 2015. The member States of the Gulf Cooperation Council have been on a stable growth path, despite weak oil prices and exports. Expansionary fiscal policies in GCC countries will continue to economic activities. In contrast, the economies of Iraq, Jordan, Lebanon, the Syrian Arab Republic and Yemen have been hampered by continuing political instability, social unrest, security incidents and geopolitical tensions. The war in the Syrian Arab Republic has been taking a particularly heavy human toll and has led to the widespread destruction of crucial infrastructure. An extraordinarily large number of refugees pose severe challenges for neighbouring countries. In Turkey, the surge in capital outflows, the depreciation of the currency and the sharp increases in policy interest rates are expected to reduce its GDP growth to about 2 per cent in 2014, before bouncing back in 2015.

Economic growth in Latin America and the Caribbean is expected to continue at a subdued pace in 2014, at about 2.6 per cent. Growth in South America is decelerating markedly. Argentina is experiencing a noticeable slowdown amid decreasing business confidence and persistent inflation pressures, while Venezuela is likely to enter into recession. Brazil’s economy continues to expand at a very moderate rate of 1.7 per cent in 2014, with weak prospects for investment demand. Other South American countries, such as the Bolivia, Colombia and Peru, continue on a more solid growth path. Economic growth in Mexico and Central America is strengthening, benefiting from the pickup in activity in the United States, with Mexico expecting to grow by 3.2 per cent in 2014, accelerating from a growth of 1.1 per cent in 2013.

The least developed countries (LDCs) are expected to strengthen growth in 2014 and 2015. More than one half of the LDCs are forecast to expand by at least 5 per cent in 2014. Several of them have registered robust growth rates above 7.0 per cent since 2012, including Sierra Leone, the Democratic Republic of the Congo, Liberia, Ethiopia, Mozambique and Zambia. Despite the strengthening economic conditions, the development prospects in the LDCs remain severely constrained by many structural factors, such as recurring political conflicts, high vulnerability to adverse weather patterns and commodity price fluctuations, lack of productive diversification and fragile institutions.

For instance, in the Central African Republic, the political situation will continue to depress economic development. In Equatorial Guinea, which is heavily dependent on its oil sector, declining oil production will underpin an economic contraction in both 2014 and 2015; this will further cripple the prospects for any meaningful reduction in the high poverty level that persists despite the country’s high per capita income level. In Yemen, despite higher GDP growth in 2013 mainly due to foreign aid, oil and agricultural output has been restricted by internal violence and infrastructure weaknesses.

Addressing these structural issues poses a major challenge for the LDCs. In this context, they also face the need to build and enhance their institutional capacities, which constitutes a precondition for the effective implementation of policies supported by international aid and the provision of public goods and services.

International trade: sluggish

International trade has been growing at a sluggish pace in the past two years, only at 2–3 per cent, compared with the long-term trend of 7 per cent.

A weak import demand from major developed countries can explain part of the sluggishness in trade activity, but the lack of progress in the multilateral trade negotiations over the past decade may have reduced the momentum in creating new trade flows in the world economy.

The successful outcome of the Ninth WTO Ministerial Conference in December 2013 in Bali has to some extent renewed faith in the multilateral trading system (WTO, 2013).² However, there remains much unfinished business under the Doha Round.

Meanwhile, the mushrooming of the regional trade agreements may boost regional trade, but can in the long run make the international trading system more uncertain and fragmented, and less able to provide a coherent, development-oriented framework to support development for all.

Unemployment: a key policy challenge

High unemployment remains a key challenge for many countries in the world.

Among developed countries, the unemployment rates remain elevated in a number of European economies. The worst cases are found in Spain and Greece, in which the unemployment rates stand at about 25 per cent, and youth unemployment rates are more than double this rate. The unemployment rate in the United States has continued to improve, but a large portion of the improvement is owing to a drop in labour force participation.

The employment situation is mixed across developing countries. The unemployment rates in East Asia are generally low, but, in contrast, North Africa and Western Asia are challenged by high unemployment rates, particularly among the young.

Inflation: remaining tame

Inflation remains tame worldwide, partly reflecting output gaps, high unemployment and financial deleveraging. Inflation is not an issue in developed economies. In fact, the risk of falling into deflation has become a concern for Europe. Among developing countries and economies in transition, high inflation is found in only a dozen economies mainly in South Asia and Africa, plus a few scattered in other regions.

Uncertainties and risks

The baseline outlook presented abov...

Table of contents

• Cover
• Title Page
• Copyright
• Contents
• List of Figures
• List of Tables
• Preface
• Notes on Contributors
• 1.  World Economic Outlook and the Challenges to the UN Development Agenda Beyond 2015
• 2.  Fiscal Policy, Income Redistribution and Poverty Reduction in Latin America: Bolivia, Brazil, Chile, Costa Rica, El Salvador, Guatemala, Mexico, Peru and Uruguay
• 3.  “Small Miracles” – Behavioral Insights to Improve Development Policy: The World Development Report 2015
• 4.  Culture and Collective Action
• 5.  Is Poverty in Africa Overestimated Because of Poor Data?
• 6.  Filling Gaps when Poverty Data are Missing: Updating Poverty Estimates Frequently with Different Data Sources in Jordan
• 7.  The Social Pension and Time Allocation in Poor South African Households
• 8.  Assessing the Impact of Social Grants on Inequality: A South African Case Study
• 9.  Speculative Capital Flows, Exchange Rate Volatility and Monetary Policy: South African Experience
• 10.  Challenges of Urbanisation in India
• 11.  Are Foreign Direct Investments in the Balkans Different?
• 12.  Time-consistency and Dictator Punishment: Discretion Rather than Rules?
• Index