CAIRO: Real GDP will grow by 3.5 percent globally in 2010, with Africa growing by an estimated 5 percent, according to a UN report released this week. Emerging market economies in Asia and Latin America are leading the recovery; some achieving double digit growth rates in the first quarter for 2010, according to the United Nations Conference on Trade and Development's (UNCTAD) Trade and Development Report for 2010 — titled “Employment, Globalization and Development,” launched Sept. 14. Asia's GDP is expected to grow by 8 percent and South America by 5 percent, as per UNCTAD estimates. Developing countries should rethink their policies in support of sustained economic progress if their current strategies for achieving growth and creating employment rely heavily on expanding exports, the report warned. It added that none of the US, Chinese, Japanese or European economies will retain their traditional roles as the engines of growth for the global economy, stressing the need for developing nations to focus on sustainable growth through job creation and a reduction in poverty. Commenting on the report and its relevance to Egypt, Mohamed El Oraby, assistant foreign minister for economic affairs, said that in times of mounting challenges and multiple crisis, policies should revert to focusing on real economic activities and refrain from speculative endeavors in financial markets. “Governments should insure that efforts are oriented towards job creation in an attempt to overcome the rise in unemployment, which is becoming a persistent problem that has been exasperated by the current global situation,” he said. “Egypt calls for pro-cyclical development strategies that aim at expanding the capacities of developing countries and in trade, investment and employment as well as encouraging the sharing of best practices,” he added. The report argues that not all countries can succeed with export-led strategies at the same time — some nations will have to be net consumers of exported goods. Global markets are expected to grow at a slower pace compared to before the crisis, posing challenges for export. Meanwhile, competing for export success by keeping labor costs low results in a race to the bottom in wages, which is counterproductive to reducing poverty and creating jobs. Instead, the report finds, countries should try harder than in the past to create a virtuous circle of high investment in fixed capital that leads to faster productivity growth and corresponding wage increases, causing a steady increase in domestic demand and employment. With regards to employment, the report advises the use of lower interest rates and productivity-related wage increases as tools to encourage job creation. Magda Kandil, executive director of the Egyptian Center for Economic Studies, presented the report's findings, and said that what she found most interesting was the focus on fixed investments as well as productivity-related employment creation as mechanisms and for a cycle of real growth, rather than just exports. Talking about the job creation, she said, “There is a tendency in Egypt to keep labor costs as low as possible in order to be internationally competitive. But if wages grow less than productivity, the supply potential expands faster than domestic demand, thereby discouraging innovation and productive investment.” The report argues that this can only be achieved through strategic institution building to enable sustained growth of labor incomes in line with productivity growth. Kandil confirmed this, stressing that the government has not focused enough on the types of investments that spur job creation and increasing people's incomes as part of the value added by these businesses. She linked this with the government's lack of support for small and medium enterprises (SMEs), which constitute 90 percent of businesses in the country. While larger, more prominent companies are well-financed, investment in SMEs remains limited preventing the UNCTAD-proposed cycle from taking off, she added. Kandil said that the benefits of favorable growth rates and development were entirely channeled towards a minute elite segment of the population, preventing any trickling down; however, she did credit the government's monetary and fiscal policies, reforms and stimulus plans at the time of the crisis. She reaffirmed the reports warning that a premature exit from this type of demand stimulating macro-economic policies in developed countries like Egypt might cause a deflationary spiral with attendant slumps in growth and employment around the world. She concluded by calling for policy coordination on an international level, a solution prescribed by the report, as failure to coordinate policies at the G20 level carries the risk of such imbalances remerging, especially among developing countries.
