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The political economy of development
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                           PRESS RELEASE
                                                      25 August 1997

         The contents of this Report must not be quoted or
        summarized in the press, on radio, or on television,
                      before 15 September 1997
                           22:00 hrs. GMT

     The big story of the world economy since the early 1980s has been
increasing integration through the unleashing of market forces.  But 
there is also another story, one that is attracting increasing attention
in the 1990s .... social and economic divisions among, and within,
countries are widening.  

     This poses a serious threat of a political backlash against
globalization, one that is as likely to come from the North as from
the South. Such a backlash could reverse beneficial reforms achieved in
developed and developing countries over the past decade. And, it may 
provoke a roll back of some of the more longstanding achievements of 
economic integration. The 1920s and 1930s provide a stark, and
disturbing, reminder of just how quickly faith in markets and economic 
openness can be overwhelmed by political events.     

     Evidence is mounting that slow growth and rising inequalities are
becoming more permanent features of the world economy. This conclusion 
from UNCTAD, documented in its Trade and Development Report 1997 (1)  
(216 pages),  is a wake-up call to policy-makers everywhere. UNCTAD,
however, also argues that it is possible to design policies to manage
integration into the world economy that can reconcile rapid growth
and distributional objectives.

Amber lights switching on around the globe

     The TDR 1997 documents, in detail, seven troublesome features
of the contemporary global economy:

     Although there are significant exceptions at the country level, 
     overall the world economy is still growing too slowly -- whether
     to generate sufficient employment with adequate pay or 
     to alleviate poverty (see TAD/INF/2712); 

     Gaps between developed and developing countries, as well as within 
     the latter, are widening steadily.  In 1965, average GNP per capita
     for the top 20 per cent of the world's population was 30 times that 
     of the poorest 20 per cent; 25 years later, in 1990, the gap had 
     doubled -- to 60 times;

     The rich have gained everywhere... and not just in comparison to 
     the poorest sections of society; "hollowing out" of the middle-class 
     has become a prominent feature of income distribution in many 
     developing and developed countries; 

     Finance has been gaining an upper hand over industry, and rentiers
     over investors. In some developing countries, debt interest payments 
     have reached 15 per cent of GDP; trading in existing assets is thus 
     often much more lucrative than creating wealth through new 

     The share of income accruing to capital has gained over that 
     assigned to labour. Profit shares have risen in developed and 
     developing countries alike. In four out of five developing 
     countries, the share of wages in manufacturing value added
     today is well below that in the early 1980s;

     Increased job and income insecurity is spreading. As rising
     interest charges have eaten into business revenues, corporate
     restructuring, labour shedding and wage repression have become 
     the order of the day in much of the North as well as parts of 
     the South;

     The growing wage gap between skilled and unskilled labour is 
     becoming a global problem. Already an established trend in many
     developed countries, absolute falls in the real wages of unskilled
     workers   20 to 30 per cent in some cases -- have been common in 
     developing countries since the early 1980s.

     There should be no doubt, UNCTAD warns, that the burden of 
     international economic disintegration, if it were to take place, 
     would -- as during the Great Depression -- be borne by those who 
     can least afford it.
Managing countries' entry into the world economy... 

     Contrary to much current economic thinking, UNCTAD says that 
increased global competition does not automatically bring faster growth
and development. Nor do growth and development automatically bring about 
a reduction in inequality. No economic law exists that will make 
developing economies converge automatically towards the income levels 
of developed countries if they only open up.
     Rather than the "big bang" approach widely adopted in recent years 
in many parts of the world, UNCTAD urges a carefully phased 
liberalization into the world economy -- tailoring the process to the 
strength of the economy concerned,  as well as that of the country's 
institutions. Government policies devised to manage integration into 
the world economy can also be put to good effect in reconciling rapid 
growth and distributional objectives, it argues.   

...and managing profits for development

     The prevailing notion that, faced with globalization forces, 
policy-makers in developing countries may have lost their room to 
pursue development objectives actively is not accepted by UNCTAD. 
Their role is as important as ever, the TDR 1997 says, as "growth 
and income distribution both depend on how profits are managed".

     In this regard, the TDR extends UNCTAD's existing work on the 
East Asian economies in new directions. In most of those countries, 
it reports, policies designed to provide incentives to private firms
to retain profits and invest them in new equipment, capacity and jobs
have been critical in establishing a strong profit-investment nexus. 
Closing unproductive channels of wealth accumulation and discouraging
luxury consumption have also been essential.    
     Experience shows that policies designed to manage profits so as to
accelerate growth can also serve to manage distribution. It is important, 
though, that efforts to manage emerging inequalities be included at the 
outset when designing development strategies, as was successfully done 
in some, although not all, newly industrializing East Asian countries.  
Profits, investment and income inequality

     "If speculative talk about converging incomes and living standards 
is to cede place to a realistic policy agenda, it is necessary to have 
a firm grasp of what drives economic growth in a market economy.  That 
role belongs to profits".  

     From this starting point UNCTAD offers a distinctive analysis of 
the links between profits, income levels and investment in today's 
globalizing world. 

     Turning higher profits into general improvements in standards of 
living hinges on the creative energy of entrepreneurs. But, the "animal 
spirits" of the entrepreneurial class are not necessarily being unleashed 
on creating new productive assets. Instead, they are often buying and 
selling second-hand assets with an eye to large speculative gains.  
     Some of the factors making for greater inequality in a globalizing 
world at the same time deter investment and slow down growth.  Rapid 
liberalization has delinked finance from trade and investment.  An 
increased concentration of wealth in the hands of a few is associated 
with stagnant investment, rising unemployment and reduced pay. 

Redressing trade liberalization biases 

     Effective economic reforms in the developing world are only one 
part of the equation required to close income gaps across the world 
economy.  Another part is an enabling global environment. 

     "Among the asymmetries of globalization is the fact that 
liberalization of the world economy has proceeded so far in a 
lopsided way that tends to prejudice the growth prospects of 
developing countries by discrimination against areas in which 
they can achieve comparative advantage."

     Progressive redressing of these biases remains an important 
challenge for the whole international community.  In future trade
negotiations, it is necessary to restore balance to the agenda in 
such a way that would speed up the liberalization of sectors of 
traditional interest to developing countries, and at the same time
to identify new areas in goods and/or services capable of providing
additional trading opportunities.

                            ** *** **
(1) The Trade and Development Report, 1997 (Sales No. E.97.II.D.8) may 
be obtained at the price of US$48, from United Nations Publications/Sales
Section, Palais des Nations, CH-1211 Geneva 10, Switzerland, 
fax: 41 22 917 0027, e-mail:, 
or from United Nations  Publications, Two UN Plaza, Room DC2-853, 
Dept. PRES, New York, N.Y. 10017, U.S.A., 
telephone: 1 212 963 83 02 or 1 800 253 96 46, 
fax: 1 212 963 34 89, e-mail: 
For more information, please contact Yilmaz Akyuz, Chief, Macroeconomic 
Section, Division on Globalization and Development Strategies, UNCTAD, 
on telephone: 41 22 907 5841, fax: 41 22 907 0274, or 
e-mail:; or Carine Richard-Van Maele, 
Senior Press Officer of UNCTAD, on telephone: 41 22 9075816/28, 
fax: 41 22 9070043; or