FROM TRANSITION TO STRUCTUAL TRANSFORMATION
The transition countries have made remarkable progress in the past quarter century. Although outcomes of their development vary in terms of economic system and economic growth. In the turbulent global economic environment some gradual reformers have demonstrated bigger resilience to economic crises, higher average growth while early successful reformers have shown a mediocre growth, with larger budget and account deficits, and unemployment.
According to UNCTAD's latest estimates, global output decelerated to 2.2 per cent in 2016, down from 2.6 per cent experienced in both 2014 and 2015. The global trade is down to 1.3 per cent over the year in volume terms, compared to 7 per cent before the crisis. The loss of dynamism in the advanced economies, combined with low commodity prices and global financial instability, is having knock-on effects on most developing countries and transition economies.
Following a 2.8 per cent contraction in 2015, the economic activity in the transition economies is expected to recover in 2017 and 2018, with aggregate GDP expanding at 1.4 per cent and 2.0 per cent, respectively. These economies have entered a period of tentative stabilization. While output continued to decline in several countries in 2016, the aggregate indicators of the region started to show some improvement.
On the positive side, stronger links with China, e.g., within the framework of the “Belt and Road” initiative, will contribute to an upgrade of the regional infrastructure and have positive spillover effects. Thanks to continuing robust capital accumulation, growth in Central Asia will exceed the CIS average.
FDI flows also rebounded in the region, including owing to an exceptional rise in FDI flows to Kazakhstan – which have been more than doubled, to $9 billion, due mostly to an increase in mining exploration activities and interest from new investors. The project, which could span a decade of work, is expected to cost up to $36.8 billion and to produce new oil by 2022. In addition, agriculture and related businesses are targeted. For example, Chinese companies promise to invest $1.9 billion in Kazakh agriculture.
According UNCTAD Investment trends monitor 2017 at the regional level, falling flows of FDI to Europe (-29%), Developing Asia and Oceania (-22%), Latin America and the Caribbean (-19%) and Africa (-5%). In contrast, FDI flows rebounded among transition economies (38%). The FDI to transition economies are forecast to rise moderately in 2017, to about $80 billion, supported by the bottoming out of the economic downturn, higher oil prices, privatization plans. Geographical sources of FDI for transition economies have been in part shifting towards developing economies, especially China.
Developing and transition economies are expected to account for almost 40 per cent of global B2C e-commerce by 2018, while the share of developed countries is set to fall from more than 70 per cent to about 60 per cent, according to market estimates.
At the same time the challenges remain:
- Still depressed commodity prices and persistent geopolitical tensions, along with structural constraints, such as an outdated capital stock, deindustrialization, demographic pressure, challenging business conditions, will continue to generate an inauspicious growth environment;
- tightening of monetary and fiscal policies, while also implementing some targeted stimulus measures, limiting the room for monetary easing;
- tighter restrictions on the foreign exchange operations of businesses and households and cross-border transactions;
- fiscal policy consolidation measures aimed at maintaining stability of public finances and slow down the depletion of accumulated reserve funds;
- Currency depreciations, which consequences have yet to be seen;
- deterioration of external balances in most CIS countries. The region’s aggregate current account surplus shrank sharply. The contraction of exports in 2016 exceeded the observed fall in imports. The region’s terms of trade can continue to deteriorate in 2017-2018; further fragmentation of trade in the region; diversification of their export markets remains an important challenge;
- resulting pressure on the balance of payment was offset by a reduction in capital outflows, current account deficits remain very large;
- The ability to overcome the dependence on primary commodities and low-tech exports is constrained by inadequate access to modern technology and limited resources for investment;
- The banking system remains fragile, although concerns about financial stability have receded;
- Against this background, the growing stock of debt incurred by developing countries and transition economies, At the global level, any growth recovery appears still to be strongly debt-driven;
- The big investment push in developing and transition regions can remain one of the unfulfilled promise;
- Trade across borders/doing business transparency indexes remain low
STRUCTUAL TRANSFORMATION FOR INCLUSIVE ECONOMIC GROWTH
To attain sustained and inclusive growth, countries need to adjust their policy strategies in order to advance structural transformation
Some of the critical issues need to be addressed in order to set in place structural transformation processes:
- Structural transformation requires a comprehensive policy approach. This includes strategic policies for international trade, pro-growth macroeconomic policies to ensure high levels of aggregate demand; a stable and competitive exchange rate and policies in support of the profits-investment nexus;
- promotion of structural transformation requires attention to different sources of growth, including boosting private and public investment, fostering technological progress, strengthening domestic demand and increasing the capacity of domestic producers;
- development of institutions, rules and norms that provide a stable framework for economic activity while being flexible to respond to specific situations. These policies/institutions generally are part of a developmental state, which should be interlinked with the business community;
- promote a policy space to strike a balance between market-driven efficiency and the demands for shared prosperity and greater economic security;
- revival of industrial production is an essential tool for all countries. It does not consist only in supporting a number of key sectors to diversify and upgrade the economy, but also in the construction of linkages and capabilities to build a production base fit for purpose in a rapidly changing world, in which flexibility and policy space are key;
- proactive industrial policies are needed to encourage the shifting of employment and resources from low-productivity sectors to higher productivity industrial and modern services sectors;
- strategic approach to international trade needs to address with pragmatism the choices of processes, products and markets, developing the production and learning linkages between the exporting sectors and the rest of the economy;
– promote export-led growth; to move from enclave-type/subcontracting export-oriented activities to stronger productive linkages with domestic economy; to combine production for global, regional and domestic markets;
- Avoid adopting export strategies that rely on compressing wages; labor is not just a cost of production, but an important source of demand and tax revenue;
- More generally, the aims should be both export sophistication (which captures more than technical characteristics; it includes product differentiation, production fragmentation, resource availability, etc.) and the underlying systemic conditions that result in faster technological development and better export performance;
- Changing corporate governance and recovering public investment are needed to reinvigorate the profit-investment nexus and spur productive investment;
- Taxation rules can facilitate profit reinvestment and reduce incentives for debt financing, and should address tax erosion that hinders public investment;
- financial system should provide adequate credit and liquidity to small and medium enterprises;
- On the production side, both the composition of export-oriented manufactures – the more technologically intensive the better – and the share of domestic value added determine whether and to what extent exporting will induce structural change and productivity growth;
- Islands of manufacturing excellence are encouraging, but they are insufficient to generate the sort of economy-wide productive transformation necessary to achieve substantive industrialization. Export processing zones need to be transformed into more integrated industrial development parks with much stronger backward and forward linkages to the rest of the economy;
- Cultivate the capabilities needed to change the composition and sophistication of production activities. Allocating the accumulated resources to high productivity activities and to adopting and mastering catch-up technologies. Strengthening knowledge linkages to the rest of the economy, particularly the primary sector and modern services. Public R&D likely to be critical, paying particular attention to productivity of research, knowledge transfer to the real sector, tax incentives, IPR protection, etc.;
- promote a strong learning environment to ensure the availability of qualified technical personnel, along with investment in both formal educational institutions/vocational education and in shop-floor training;
- Coordinated frameworks on industrial development and technology and innovation capacity need to be emphasized to avoid overlaps between these policies. Industrial policy has an extensive framework that also includes aspects of innovation policy, as structural transformations are possible when they facilitate capabilities for knowledge accumulation and transfer within and across firms and sectors;
- new frontier of competitiveness - trade facilitation reforms which improve countries’ trade performance and the effectiveness of Customs and other border agencies. Such reforms should be comprehensive and ambitious and advance the trade and development objectives of countries to help reap the full development-related benefits from trade facilitation reforms. Trade facilitation should be linked to investments in transport infrastructure, information and communications technologies and broader trade-supporting services. Since many trade facilitation challenges and solutions are regional, their implementation should be included in regional integration schemes;
- unlock the potential of e-commerce, through policies that can help to harness e-commerce for sustainable development. Key policy areas include the development of ICT infrastructure, logistics and trade facilitation, the legal and regulatory environment, e-payments, skills development in combination with an enabling international environment;
- Promote development-oriented competition rules, that can offset the global dominance of MNE, to ensure that firms outside GVCs are not unfairly affected;
- Bolster access to finance for structural transformation, not only in terms of supporting particular lines of investment, but also as a useful vehicle for monitoring and influencing corporate behavior;
- Close tax loopholes through fiscal and regulatory measures at the national, regional and international levels, and require greater transparency in corporate decision-making;
- Effective regulation of distortionary monopolistic practices is essential to ensure that profits are directed towards productive investment;
- In addition, regional markets offer new export opportunities; Development of trade linkages/economic cooperation between transition economies and developing countries, including between their regional unions can be advisable;
- Increase participation in economic decision making at global and regional level (G-20, Shanghai Organization);
- The main goal is the successful implementation of the 2030 Agenda for Sustainable Development
Dmitry Godunov. UNCTAD
 This is the working paper for the G-Global Round Table discussions, therefore this paper should not be considered, distributed or/and quoted as an official position document of UNCTAD
 Ref. UNCTAD Trade and Development Report 2016
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