tdr2022 Ens

Development prospects in a fractured world :
Global disorder and regional responses
Geneva, 2023
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United Nations Conference on Trade and Development
UNCTAD/TDR/2022
ISBN: 978-92-1-113075-1
eISBN: 978-92-1-002162-3
ISSN: 0255-4607
eISSN: 0255-4607
Sales No. E.22.II.D.44
Table of contents
Table of contents
OVERVIEW........................................................................................................................ I-XIII
Chapter I
Global Trends and Prospects........................................................................................ 1
A. Too close to the edge...................................................................................................... ......... 2

1. A year of serial crises................................................................................................ ......... 2
2. Global stagflation: spinning back down the years...................................................... ......... 4
3. Global stagflation redux: bad news on the doorstep................................................... ......... 9
B. Growth prospects through the fog of war and inflation.................................................... ......... 11
1. Global growth and inflation outlook........................................................................... ......... 12
2. Multiple adverse supply shocks ................................................................................ ......... 19
3. Localized demand pressures..................................................................................... ......... 22
4. Wages and markups................................................................................................. ......... 25
C. Obscured by monetary Clouds: towards a more sustainable agenda................................ ......... 28
D. Regional trends............................................................................................................... ......... 31
References........................................................................................................................... ......... 37
Chapter II
Trends in International Markets.................................................................................... 41
A. Introduction.................................................................................................................... ......... 42
B. Global financial conditions and developing country vulnerabilities................................... ......... 42
1. Net capital flows to developing countries: mounting headwinds................................ ......... 43
2. External debt sustainability in times of tapering......................................................... ......... 48
3. Policy responses by the international community....................................................... ......... 51
C. Trends in international trade............................................................................................ ......... 54
D. Commodity markets........................................................................................................ ......... 58
References........................................................................................................................... ......... 67
iii
TRADE AND DEVELOPMENT REPORT 2022
Development prospects in a fractured world: Global disorder and regional responses
Chapter III
South-Led Integration in a Fragile World...................................................................... 69
A. The long shadow of past and present mistakes............................................................... ......... 70

B. The issues at stake: compounding the inequality-environment doom loop....................... ......... 71
1. The inequality-recession loop.................................................................................... ......... 71
2. Fiscal and monetary policies..................................................................................... ......... 72
3. The broken nexus between credit and capital formation ........................................... ......... 79
4. Balance of payments vulnerabilities.......................................................................... ......... 80
5. Losing ground in the fight against climate change..................................................... ......... 83
C. Lessons for an alternative horizon................................................................................... ......... 88
1. Regional financial arrangements............................................................................... ......... 90
2. Steering the world economy onto a sustainable path................................................. ......... 90
3. Scenarios compared: climate catastrophe or climate change?................................... ......... 94
4. Scenarios compared: trade, finance and macroeconomic stability ............................ ......... 96
5. Scenarios compared: economic growth and correction of global imbalances............. ......... 101
6. Scenarios compared: employment, distribution and the role of the State................... ......... 104
D. Conclusion...................................................................................................................... ......... 107
References........................................................................................................................... ......... 107
Chapter IV
Regional Integration: Issues at Stake............................................................................ 113
A. Introduction.................................................................................................................... ......... 114
B. Regionalism: Concept, Evolution, Challenges................................................................... ......... 115
C. Developmental Regionalism: Key Challenges................................................................... ......... 118

1. Trade and Developmental Regionalism: Issues at stake............................................. ......... 118
2. Institutional Adaptability: The Case of Regional Development Finance........................ ......... 119
3. The Challenge of financialization and corporate control to regional integration.......... ......... 122
References .......................................................................................................................... ......... 124
iv
Table of contents
Chapter V
Trade Regionalism and Development........................................................................... 125
A. Introduction.................................................................................................................... ......... 126
B. Recent patterns in regional trade: developmental impacts of regionalization................... ......... 126

1. Trade in goods.......................................................................................................... ......... 128
2. Trade in services....................................................................................................... ......... 134
C. Development-oriented trade integration and regional value chains.................................. ......... 138
D. New challenges to regional integration: the digital economy and climate change............ ......... 141
1. The digital economy: challenges of data governance................................................. ......... 141
2. Climate change......................................................................................................... ......... 144
E. Towards a complementary relationship between regionalism and multilateralism........... ......... 149
References........................................................................................................................... ......... 151
Chapter VI
Regional Development Finance: Progress and Challenges............................................ 155
A. Introduction.................................................................................................................... ......... 156
B. Regional providers of foreign exchange liquidity in times of crisis.................................... ......... 157

1. Counter-cyclical and counter-intuitive? Covid-19 and the untapped liquidity of RFAs ......... 159
2. Implications for the RFAs........................................................................................... ......... 161
3. Countering dollar hegemony..................................................................................... ......... 162
C. Long-term finance: new roles for regional and multilateral development banks............... ......... 165
1. The new landscape of long-term regional finance..................................................... ......... 167
2. The role of RDBs during crisis: counter-cyclical responses during Covid-19............... ......... 169
D. Scaling up capitalization and capacities: new sources of finance for RDBs...................... ......... 173
1. Recycling unused SDRs through RDBs ..................................................................... ......... 174
2. Where next? ............................................................................................................. ......... 175
E. Conclusions and policy recommendations....................................................................... ......... 180
References .......................................................................................................................... ......... 182
v
Chapter VII
Multinationals, Development and Corporate Arbitrage.................................................. 187
A. Introduction.................................................................................................................... ......... 188
B. Corporate control, investment and the expansion of MNEs.............................................. ......... 190

1. Corporate strategy, international production and regional development..................... ......... 190
2. The financialization of the inner corporation.............................................................. ......... 191
3. Intermediary subsidiaries.......................................................................................... ......... 194
C. Regulatory complexity and the fragmentation of the firm................................................. ......... 196

1. Regulatory complexity as a by-product of regulatory layering ................................... ......... 196
2. Legal implications of the use of subsidiaries............................................................. ......... 202
D. Corporate arbitrage and development: mapping corporate equity chains......................... ......... 205
1. Mapping corporate equity chains.............................................................................. ......... 206
2. Interpreting the results.............................................................................................. ......... 211
E. Conclusion and policy lessons......................................................................................... ......... 214
References........................................................................................................................... ......... 216
vi
Table of contents
List of figures
1.1 Countries with double-digit inflation rates, June 2022 vs June 2021.................................... ......... 3
1.2 Real oil price, January 1970–April 2022.............................................................................. ......... 5
1.3 Energy intensity, 1965–2020............................................................................................... ......... 6
1.4 Labour share, 1980–2022................................................................................................... ......... 6
1.5 Debt, emerging market and developing economies, 1970–2020.......................................... ......... 7
1.6 Number of countries with inflation-targeting central banks, 1990–2022.............................. ......... 7
1.7 Nominal interest rates, selected emerging economies, July 2021–May 2022....................... ......... 9
1.8 Global growth cycles before and after the GFC and the Covid shock, global economy........... ......... 14
1.9 Covid recovery compared to pre-Covid trend, 2016–2023.................................................... ......... 15
1.10 Expected output gap in 2023 in G20 countries..................................................................... ......... 16
1.11 IMF global consumer inflation estimate and forecast, Jan. 2020–Oct. 2023......................... ......... 17
1.12 Consumer price inflation, major emerging economies, Jan. 2019–May 2022....................... ......... 18
1.13 10-year real interest rate in the United States, 2006–2022.................................................. ......... 19
1.14 United States producers’ price index for semiconductors and other electronic components.. ......... 19
1.15 Drewry world container index (DWCI) freight cost................................................................. ......... 19
1.16 Commodity price index, 2014 to 2022 (April)....................................................................... ......... 20
1.17 Commodity food price index, 2014 to 2022.......................................................................... ......... 20
1.18 Fertilizer price index, January 1970–June 2022................................................................... ......... 21
1.19 Energy prices in the euro area, 2014–2022......................................................................... ......... 21
1.20 Government borrowing and the consumer price index, selected developed and emerging
economies, 2019–2021....................................................................................................... ......... 23
1.21 Real wages, United States, 2015–2022............................................................................... ......... 23
1.22 Employment/population ratio, United States, 2007–2022..................................................... ......... 24
1.23 United States private consumption and residential investment............................................. ......... 25
1.24 Unit labour cost per employed person.................................................................................. ......... 26
1.25 Aggregate markup, United States, 1st quarter 2017–2nd quarter of 2021............................... ......... 27
2.1 Emerging market yield decomposition, 2007–2022............................................................. ......... 43
2.2 Net capital flows to developing countries, 2018–2021......................................................... ......... 44
2.3 Nominal exchange rate depreciations against the United States dollar, selected
developing countries, January–July 2022............................................................................ ......... 47
2.4 Total external debt stocks to export revenues, developing countries, 2010-2021.................. ......... 50
2.5 Servicing costs on public and publicly guaranteed external debt to government
revenues, developing countries and groups, 2010–2021...................................................... ......... 51
2.6 Global supply chain pressure index (GSCPI), January 2005–June 2022................................ ......... 54
2.7 World merchandise trade, January 2005-May 2022............................................................. ......... 55
2.8 Metric tons of world exports by vessel type, 1 January 2020–7 June 2022 ......................... ......... 57
2.9 Daily commodity price indices by commodity group and product, Jan. 2015–July 2022....... ......... 60
3.1 Real GDP per capita, selected countries and country groups, 2000–2022............................ ......... 70
3.2 Primary income distribution, developed and developing economies, 1971–2022.................. ......... 72
3.3 Government spending on goods and services, developed and developing economies,
1980–2022......................................................................................................................... ......... 73
vii
3.4 Assets and liabilities of major central banks, developed economies, Jan. 2009–July 2022... ......... 74
3.5 International debt securities outstanding, selected countries,
1st quarter 2000–1st quarter 2022........................................................................................ ......... 75
3.6 Net portfolio flows to emerging economies and Nominal Broad Dollar Index,
2nd quarter 2006–4th quarter 2021....................................................................................... ......... 76
3.7 Dollar-euro exchange rate and crude oil price, January 1999–July 2022............................. ......... 76
3.8 Assets and liabilities of major central banks, developing countries,
January 2009–July 2022..................................................................................................... ......... 77
3.9 Private investment, developed and developing economies, 1970–2022............................... ......... 79
3.10 Stock of domestic credit and of fixed capital, selected countries, 1985–2021...................... ......... 80
3.11 Annual variations of the nominal exchange rate and Emerging Market Bond Index (EMBI),
selected countries, 2004–2020............................................................................................ ......... 82
3.12 Carbon dioxide emissions, developed and developing economies, 1970–2022..................... ......... 84
3.13 Variation of carbon intensity of GDP, developed and developing economies, 1975–2022...... ......... 84
3.14 Global crude oil production, 2018–2021, and prices, 2012–2021......................................... ......... 89
3.15 Global environmental outcomes in two simulated scenarios, 1990–2030............................. ......... 95
3.16 Shares or manufacturing exports by developing economies linked with trade accords......... ......... 98
3.17 Net External position, developing regions, 2000–2030......................................................... ......... 99
3.18 Exchange rate and inflation gains, developing regions, 2020–2030...................................... ......... 100
3.19 GDP growth scenarios, selected country groups, 1990–2030............................................... ......... 102
3.20 Current account balance scenarios, selected country groups, 1990–2030........................... ......... 103
3.21 Employment rate scenarios, selected country groups, 1990–2030....................................... ......... 105
3.22 Labour income share scenarios, 2020–2030, selected country groups................................. ......... 106
4.1 Regional trade agreements, by groups, 1958-2021.............................................................. ......... 117
4.2 Shares in global trade, 1995 and 2020................................................................................ ......... 118
5.1 Composition of merchandise exports, selected country groups and components,
1995–2020......................................................................................................................... ......... 129
5.2 Composition of African merchandise gross exports, selected components, 1995–2020........ ......... 134
5.3 Composition of business service exports, selected country groups and industries,
1995–2018......................................................................................................................... ......... 136
5.4 Evolution of global trade-embodied and production emissions of CO2 and their
intensities, 1995–2018........................................................................................................ ......... 146
5.5 Shares of carbon emissions embodied in final demand by sources, selected country
groups, 1995–2018............................................................................................................. ......... 147
5.6 Per capita carbon emissions embodied in final demand by sources, selected country
groups, 1995–2018............................................................................................................. ......... 148
6.1 Evolution of the global financial safety net, 1994–2018........................................................ ......... 159
6.2 Active central bank currency swaps and lending from IMF and regional financial
arrangements, selected income groups, March 2020–December 2021................................ ......... 160
6.3 Active central bank currency swaps and lending from IMF and regional financial
arrangements, selected geographic areas, March 2020–December 2021............................ ......... 160
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Table of contents
6.4 Multilateral disbursements to developing countries by institution, 2018–2020..................... ......... 167

6.5 Commitments and disbursements of international financial institutions to developing
countries by lending type, 2016–2020................................................................................. ......... 168
6.6 Disbursements by regional development banks and World Bank to developing countries
by income group, 2018–2020.............................................................................................. ......... 168
6.7 Bilateral and multilateral disbursements to developing countries, 2016–2020..................... ......... 169
7.1 Global structure of a United States non-financial corporation............................................... ......... 193
7.2 International Investment Agreements, 2022......................................................................... ......... 197
7.3 The Evolution of International Investment Agreements, 1957–2022..................................... ......... 198
7.4 International investment agreements by type, 1957–2022................................................... ......... 199
7.5 Regional trade agreements, 2022........................................................................................ ......... 200
7.6 Direct and Indirect Ownership Patterns................................................................................ ......... 202
7.7.A United Kingdom indirect investment in the Global South....................................................... ......... 208
7.7.B France indirect investment in the Global South..................................................................... ......... 208
7.7.C Germany indirect investment in the Global South................................................................. ......... 209
7.7.D Japan indirect investment in the Global South...................................................................... ......... 209
7.7.E Republic of Korea indirect investment in the Global South.................................................... ......... 210
7.7 F United States indirect investment in the Global South.......................................................... ......... 210
7.8.A Shares of foreign equity holdings in corporate groups, by region and by jurisdiction
of global ultimate owner, 2018............................................................................................. ......... 212
7.8.B Shares of foreign equity holdings held indirectly through third-party jurisdictions,
by region and by jurisdiction of global ultimate owner, 2018................................................ ......... 212
7.9 Shares of direct and indirect equity investment amounting to “phantom FDI” within
top 100 MNEs, by region and by jurisdiction of global ultimate owner, 1998......................... ......... 213
ix
List of tables
1.1. World output growth, 1991–2023............................................................................ ........ 13

2.1 Developing countries considered in or close to debt distress, mid-2022............................... ......... 46
2.2 World primary commodity prices, 2008–2022...................................................................... ........ 59
4.1. Evolution of the system of multilateral development banks, 1944-2022............................... ......... 119
6.1 Major regional financial arrangements within the global financial safety net......................... ......... 166
6.2 Evolution of the multilateral development bank landscape, 1944-present............................ ......... 174
6.3 Loan commitments and disbursements by selected regional development banks,
2019–2020......................................................................................................... ........ 178
List of boxes
1.1 Exile on Wall Street: shadow banking and financial fragility.................................................. ......... 7
1.2 Demand-driven and supply-driven inflation in the United States........................................... ......... 21
1.3 Cereal killers: Cracking down on commodity market speculation......................................... ......... 30
2.1 Monetary tightening in developing countries........................................................................ ......... 47
2.2 Developing countries’ sovereign defaults and restructurings in 2022................................... ......... 52
2.3 The war in Ukraine: a shock too far for global food systems? .............................................. ......... 64
3.1 Global value chains and the wage share: what lessons from global and regional trends?..... ......... 84
6.1 The Persistence of the US Dollar as an International Currency.............................................. ......... 163
6.2 What does regionalism mean to the new Southern-led banks?............................................ ......... 170
6.3 Regional banks and projects: how a Multilateral Development Bank financed
the anti-Covid-19 vaccine ................................................................................................... ......... 172
6.4 Giving banks more policy space: reducing the role of credit rating agencies......................... ......... 177
6.5 Is financial regulation constraining lending capacity by development banks? ...................... ......... 178
7.1 The Rise of Corporate Treasury Operations .......................................................................... ......... 195
7.2 Investment Protection and Climate Change.......................................................................... ......... 201
7.3 The Competition State and OFCs.......................................................................................... ......... 204
7.4 The CORPLINK Study and its limitations for development research ...................................... ......... 206
List of charts in boxes
1B2.1 Decomposition of United States consumer inflation, measured by personal

consumer expenditures (PCE), January 2017–July 2022...................................................... ......... 22
2.B1.1 Monetary policy in developing countries............................................................................... ......... 48
2.B2.1 Developing countries’ ongoing sovereign defaults and restructurings in 2022...................... ......... 53
3B.1 Domestic income and wages activated by foreign final demand........................................... ......... 86
3B.2 Wage share trajectories according to activating sources of final demand, domestic
and foreign, 1995–2018...................................................................................................... ......... 87
x
Overview
OVERVIEW
Close to the edge
After a rapid yet uneven recovery from the pandemic in 2021, in 2022 the global economy was
confronted with new and multiple shocks. These span energy markets and the financial sector, the
real economy and supply chains, climate and geopolitics.
Inflation has become the key concern for policymakers, and monetary tightening has been used as the
main policy tool to address price rises. The policy consensus in advanced economies is that central
banks can pilot them to a soft landing and avoid a full-blown recession. This policy stance carries
short- and long-term risks. In the short run, monetary tightening will lead to declining wages and a fall
in employment and government revenues. In the mid- to long-term, a monetarist pathway will reverse
the pandemic pledges to build a more sustainable, resilient and inclusive world. These global effects
of these risks are asymmetric.
In a system weakened by the pandemic, developing countries are particularly influenced by the policy
decisions of advanced countries. UNCTAD worries the situation in the developing world is much more
tenuous than recognized by the international financial community, thus undermining the ambition of
a global financial safety net (GFSN). Forty-six developing countries are exposed to severe financial
pressures because of the high cost of food, fuel and borrowing; more than double that number are
vulnerable to at least one of those threats. The likelihood of a widespread developing country debt
crisis and a potentially lost decade, therefore, is very real, as is the risk of not meeting the sustainable
development goals (SDGs) by the end of the decade.
Policy measures to address these risks and avert further cascading crises are known, but they require
political will and multilateral coordination to be put into action. One important step would be to deploy a
mix of policy tools to address inflationary pressures. Another set of measures concerns the international
financial system and includes a fairer and more permanent use of Special Drawing Rights (SDRs) to
ease balance of payments constraints and reduce fiscal pressures. Additional arrangements, such as
currency swaps, should be considered to deal with currency instability; discussions on a multilateral
legal framework for handling debt restructuring, including all official and private creditors, should be
launched.
The experience of the Covid-19 pandemic has shown a bold policy change is viable, especially in times
of global crises. And despite current setbacks, the mounting pressures of 2022 present a moment for
wider reform. Such a moment was largely missed in 2010–2012, when the world was dealing with the
aftermath of the global financial crisis (GFC). The reform of the international financial regulations was
partial, at best. Nor did it address structural problems inside and between the economies. A decade
later, the world economy is in a more precarious condition, and if the current moment for multilateral
reform is not seized, the multilateral system will remain at risk of further fracture.
A. The inflation spectre haunting the world

The slowdown in growth and acceleration of inflation beginning in the second half of 2021 have
invoked parallels between the current moment and the stagflation of the 1970s. Policymakers appear
hopeful that a short sharp monetary shock – of the kind initiated at the end of that decade – will be
able to anchor inflationary expectations without triggering the kind of deep recession that marked the
start of the 1980s and led to a lost decade for many developing countries.
I
The current context, however, is vastly different from the economy of the 1970s: structural and
behavioural changes linked to deepening financialization, market concentration and labour’s greatly
reduced bargaining power have transformed economic dynamics in both advanced and developing
countries, with significant implications for the political economy of inflation.
First, core global inflation is driven by fewer sectors in 2022 than it was in the 1970s. Second, the
recent commodity price increases, when measured in real terms, have so far been smaller than in the
1970s. Third, the energy intensity of gross domestic product (GDP) has declined considerably since
the 1970s, reducing the inflationary impact of higher energy prices. Fourth, nominal wage growth is
not keeping up with CPI inflation; therefore, real wages in developed and developing countries alike are
stagnating or declining, ruling out a wage-price spiral as the inflationary lubricant. Fifth, both developed
and developing countries have high levels of indebtedness in both private and public sectors, with
much of the developing country debt denominated in foreign currency and short-term. Sixth, far more
central banks are independent today than in the early 1980s, with clear mandates to prioritize inflation
targeting and “transparent” monetary policy rules. Meanwhile, the spread of financial innovation and
the expansion of private credit in a loosely regulated market have created a large and growing universe
of non-bank financial institutions, the shadow banking system. Shading banking has continued to
expand in advanced and crucially in developing economies over the past decade. In the current
environment of slowing growth, underregulated financial markets pose renewed risks to stability in
developed and developing countries alike.
The drivers of inflation today are also distinct. While the surge in inflation from the end of 2021 belied
hopes it would be short-lived, the evidence does not suggest this surge came from a further loosening
of fiscal policy or wage pressure. Instead, inflation has derived largely from cost increases, particularly
for energy, and sluggish supply response due to a prolonged history of weak investment growth.
These are being amplified by price- setting firms in highly concentrated markets raising their mark-ups
to profit from two rare opportunities – in 2021, the surge in demand occasioned by the global recovery
and in 2022, the surge in speculative trades related to a wave of global concerns about fuel supply,
with no substantial changes in actual demand or supply.
Food and energy price rises pose significant challenges for households everywhere, and with added
pressure on fertilizer prices caught in their vortex, the damage could be lasting. The war in Ukraine is
no doubt a major factor in this story, although commodity markets have been in a turbulent state for
a decade and were in an upswing for most of 2021. To date, insufficient attention has been given to
the role of speculators in provoking this situation through betting frenzies triggered by their oversize
footprint in futures contracts, commodity swaps and exchange traded funds. Although the resulting
price spikes are often short lived, consumers in the developing world are hit hard, pushing hundreds
of millions back into extreme poverty. This UNCTAD Report offers a set of policy measures to tackle
the effects of the financialization of commodity markets to bring greater transparency, oversight and
regulation to these activities.
Under present circumstances, continued monetary tightening will have little direct impact on the principal
sources of inflation. Rather, they will re- anchor inflationary expectations by choking off investment
demand and pre- empting any incipient labour market pressures. A more immediate impact could be
a sharp correction in asset and commodity prices, from crypto currencies to housing and metals. With
financial entanglements since the GFC becoming increasingly global, complex unanticipated shocks
remain a real and present danger.
Monetary tightening thus poses a two-fold risk to the real economy and the financial sector: given
the high leverage of non-financial businesses, rising borrowing costs could cause a steep increase in
non-performing loans and trigger a cascade of bankruptcies. With direct price and markup controls
ruled out as politically challenging, and if monetary authorities are unable to stabilize inflation quickly,
governments might resort to additional fiscal tightening. This would only help precipitate a sharper
global recession. The impact of the United States Federal Reserve (the Fed) tightening will be more
II
Overview
severe for emerging economies with high public and private debt, substantial foreign exchange
exposure, a high dependence on food and fuel imports and high current-account deficits.
In this situation, central banks cannot bring inflation down at a socially acceptable cost. Needed instead
are appropriate industrial and employment policies to target supply chain disruptions and labour
shortages and to increase the supply of key items in the medium term; this should be accompanied
by sustained global policy coordination and (liquidity) support to help countries fund and manage
these changes. In the meantime, policymakers should seriously consider alternative paths of action to
lower inflation in socially desirable ways, including strategic price controls, better regulation to reduce
speculative trades in key markets, targeted income support for vulnerable groups and debt relief.
B. Growth prospects through the fog of war and inflation

Based on the United Nations Global Policy Model, the world economy is expected to grow 2.5 per
cent in 2022. The downward revision from last year derives from three factors:
• The policy stimulus enacted in 2020 and 2021 proved less effective than expected. In particular,
in the bounce-back from the recession, the fiscal and financial stimuli turned out to be smaller
than expected, with a weaker impact on growth. This made the subsequent policy tightening
(both fiscal and monetary) more recessionary than it would have been if the recovery had been
stronger.
• The supply response of key goods and commodities was insufficient to match the post-lockdown
demand surge. This outcome is unsurprising; many governments were reluctant to boost public
investment and employ an active industrial policy, thus leading to a situation where the “policy
tapering” underway (to liquidate excess central bank assets) was compounded by the interest
rate hikes meant to counter inflationary pressures.
• Unexpected headwinds coming from the war in Ukraine brought down growth in the Russian
Federation and Ukraine and triggered a swing in commodity prices and are now acting as an
adverse supply shock in both advanced and developing economies.
The slowdown in activity is unable to provide decent jobs, is inadequate to generate incomes to
overcome inherited (and excessively large) debt burdens, is too unstable to offer long-term prospects
for economic development and is deepening the inequalities of income and wealth that were entrenched
even before the pandemic hit.
For developing economies, the deceleration is a particular cause for alarm. Excluding China, the group
is projected to grow 3.0 per cent this year, below the pre-Covid average of 3.5 and diminishing the
room for rising per capita incomes. To put this into context, in the early 2000s, the last period of
sustained progress for industrialization and development, the group grew at 5 per cent per year,
on average. China will slow down as well, to an estimated 4 percentage points compared to 2021,
although it is projected to continue growing faster than other countries, at approximately 4 per cent in
2022, and to accelerate in 2023, one of the few countries expected to do so.
Developed economies are projected to grow 1.7 per cent in 2022 and 1.1 per cent in 2023. On average,
this is 0.5 percentage points below the mean of the pre-Covid-19 period and 0.9 per cent below the
pre-GFC mean. The slowdown is particularly marked in the United Kingdom and the European Union,
especially in France, Germany and Italy. As discussed in previous UNCTAD Reports and the section
above, this reflects policymakers’ excessive reliance on monetary policy to manage the direction of
the economy.
While the global increase in inflation has sparked concerns about economic overheating in some
economies, in most G20 economies, real GDP is expected to be below its pre-Covid-19 trend by the
end of 2023. Projecting average 2016–2017 growth into the future, we argue the world economy will
III
still be over 3 percentage points below its pre-Covid-19 trend in 2023, with no sign of the gap closing
any time soon.
The current macroeconomic and financial conditions place developing economies in a vulnerable
position, as they are exposed to ever-more frequent shocks from commodity markets, capital flows,
inflationary bursts, exchange rate instability and debt distress. Meanwhile, South–South trade has
weakened, while geopolitical trade disruptions, increased market concentration and restricted policy
space are weakening developing countries’ position in global value chains. Many liquidity constrained
economies are now allocating their limited fiscal space to emergency price subsidies, sacrificing public
investment in infrastructure and welfare programs, while advanced economies are once again warning
of a fiscal cliff and raising the spurious claim of the expansionary effects of austerity. The war in Ukraine
and the growing risks of geopolitical tensions are pushing the world towards a disjointed multipolar
configuration, diminishing the hope, at least for the moment, of a more cooperative global order.
Our downward growth prognosis for 2022–2023 is midway between optimistic soft-landing scenarios
and pessimistic alternatives centred on deepening geo-political tensions and military escalation. As
of mid-2022, assuming the war in Ukraine turns into a political and military stalemate, with a growing
human toll but without further negative economic impact on the rest of the world, we expect inflation to
fall later in 2022 and the beginning of 2023. A recession in Europe and a sharper growth slowdown in
the United States and China would pull commodity prices down faster and further reduce inflationary
pressures. At the same time, the appreciation of the dollar, driven by the interest rate hikes, may
generate recessionary shocks in developing economies, further slowing world output and prices in
2023. There is considerable contingency surrounding these trends.
These policy trends notwithstanding, a path to overcome the current economic setbacks and achieve
the SDGs is still available. It requires simultaneously dealing with the urgency of the cost of living
crisis and the necessity of advancing structural transformation towards a fairer and greener economy,
while addressing a deteriorating growth outlook by boosting productive investment and expanding
redistributive measures to bolster local markets and boost the confidence of firms and households.
C. Debt distress
With the deterioration of financial conditions starting in the last quarter of 2021, net capital flows to
developing countries have turned negative; some 90 developing countries have seen their currencies
weaken against the dollar this year and over a third by more than 10 per cent; bond spreads are rising,
with a growing number posting yields 10 percentage points higher than United States Treasury bonds,
and exchange reserves falling. At the moment, 46 developing countries are severely exposed to financial
shocks and another 48 seriously exposed; the threat of a global debt crisis is a serious one. Developing
countries have already spent an estimated $379 billion of reserves defending their currencies in 2022,
almost double the amount of new SDRs received in the recent allocation (excluding China).
Global financial conditions, including the United States monetary tightening cycle, have put the already
fragile debt sustainability in many, though not all, developing countries in further and acute peril. The
ratio of total external debt stocks to exports (of goods and services, including tourism revenues)
provides an indication of countries’ solvency, given the importance of export revenues to service
foreign-currency denominated debt obligations.
For all income groups (low- and middle- income countries, according to the World Bank income
classification and excluding China), this indicator rose from an average of 100 per cent in 2010 to 159
per cent in 2020. By 2021, this figure had fallen to 127 per cent, reflecting the much stronger growth in
export revenues compared to that of external debt stocks in this year. This is still 18 percentage points
above the average value for this indicator at the height of the taper tantrum crisis in 2013 (108 per cent)
IV
Overview
but below the value for 2016 (142 per cent) when the first cycle of monetary tightening started. A core
danger of current financial conditions is that this recent positive development will be reversed.
Three factors have been critical in pushing most developing economies further towards the financial
precipice. First, after many announcements over the past decade, United States monetary policy
has set on a decisive tightening cycle that has seen the 10-year Treasury yield increase almost
six-fold between mid-2020 and mid-2022. Second, price hikes in some commodity markets have
added to inflationary pressures on a global scale. This has negatively affected developing country
commodity importers but has benefited some developing country commodity exporters. While, for
now, commodity prices for gas (United States), wheat and oil have returned to near pre-war levels,
uncertainty remains about the extent to which continuation of the war in Ukraine will affect commodity
prices in the future. Third, the Covid-19 pandemic lingers in many countries, with high, unresolved
debt burdens in developing countries.
The flight of capital from developing economies to safer assets and jurisdictions continued unabated in
the second quarter of 2022, reaching levels comparable to those following the onset of the Covid-19
pandemic by the end of June 2022. This is borne out in the data on emerging market sovereign bond
spreads. These spreads – an important indicator of sovereign financial risk and distress – rose sharply
between September 2021 and July 2022, following the Fed’s more aggressive stance on monetary
policy normalization in response to concerns about domestic inflation. Contrary to earlier episodes of
steeply rising emerging market sovereign bond spreads in the wake of the GFC and at the height of
the Covid-19 pandemic, when 10-year United States Treasury bond yields actually fell, the emerging
market bond spreads moved in tandem with their yield curve – a clear indicator of the central role
played by the tightening monetary policy cycle in the United States in mid-2022.
Economies already suffering from severe balance of payment constraints and high external vulnerabilities
well before the onset of the Covid-19 pandemic have been hit harder. Thus, for example, low- and
middle-income countries whose external sovereign bonds traded in distressed territory in June 2002
had already seen their bond yields rising to above 10 percentage points relative to the most common
benchmark – the yield on 10-year United States Treasury bills – in mid-2019 (including Egypt, the
Republic of Türkiye, Pakistan, Uganda and Zambia). In contrast, for emerging market economies with
larger and more liquid markets and investment grade ratings, sovereign bond spreads were relatively
contained.
A response to this challenge requires, first and foremost, the deterioration of financial conditions
in developing countries to be addressed. So far, policy and financial commitments made by the
international community in recent months have fallen short of what is required. Three areas of multilateral
action require urgent response: the provision of Official Development Assistance (ODA), the allocation
and effective deployment of SDRs and policies to address debt distress in developing countries.
• In 2021, ODA reached $178.9 billion, equivalent to 0.33 per cent of gross national income (GNI)
of the members of the Development Assistance Committee (DAC). This figure is less than half
of the established commitment of 0.7 per cent of GNI. Over the last 50 years, the failure of DAC
members to hit that target has cost developing countries over $ 5.7 trillion in developing financing.
Moreover, resources allocated to least-developed countries (LDCs) are under threat because of
the declining share of grant financing and the expected increase of in-donor country refugee
costs.
• Developing countries have made active use of their share of resources received through the
allocation of $650 billion in SDRs by the International Monetary Fund (IMF) in August 2021. At
least 69 developing countries have included SDRs in government budgets or deployed them for
fiscal purposes, for a total of $81 billion since this allocation. But additional resources are urgently
needed, including a new emission of SDRs, reform of existing allocation rules and a development
link in SDR allocations, as long advocated by UNCTAD.
V
• Piecemeal measures to provide short-term debt relief are inconsistent with the magnitude of
the challenges faced by debt countries in terms of both existing liabilities and future financing
needs. Actions ought to focus on two broad areas. First, a multilateral legal framework for debt
restructuring is required to facilitate timely and orderly debt crisis resolution with the involvement
of all official (bilateral and multilateral) and private creditors. The framework would facilitate the
provision of debt relief linked to a debt sustainability assessment incorporating long- term finance
needs, including for the achievement of the 2030 Agenda and the Paris Climate Agreement.
Second, a publicly accessible registry of debt data for developing countries is needed to address
debt transparency challenges. Following the UNCTAD Principles for Responsible Sovereign
Borrowing and Lending, this registry would allow the integration of the debt data of both lenders
and borrowers at the level of specific transactions in a way that ensures interoperability of data
across direct and indirect sources of reporting.
D. Trends in international markets

Despite tensions and policy risks, global trade is expected to grow almost at par with the global
economy in 2022, in the range of 2 to 4 per cent. This would represent a sharp deceleration from
2021, due mainly to a combination of continued supply chain disruptions, weakened demand for
consumer durables, unduly aggressive monetary policy and elevated freight charges. Beyond 2022, the
prospects for trade remain weak, mirroring the expected deceleration of economic growth discussed
in the previous chapter and suggesting a return to the subdued long-term trend before Covid-19.
At the level of inernational trade governnace, while the agreement reached at the 12th Ministerial
Conference of the World Trade Organization (WTO) seemed to send a positive message, unresolved
issues around a fully and well-functioning dispute settlement system pose an ongoing challenge to
multilateralism. The outcomes of value to developing countries mainly concern emergency responses
to food insecurity and the Covid-19 pandemic, notwitstanding the resistance of some advanced
economies to the waiver agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS)
legislation that could help developing countries combat the pandemic.
The outbreak of war in Ukraine came at a time of historically high prices across the various commodity
categories, and the conflict exacerbated the upward price pressures at play in world markets before
February 2022. The war has had a truly global impact on commodity markets, however, because of
the key role played by the Russian Federation and Ukraine in international food, mineral and energy
supplies. Between them, Ukraine and the Russian Federation provide approximately 30 per cent of the
world’s wheat, 20 per cent of maize and over 50 per cent of sunflower oil. The Russian Federation and
neighbouring Belarus account for approximately 20 per cent of global fertilizer exports.
A combination of factors unleashed by the war, including production disruptions, interruptions to
transportation links and the imposition of economic restrictive measures, have put a severe constraint
on the supply of these materials from these three countries. The result has been international supply
shortages and acute spikes in prices, reflected in an increase of 15 per cent in the aggregate
commodity price index in March–April 2022. The most drastic spike in prices was observed in energy
commodities; these rose by 25 per cent in the two months following the start of war.
World oil and gas prices were immediately affected, with the price of the Brent crude oil benchmark
rising rapidly from just under $100 on the eve of the invasion to over $120 only two weeks later. Yet
the release of 180 million barrels from the United States strategic petroleum reserves, as well as the
readiness of China and India to receive Russian Federation oil exports and thus take advantage of the
significant discounting of the country’s Urals brand of crude oil trades compared to other benchmark
prices, proved sufficient to ensure global oil supplies did not tighten further.
VI
Overview
The natural gas market has been particularly sensitive to the conflict, given the dependence of
numerous European countries on natural gas supplies from the Russian Federation. Given the fixed
distribution systems (i.e. pipelines) required to deliver gas, ready substitutes for these energy products
are not easy to come by. The decision by Germany to halt the Nord Stream-2 Baltic Sea gas pipeline
project, the pledge by the European Union to reduce Russian gas imports by two-thirds by the end of
the year and the intermittent shutting off of gas flows to the continent by Russian Federation authorities
provoked a surge in European natural gas prices; these increased more than four-fold in April 2022
compared to April 2021. As liquified natural gas (LNG) is a substitute for natural gas, LNG prices were
almost 30 per cent higher in June 2022 than in January 2022 and over double the level registered a
year earlier in June 2021. These price movements add to the import bills of LNG-importing developing
countries and could potentially exclude some developing countries from the LNG supplies on which
they depend to meet their energy needs.
Notwithstanding wheat and maize price hikes, fears of a sustained upward trend in commodity prices
were eased as substantial declines were observed in the price of a range of commodities from April
2022 onwards. By mid- 2022 grain prices had returned to the levels observed prior to the war. A
confluence of factors lies behind this generalized retreat in commodity prices, chief among which is
a steeper than anticipated tightening of monetary policy in developed economies and a subsequent
deceleration in economic growth, thereby softening the global demand for these raw materials.
Similarly, a sharp slowdown of the expansion of the Chinese economy has dampened demand for
commodities. This is particularly so in the case of industrial metals for which Chinese demand is
an outsized component of global demand. On the supply side, an agreement signed between the
Russian Federation and Ukraine in mid-July 2022 and renewed in November allowed some Ukrainian
ports in the Black Sea to be reopened to ship grains and other materials and also served to ease
upward price pressures on these products.
In addition to these physical demand factors, the financialization of commodity markets is a main
factor driving price movements. As commodities have increasingly become a financial asset, huge
quantities of money are traded daily in commodity futures throughout global markets, with investors’
decisions having an outsized impact on prices. In fact, much of the recent downturn in prices relates
to the impact of monetary tightening in advanced markets on investors’ decisions.
The recent drop in dollar-denominated international commodity prices has not, however, translated
into a significant easing of domestic inflationary pressures on these products in many developing
countries where depreciating local currencies – an inevitable consequence of the abrupt tightening of
monetary policy in developed economies – have kept local prices of energy and staple food products
at high levels. As a result, poorer households in the developing world continue to suffer difficulties
meeting their basic needs, while governments in numerous developing countries see their already
limited fiscal resources eaten away because of the substantial energy and food subsidies they provide.
As a result, a “return to normalcy” appears ever-more elusive. The mix of macroeconomic and financial
constraints left as a legacy of past crises, together with the inadequacy of policy responses, heralds
cascading crises that can threaten our economic, environmental and political systems, causing
successive crises and diminishing the likelihood of attaining SDG goals by 2030.
Alternative policy stances able to yield meaningful if modest advances for the achievement of the
SDGs are increasingly implausible. If at all, countries in the Global South must make initiatives towards
policy coordination around different principles than those dictated by market forces. In such a path,
though, developing economies would need to harness the involvement of the most industrialized and
financially stronger economies. Gaining such a degree of policy coordination requires political will
across many layers of common interests.
VII
E. The challenge of institution building in a divided world

As crises affecting the global economy become increasingly complex, policymakers at all levels of
the multilateral system seek solutions to safeguard against future shocks and amend the existing
asymmetries across the global economy. For many developing countries constrained by the limited
size of their own domestic markets, establishing closer economic ties with their neighbours has been
a longstanding part of the development policy agenda. The record has so far been uneven, with only
East Asia exhibiting a more lasting process of successful regional ties and cooperation.
Governments’ political will to coordinate policies in some areas is a prerequisite for building regional
integration. In this respect, developmental regionalism, defined as a set of proactive policies and
institutions coordinated by the states of the region in question, has historically proven to help build
resilient economies able to compete in the global market, while safeguarding national goals of
economic growth and development.
After a series of unsuccessful starts and disappointments, there are signs that such integration is
gaining converts in parts of the developing world. The extent to which these efforts can be capitalized
upon by regional integration fora across the developing world will be determined by the capacity of
regional governance institutions to balance national and regional developmental goals against the
challenges of the deeply asymmetric global economy.
1. Trade regionalism
Proposals to forge greater consistency in trade, investment and industrial policies are back on the
agenda. However, some trade rules have increasingly come to foster incentives skewed to boosting
cost competitiveness through labour market flexibility, wage restraint and pollution offshoring, rather
than through capital formation and sustainable productivity gains.
Certain rules and regulations in the WTO agreements and, even more so, in the many bilateral and
regional Free Trade Agreements (FTAs) between developed and developing countries, constrain the
use of industrial and environmental support policies needed to enhance the structural transformation
of developing countries and to reduce their energy and material throughput. Without renewed support
and application of the principles of special and differential treatment and common but differentiated
responsibilities, it will be difficult for developing countries to transition towards diversified and higher
value-added activities in a world facing widening inequality and increasing natural disasters and
environmental catastrophes.
Trade regionalization can, if effectively designed, play a role in reducing trade-embodied CO2 emissions,
which increased by 90 per cent between 1995 and 2018, mostly on the back of pollution offshoring
and growing extraregional imports of developed regions where per capita emissions remain around 10
times higher than in developing regions.
At the same time, trade integration should not be confined to trade liberalization but be part of a broader
development strategy promoting regional specialization, economies of scale and mutual economic
interdependence, without preventing linkages among firms and across sectors at the national level to
build a strong nexus between profits, investment and exports and allow each economy to upgrade
and diversify its productive base. The establishment of virtuous cycles of rising productivity, increasing
economic sophistication and growing intraregional trade can, in turn, underpin greater cooperation
around a widening range of non-trade issues that emerge with closer economic interdependence and
address emerging imbalances and divergences among participating countries that may, if they persist,
undermine the stability of regional arrangements.
The increasing attention to geopolitics in the design of trade policy reflects growing tensions at the
global level that are challenging the rationale for multilateralism. Greater fragmentation also leads to
diverging interests. As a result, regional identities and historically embedded norms and values may
VIII
Overview
come to play a more relevant role and shape distinct regional policy orders. Managing economic
interdependence in such a polycentric world will require a more synergetic relationship between
global institutions and regional arrangements. Accordingly, the appropriate call is to strengthen “open
developmental regionalism”, as this does not unduly reduce the policy space available to developing
countries.
Contrary to deep FTAs or the recent mega-regional agreements, open developmental regionalism could
help developing countries’ voices be heard and reinforce South–South cooperation towards achieving
a more development-oriented international trade governance. An open and proactive regional trade
governance could shield developing economies from adverse global effects, even as it supports stronger
production links (including through regional value chains) among neighbouring countries.
In terms of rulemaking, open developmental regionalism would limit binding commitments to border
measures, while relying on cooperation and creating flexible policies aimed at regional harmonization
of behind-the-border trade measures as, for example, in the Association of Southeast Asian Nations
(ASEAN) model. Supported by institutional structures, such as the developmental state, and augmented
by cooperation in non-trade areas and regional regulatory frameworks that manage the interface
between the global and regional economies, open developmental regionalism may thus facilitate the
management of the diverging interests and sensitivities of developing and developed countries for a
more inclusive and developmental international trade governance.
For regionalism to support multilateralism, the connections between regional and global governance
should be properly managed. Some WTO rules need to be improved, and experience suggests it is a
difficult and lengthy process to amend and add flexibilities to the implementation of WTO commitments.
For example, such added flexibilities could have been obtained (i) by creating an expeditious solution
to deal with TRIPS restrictions on exporting medicines under a compulsory license mandated in 2001,
yet it took 15 years before the amendment to TRIPS came into force, and the amendment itself has
been regarded as unworkable; (ii) by agreeing to longer transition periods, such as in Trade-Related
Investment Measures (TRIMs) as proposed by developing countries as an implementation issue, but
despite a 2001 mandate (including that they could be an early harvest of the Doha Round), they have
not been agreed upon; or (iii) by allowing countries who graduate from LDC status to continue enjoying
this status for 12 years after graduation, but this has not yet been agreed to either.
2. Regional development finance

Along with regional production and trade networks, developmental regionalism needs to be supported
by a well-capitalized regional financial system, including institutions of monetary coordination and
financial crisis resolution. These arrangements can be categorized as follows:
• Regional funds for short-term balance of payments shortfalls. In practice, all these funds have
proven throughout three decades to be too small to withstand balance of payments crises.
• Regional payment systems to reduce exposure to exchange rate fluctuations and promote
interregional trade. These are mostly customs unions and payment systems that target transaction
costs. These mainly exist in Latin America, although initiatives to introduce payment systems in
Africa have been discussed for a long time.
• Publicly financed regional development banks with a long-term lending horizon and broad
economic (rather than narrowly financial) mandates which recognize many development
challenges go beyond national borders.
Such regional development finance institutions are likely to play a key role in the remainder of the
decade to meet Agenda 2030 and lower (or zero) carbon pledges, given the poor record of private
capital markets to provide the scale and variety of financial and technical support required to meet
these goals.
IX
The need to scale-up these financing arrangements means funds should be raised and invested with
some degree of cross-border cooperation and co-ordination. Much has already been achieved, and
the record of public Development Finance Institutions (DFIs) shows a steadily increasing momentum
in institution building, finance and transformational vision. Yet some important policy changes are
required to give them the necessary capacity and policy space.
In the wake of the 1997 Asian financial crisis and the GFC, developing countries sought and created
regional solutions as a “first resort” complement to the IMF’s lending of last resort. Within a few
decades, there was a multiplicity of regional funds and eventually bilateral swaps between central
banks from different countries, all adding warp and weft to the GFSN. Their expansion over the years
meant that by 2020, developing countries had ten times as much firepower to call on in terms of
volume, as well as a variety of providers, terms and conditions from which they could, albeit to varying
degrees, choose.
Given their potentially game-changing role, it is notable that these regional institutions and mechanisms
were not used widely during the Covid-19 shock. Compared to the GFC, when regional institutions were
used substantially, Regional Financing Arrangements (RFAs) contributed limited financing compared to
the IMF, particularly bilateral credit swaps between central banks. Early UNCTAD research suggests
this is related to the institutional setup of some funds: those contingent on an IMF package were less
called upon, as were those with a less evenly balanced or autonomous governance structure. Hence,
small autonomous funds were relied on heavily, while much more voluminous but less equitably
organized funds were used less, or not at all.
An open discussion is long overdue about the implications of governments’ reluctance to provide
adequate and reliable finance to their development banks. Possible responses include revisiting
government owners’ AAA credit rating strait/jacket, because this limits the way banks can use the
capital they do have, or designing new credit rating agencies better suited to the purpose of rating
public Development Finance Institutions (DFIs). One of the most promising recent developments is the
potential to redistribute unused SDRs to low-income countries needing them, through their regional
development banks.
One compelling reason for this policy is that SDR allocations are a global mechanism already in
existence, whose usefulness was shown during Covid-19, and Regional Development Banks (RDBs)
are natural candidates to re-channel them. This matches the policy objectives underlining the SDR
general allocation with banks’ existing public mandates, tools and experience. Therefore, instead of
inventing new solutions, this link could be expanded in the light of new information about what is
possible and what is needed.
These financing options may prove more promising than other alternatives, such as regional capital
markets. While experience in Asia and elsewhere suggests regional markets can raise local currency
bonds in the tens of trillions of dollars, these have not typically been directed to the kinds of investments
needed for Agenda 2030 or climate mitigation and adaptation. Another limitation to their usefulness at
the regional level is that this kind of spending needs a degree of harmonization of development plans
and objectives, rules and regulations, as well as agreement on how to divide the respective costs
and benefits. Moreover, regionally integrated markets require complete capital account liberalization
among the participating countries, and for well-known reasons, this is seen as a risky strategy with
uncertain benefits.
Assuming public banks and funds will continue to be relied upon, they may need clearer mandates
and a stronger sense of what the governments involved expect from their lending activities. This can
be expressed as a vision statement, in the legislation enacting them or in the reporting requirements
and indicators of performance.
X
Overview
3. Confronting corporate arbitrage

An additional set of barriers to the developmental gains promised by regionalization comes from
the financialization of the corporate sector. Developing countries are particularly vulnerable in the
current structure of global financial and corporate governance, for two reasons. First, at the level of
global political economy, regulatory complexity has been conducive to the rise of the “fragmented
firm.” Modern multinational enterprises (MNEs) are organized as a network of entities held directly or
indirectly by the parent firm through equity ownership but trading with one another “as if” they were
separate companies. Estimations made by UNCTAD and other organizations suggest that between
one-third and roughly two-thirds of global trade today is intra-firm – that is, trade between subsidiaries
and affiliates of the same MNE, many of which are located in different countries.
Second, indirect forms of investment create a distinction between the ultimate and the immediate
owners of assets and can thus pose a major challenge for governments in exercising control over
the investment regime. Along with the changes that parallel technological, financial and regulatory
shifts in the global economy, indirect forms of corporate ownership mean that notwithstanding the
macro-financial data on FDI flows, the economic substance of international investment, including in
developing countries, is often structured much like a variant of asset management. This is pertinent for
the developmental outcomes at both national and regional levels.
In our study, we examined the functional role of corporate subsidiaries of top 100 MNEs globally. We
found that a quarter of large multinational subsidiaries in the Global South only maintain balance sheets.
This indicates that they perform very few, if any, economic activities, in the host jurisdiction. This contrasts
to their behaviour in some economies of the Global North, whereby nearly all directly held subsidiaries
display an income statement, which is an indication of their real economic activity. This difference in the
registration of value-creating operations allows corporate players to exploit the financial, accounting and
regulatory infrastructure offered to them by certain jurisdictions, leaving most developing economies
structurally disadvantaged in the process of rent extraction and competition for capital.
This has multiple implications for policymakers at the national level, but also at at the regional (and
multilateral) level. The use of intermediary subsidiaries creates statistical anomalies in FDI accounts,
because flow of investment through intermediary subsidiaries located in third countries inevitably
creates data inconsistencies in FDI statistics. As data on aggregate FDI positions are typically based
on immediate asset ownership, they provide a potentially biased measure of international financial
ties, the distribution of asset ownership and the risks associated with investment – for home and host
countries alike. By using intermediary subsidiaries in a third country, the owners and managers of an
entity or the parties to a contract can, if they so choose, register these in the same jurisdiction where
they reside or work or where the underlying assets held by an entity are located. This is important for
a number of reasons.
While regional trade and investment agreements may well encourage investment into the region, the
way investment is structured through subsidiaries is crucial for the economic impact of the investment.
MNEs can (and do) structure those investments indirectly through intermediaries and ensure a
considerable portion of the operational activities takes place elsewhere. They may do so because
certain countries offer a better regulatory environment, lower taxation and other advantages. Because
of statistical anomalies associated with financial and legal innovation at the corporate level, none of
these outcomes is picked up in FDI statistics.
Success in attracting FDI is not, in and of itself, conducive to making incoming foreign capital work
for the host economy and increase its productive capacity, levels of employment and welfare. Large
corporate groups can be structured in such a way that local subsidiaries exploit the local economic
advantages of inexpensive labour, natural resources and so on, while other subsidiaries in the corporate
group located in other jurisdictions contribute to and benefit from value extraction via the localization of
profits, low taxes, and other types of corporate arbitrage.
XI
In terms of the macroeconomy, earning stripping through the use of corporate subsidiaries affects
the fiscal space of any host economy. Developed countries can potentially offset a significant part of
the direct corporate tax revenue loss by collecting increased investor-level tax revenues on dividends,
interest and capital gains, which themselves tend to be boosted by higher rates of global corporate tax
avoidance. Developing countries, in contrast, are generally unlikely to recover any significant revenues
this way. They also face an additional disadvantage in the long term: their cost of borrowing is higher
than that of advanced economies.
In the absence of a globally developed set of regulatory standards and systemic framework of
regulation, developing countries need to lead efforts to build the relevant financial, accounting, legal
and data expertise at national levels. This, in turn, will be an important step towards enhancing
communication, coordination and regulation at the level of regional blocs, long established and
currently emerging. Public authorities tasked with monitoring, analysing and regulating the behaviour
of corporate subsidiaries operating within the region can work to enhance the visibility of corporate
behaviour at national and regional levels. This can help overcome the regulatory gap in the current
structure of regionalism governance and advance multilateral efforts to combat the various forms of
corporate arbitrage.
F. Conclusion
An incorrect policy response to the key challenges of 2022 – inflation, the global slowdown, debt
distress and a potential financial crisis – will increase the risk of further fracture in a global economy
already marked by troubling asymmetries and inequality.
Preventing inflation scaremongering from monopolizing the attention of policymakers is urgent, given
the multitude of other policy challenges. While the cost of living crisis needs immediate resolution, there
are ways to use the present moment strategically to make progress towards shared prosperity. Under
current supply chain challenges and rising uncertainty, when monetary policy alone cannot safely lower
inflation, pragmatism must replace ideological conformity in guiding the next policy moves.
Problematically, geopolitical risks to trade, increased market concentration, reduced policy space
and an unresolved climate agenda are further weakening developing countries’ position in global
governance. Institutional reform should therefore focus on linking immediate macroeconomic policy
challenges with boosted investment in SDGs. Drawing on suggestions made in past Reports, UNCTAD
proposes policy programs, appropriately tailored to local economic circumstances, should be built
around the following elements:
i) Containing inflation (not cutting wages). Policymakers should avoid an undue reliance on
monetary tightening and foreswear a premature return to austerity budgets. The alternative to a
damaging rise in interest rates to bring down inflation is a pragmatic mix. Subsidies to ease the
cost of living are important in the short term, but price and markup controls are paramount, as
they allow overdue increases in real wages. This requires a reinforcement of anti-trust measures
and a reconsideration of regulation in specific markets. These policies can be bolstered at a
regional level, so that single countries are shielded from external constraints, such as exchange
rate movements and capital flows.
ii) Managing expansions (not mismanaging booms and busts). Monetary and fiscal rules need to
be better adapted, not just to respond to shocks, but also to support much-needed structural
changes in the economy, such as industrialization in developing countries and the energy
transition. Maintaining sustained job creation and industrial upgrading will require governments
to have sufficient fiscal space for the necessary investments and ongoing support measures.
Liquidity creation should always be allowed for development projects that guarantee, in the
medium-long term, higher income and tax revenues. This will require not only rethinking the
XII
Overview
independence of central banks from any development and social goals but also considering,
when appropriate, new regional arrangements.
iii) Investing first (second and third). There needs to be higher public investment in economic and
social infrastructure to boost employment, raise productivity, improve energy efficiency and
reduce greenhouse-gas emissions in an internationally coordinated effort centred on common
global objectives. But crowding in private investment will require taming financial institutions
to make sure they serve the broader social good. Industrial policies will be required to target
desired sectors and guide investment, and better capitalized public banks must be committed
to lengthening the investment horizon of private businesses, including through the productive
leveraging of reinvested profits.
iv) Levelling up. While anti-trust measures and incomes policies to boost productivity growth can
help achieve more equitable distribution of income, redistributive policies can mitigate unbalanced
outcomes. These include the reinforcement of public service provisions and progressive tax
reform, such as wealth and windfall taxes, together with a reduction of regressive tax cuts and
loopholes. Clamping down on the use of tax havens by firms and high-wealth individuals will
require legislative action at both national and international levels. Interim efforts in this direction
could include a global financial register, recording the owners of financial assets throughout the
world.
v) Curbing corporate arbitrage. The central role of legal and financial infrastructure in corporate
arbitrage and value extraction poses a particular challenge to development at all levels. Most
developing countries lack the resources and capacities required to tackle the legal dimensions
of the activity of MNEs. Therefore, an attempt to consolidate available resources at the regional
regulatory level could be an important first step towards harmonizing regulatory policies and
curbing opportunities for corporate arbitrage.
vi) Creating stronger South–South ties aimed at avoiding environmental meltdown and promoting
employment generation. In this strategy, trade, finance, credit and macroeconomic policies would
be coordinated and instrumental to the overarching goals of employment generation (especially
in some advanced economies) and green industrial development (especially in the Global South).
UNCTAD’s proposed strategy for South-led industrialization and coordination, thanks to the
concatenation of industrialization and agrarian development goals, could generate an additional
530 million jobs globally (with the current patterns and no policy change, the estimated increase
is about 330 million jobs). Most importantly, the changes envisaged would liberate much-needed
policy space for developing countries and allow a successful energy transition.
vii) Establishing a new Bretton Woods. In an interdependent world, calling for greater ambition from
domestic policymakers requires rethinking global economic governance from a development
perspective. Almost eight decades after the foundational conference in New Hampshire, the
international financial architecture is still struggling to address the imbalances and inequities of
the global economic structure. A stable multilateral monetary and financial system will require
more timely balance of payments and liquidity support, a swap facility open to all, a public credit
rating facility and rules for managing sovereign debt crises. A bolder agenda to scale up public
development finance will require an increase in base capital of multilateral financial institutions,
along with a reassessment of their lending headroom and priorities, combined with stronger
price and quantity-based controls and incentives, to ensure complementary private finance flows
towards productive transformation.
The burning question is political will. A window of opportunity is still open, but countries need to
acknowledge the systemic nature of the multiple crises the world faces and share responsibility in
addressing them.
XIII
Chapter I
I
Global Trends and Prospects
A. TOO CLOSE TO THE EDGE

1. A year of serial crises
After a rapid but uneven recovery in 2021, the world economy is in the midst of cascading and
multiplying crises. With incomes still below 2019 levels in many major economies, growth is slowing
everywhere. The cost-of-living crisis is hurting the majority of households in advanced and developing
countries. Damaged supply chains remain fragile in key sectors. Government budgets are under
pressure from fiscal rules and highly volatile bond markets. Debt-distressed countries, including
over half of low-income countries and about a third of middle-income countries, are edging ever
closer to default. Financial markets are jittery, as questions mount about the reliability of some asset
classes. The vaccine roll-out has stalled, leaving vulnerable countries and communities exposed to
new outbreaks of the pandemic. Against this troubling backdrop, climate stress is intensifying, with
mounting loss and damage in vulnerable countries who lack the fiscal space to deal with disasters, let
alone invest in their own long-term development. In some countries, the economic hardship resulting
from these compounding crises is already triggering social unrest that can quickly escalate into political
instability and conflict.
The resulting policy challenges are daunting, especially in an international system marked by rising
distrust. At the same time, the institutions of global economic governance, tasked since 1945 with
mitigating global shocks, delivering international public goods and providing a global financial safety
net, have been hampered by insufficient resources and policy tools and options that are “rigid and
old fashioned” (Syed, 2022; Yellen, 2022). Even as growth in advanced economies slows down more
sharply than anticipated in last year’s Report, the attention of policymakers has become much too
focused on dampening inflationary pressures through restrictive monetary policies, with the hope that
central banks can pilot the economy to a soft landing, avoiding a full-blown recession. Not only is
there a real danger that the policy remedy could prove worse than the economic disease, in terms
of declining wages, employment and government revenues, but the road taken would reverse the
pandemic pledges to build a more sustainable, resilient and inclusive world (chapter III).
As noted in last year’s Report, the pandemic caused greater economic damage in the developing world
than the global financial crisis. Moreover, with their fiscal space squeezed and inadequate multilateral
financial support, these countries’ bounce back in 2021 proved uneven and fragile, dependent in
many cases on a further build-up in external debt. The immediate prospects for many developing and
emerging economies will depend, to a large extent, on the policy responses adopted in advanced
economies. The rising cost of borrowing and a reversal of capital flows, combined with a sharper than
expected slowing of China’s growth engine and the economic repercussions from the war in Ukraine,
are already dampening the pace of recovery in many developing countries, with the number of those
in debt distress rising, and some in default. With 46 developing countries already severely exposed to
financial pressure from the high cost of food, fuel and borrowing, and more than double that number
exposed to at least one of those threats, the possibility of a widespread developing country debt
crisis is a very real one, evoking painful memories of the 1980s and ending any hope of meeting the
sustainable development goals (SDGs) by the end of the decade.
The acceleration of inflation beginning in the second half of 2021 (figure 1.1) and continuing even as
economic growth began to slow down in the final quarter of the year has led many to draw parallels
with the stagflationary conditions of the 1970s. Despite the absence of the wage-price spirals that
characterized that decade, policymakers appear to be hoping that a short sharp monetary shock –
along the lines, if not of the same magnitude, as that pursued by the United States Federal Reserve
(the Fed) under Paul Volker – will be sufficient to anchor inflationary expectations without triggering
recession. Sifting through the economic entrails of a bygone era is unlikely, however, to provide the
forward guidance needed for a softer landing given the deep structural and behavioural changes that
have taken place in many economies, particularly those related to financialization, market concentration
and labour’s bargaining power.
2
Figure 1.1 Countries with double-digit inflation rates, June 2022 vs June 2021
69 Economies with confirmed double-digit inflation, representing more than 2.1 billion of
world population, June 2022 (Consumer Price Index, change over respective period of previous year)
10% - 15%
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15% - 20%
20% - 60%
60% - 100%
more than 100%
23 Economies with confirmed double-digit inflation, representing less than 0.9 billion of world
population, June 2021 (Consumer Price Index, change over respective period of previous year)
10% - 15%
15% - 20%
20% - 60%
60% - 100%
more than 100%
Source: UNCTAD secretariat calculations, based on Internati al Monetary Fund (IMF) data, Refinitiv, and various national
sources.1
Note: For 2022 (top figure), the latest monthly data are available for 164 of 182 economies; for 9 of them, figures are for
one of the last months in 2021; another 10 are estimations for 2022 from various sources. Out of 69 economies with
double-digit inflation, 18 show double-digit inflation rate (at least) since the end of 2019. For 2021 (bottom figure), out of
23 economies with double-digit inflation, 16 show double-digit inflation rate (at least) since the end of 2019.
1
The designations employed and the presentation of material on any map in this work do not imply the expression of any
opinion whatsoever on the part of the United Nations concerning the legal status of any country, territory, city or area or
of its authorities, or concerning the delimitation of its frontiers or boundaries.
3
The origins of this latest wave of inflation are, in fact, unique. The successful roll-out of the vaccine in
advanced and some developing countries and the easing of Covid restrictions, combined with continued
government support for households and firms, saw demand pressures running ahead of supply responses
during the first half of 2021, creating bottlenecks, including in some key markets, such as automobiles.
The surge in inflation from the end of last year belied hopes that this would be a short-lived inconvenience.
However, the evidence does not suggest this surge has come from a further loosening of fiscal policy
or wage pressure, but instead derives largely from cost increases, particularly for energy, and sluggish
supply response due to a prolonged history of weak investment growth (chapter III). These have been
amplified by price-setting firms in highly concentrated markets raising their mark-ups to profit from two
rare opportunities – in 2021, the surge in demand due to the global recovery, and in 2022, the surge
in speculative trades related to a wave of global concern over the availability of particular sources of
energy, with no substantial changes in overall demand or supply.
Under these circumstances, continued monetary tightening – through rising central bank rates and the
normalization of their balance sheets – will have little direct impact on the supply sources of inflation
and will instead work indirectly to re-anchor inflationary expectations by further reducing investment
demand and pre-empting any incipient labour market pressures. A more immediate impact could be a
sharp correction in asset and commodity prices, from crypto currencies to housing and metals.
With financial entanglements since the global financial crisis (GFC) becoming increasingly global,
complex unanticipated shocks, including outbreaks of financial panic or extreme price volatility, or a
combination of external triggers, are a present danger. Monetary tightening poses additional risk to
the real economy and the financial sector: given the high leverage of non-financial businesses, rising
borrowing costs could cause a steep increase in non-performing loans (NPLs) and trigger a cascade
of bankruptcies. With direct price and markup controls ruled out as politically unacceptable, and if
monetary authorities are unable to stabilize inflation quickly, governments might resort to additional
fiscal tightening. This would only help precipitate a sharper global recession.
Finally, what does seem likely is that the impact of Fed tightening will be more severe for vulnerable
emerging economies with high public and private debt, substantial foreign exchange exposure, a high
dependence on food and fuel imports and higher current-account deficits (chapter II).
According to one recent estimate, an increase in United States interest rates of 1 percentage point
reduces real gross domestic product (GDP) by 0.5 per cent in advanced economies and by 0.8 per
cent in emerging economies, after three years (Iacoviello and Navarro, 2019).2 These effects are
comparable to the domestic effects of a one-percentage-point increase in the United States interest
rate, which lowers the United States GDP by almost 1 per cent after 11 quarters (Fair, 2021). More
drastic increases by 2 to 3 percentage points would therefore depress the already stalling economic
recovery in the emerging economies by another 1.6 to 2.4 percentage points.
2. Global stagflation: spinning back down the years

Disruptions to global supply chains, armed conflicts in key commodity-producing regions, slowing
economic growth, turbulence in stock markets and accelerating inflation suggest a resemblance to the
stagflation of the 1970s (BIS, 2022; World Bank, 2022; Wolf, 2022). Accordingly, the recommended
policy action is aggressive monetary tightening, which is supposed to pre-emptively anchor inflationary
expectations and avoid the steep economic costs associated with a prolonged period of interest rate
increases, such as the world painfully experienced between 1979 and 1981 when the Fed introduced
a series of rate increases amounting to almost 9 percentage points.
2
Using a structural vector autoregression (SVAR) model, Fed economists Akinci and Queralto (2021) obtained broadly
similar results: an increase in United States interest rates by 1 percentage point is found to lower the United States real
GDP by 0.5 percentage points and the real GDP of emerging economies by 0.45 percentage points. The new inflationary
environment has changed the balance of risks. Gradually raising policy rates at a pace that falls short of inflation increases
means falling real interest rates. This is hard to reconcile with the need to keep inflation risks in check. Given the extent
of the inflationary pressure unleashed over the past year, real policy rates will need to increase significantly in order to
moderate demand. Delaying the necessary adjustment heightens the likelihood that even larger and more costly future
policy rate increases will be required, particularly if inflation becomes entrenched in household and firm behaviour and
inflation expectations.
4
From this perspective, the Bank for International Settlements (BIS, 2022: 26) has clearly defined the
task facing central bankers:
“The new inflationary environment has changed the balance of risks. Gradually raising policy rates at a
pace that falls short of inflation increases means falling real interest rates. This is hard to reconcile with
the need to keep inflation risks in check. Given the extent of the inflationary pressure unleashed over
the past year, real policy rates will need to increase significantly in order to moderate demand. Delaying
the necessary adjustment heightens the likelihood that even larger and more costly future policy rate
increases will be required, particularly if inflation becomes entrenched in household and firm behaviour
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and inflation expectations.”
These policy recommendations, along with calls for fiscal policy to address investor concerns by cleaning
up public finances (World Bank, 2022: 69), closely resemble the dominant policy recommendations
of the early 1980s, and these proved disastrous, particularly for developing countries, in terms of
economic growth, inequality and poverty (TDR, 2021).
The primary cognitive blinder hindering adequate understanding of the key lessons from past crises
is still the widely shared belief and confidence in monetary policy’s singular ability to reduce output
volatility and ensure stable and lasting growth in market economies in a neutral manner, without
affecting potential output growth of the economy under consideration (Goodfriend, 2007; Blanchard,
2018). In fact, the aggressive monetary tightening of the early 1980s provoked deep distributional
shifts within and across countries, and repeating that approach today could be equally damaging.
Moreover, while echoes of the 1970s are audible in current conditions, there are important differences
between then and now – and these should caution us to avoid drawing direct policy lessons. First, the
recent commodity price increases, when measured in real terms, have so far been smaller than in the
1970s. Figure 1.2 shows this for the real increase in global oil prices. Second, the energy intensity of
GDP has declined considerably since the 1970s (figure 1.3), reducing the inflationary impact of higher
energy prices.
Figure 1.2 Real oil price, January 1970–April 2022 (adjusted dollars per barrel)
160
140
120
100
80
60
40
20
1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020
Source: World Bank (2022).

Note: Real oil prices are averages of Dubai, Brent, and WTI prices, deflated by the CPI index of the United States
(using March 2022=100).
5
A second notable difference is that core global inflation in 2022 is driven by fewer sectors than it was
in the 1970s.3 In 1979-1980, global headline inflation (a broader measure) and global core inflation
(which excludes volatile items such as food and energy) were similar: 15.2 per cent and 15.3 per cent,
respectively. But in 2022, the global core inflation rate is 2.8 per cent, whereas the global headline
inflation rate is much higher, at 7.5 per cent.4
Third, and insufficiently emphasized in many of the theorized parallels between the two periods,
nominal wage growth is not keeping up with consumer price index (CPI) inflation; hence, real wages
in developed and developing countries alike are stagnating or declining, ruling out a wage-price spiral
as the inflationary lubricant. This is not surprising given the declining influence of organized labour and
workers’ bargaining power in recent decades (ILO, 2022) – something also showing up in the secular
decline in the labour income share (figure 1.4).
Fourth, a final structural difference between the 1970s and the current conjuncture concerns the
significantly higher levels of indebtedness today in both developed and developing countries and for
both private and public sectors, with much of the developing country debt denominated in foreign
currency and short-term (chapter II).
In 1980, total debt of the emerging market and developing economies (EMDEs) stood at 65 per
cent of their GDP; half of this debt was sovereign debt and the other half was private-sector debt
(figure 1.5). When the Fed tightened monetary policy in the late 1970s and early 1980s in response
to rising inflationary pressures in the United States, it triggered the “Third World” debt crisis. Today
many emerging economies are facing even tighter financial conditions against a backdrop of high debt
(chapter II). Fifteen EMDEs already experienced a downgrading of their sovereign debts in the first five
months of 2022. Monetary tightening by the Fed thus has a considerable risk of triggering a new chain
of financial crises in EMDEs (chapter II).
Figure 1.3 Energy intensity, 1965–2020 Figure 1.4 Labour share, 1980–2022
(percentage, megajoule to GDP) (percentage of GDP)
All energy Oil Gas Developed economies (left axis)

Devoloping economies (right axis)
10 63 57
62 56
8 61 55
60 54
6
59 53
58 52
4
57 51
56 50
2
55 49
0 54 48
1980
1982
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2008
2010
2012
2014
2016
2018
2020
2022
1965 1975 1985 1995 2005 2015
Source: Bank for International Settlements (2022). Source: United Nations Global Policy Model database.
Note: Labour share is calculated as the ratio of the sum of
compensation of employees and mixed income to GDP.
3
According to BIS (2022), inflation in the emerging economies is rapidly becoming more broad-based.
4
The global inflation rates are averaged for 66 countries, using CPI data for January to April 2022.
6
Finally, far more central banks are independent today than in the early 1980s, with clear mandates
to prioritize inflation targeting (figure 1.6) and follow “transparent” monetary policy rules. Some
assessments (e.g. World Bank, 2022) say this “revolution” in monetary policy is better placed to anchor
inflation expectations, with core inflation becoming less sensitive and more resilient to (unexpected)
inflation shocks. What is missing in this narrative is that commercial banks have become progressively
less important financial actors in the intervening years, and a variety of non-bank financial institutions
have emerged as credit providers in a loosely regulated market environment (box 1.1). This evolving
“shadow banking” system, largely ignored (or worse yet, encouraged) by the authorities in the run-up
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to the GFC, greatly complicates the transmission of monetary policy (chapter III). More than a decade
later, shadow banking poses renewed risks to financial stability, in advanced and developing countries
alike.
Figure 1.5 Debt, emerging market and Figure 1.6 Number of countries with
developing economies, 1970–2020 inflation-targeting central banks, 1990–2022
(percentage, of GPD)
Total Government Private Advanced economies EMDEs
200 44
180
40
160
140
28
120
100
80 20
14
60
40
20
1
0
1970 1980 1990 2000 2010 2020 1990 2000 2010 2022
Source: World Bank (2022). Source: World Bank (2022).

Note: GDP-weighted averages based on a sample
of up to 153 EMDEs.
Box 1.1 Exile on Wall Street: shadow banking and financial fragility
Non-bank financial intermediaries carry out many of the same fundamental functions as regulated banks,5
yet they remain unregulated. The universe of non-bank financial institutions and credit providers, known as a
shadow banking system, came under the spotlight during the GFC. It comprised the markets for asset-backed
commercial paper, repurchase (repo) deals, securitization products, money market funds, private currency
swaps and other over-the-counter (OTC) transactions and off-balance sheet activities, often sponsored or
owned by official banks. Largely unnoticed until then, the vast network of unregulated credit intermediaries,
their opaque connectivity to the official banks and the hidden risks of such connections were at the epicentre of
5
Including lending, deposit taking and similar operations that create credit.
7
the global financial implosion. Having started in the relatively isolated segment of the United States mortgage
market, the financial crisis spread through shadow banking channels, was magnified by the speculation
by hedge funds and other operations involving complex, unregulated financial products and threatened
the viability of the official banking sector.
The system of shadow banking not only endangered commercial banks, but also placed additional
demands for public bailouts provided by governments trying to prevent bank failures over the period 2007
to 2008. Despite some efforts to contain and regulate parts of non-bank finance, over the past decade, the
global shadow banking has expanded in size, geography and diversity. The share of global financial assets
held at shadow banking institutions increased globally from 42 per cent in 2008 to close to 50 per cent at
the end of 2019. In 2020, shadow banking institutions originated more than two-thirds of all United States
mortgages; the share of loans to businesses they hold is nearly equal to the share held by banks (Kelleher
and Basil, 2022). And while during the pandemic, the shadow banking sector’s relative share of total global
financial assets decreased from 49.7 per cent to 48.3 per cent in 2020, in 2021, shadow banks controlled
$226.6 trillion of assets out of the total of $468.7 trillion (FSB, 2021).
In advanced economies, shadow banking accounts for, on average, 56 per cent of total financial assets
(compared to 27 per cent in emerging markets). At the same time, the rate of growth of shadow banking
sectors has been faster in the emerging markets than in the advanced economies, especially in the loan
provision by non-bank entities dependent on short-term funding. According to the Financial Stability Board
(FSB), in 2021, shadow banks controlled $226.6 trillion of assets (out of a total of just over $468.7 trillion).
More than $57 trillion of the assets controlled by shadow banking entities are the result of their credit
creation functions, such as short-term market funding, credit intermediation and securitization base funding
(FSB, 2021).
This continuous expansion poses systemic and financial stability risks in advanced and developing
countries alike. In the United States, during the 2008 crisis and again in the 2020 pandemic, when funding
markets all but shut down, the Fed stepped in with trillions of dollars in support as a backstop for virtually
every asset class. This made the Fed the “market-maker of first resort” and a buyer in the asset backed
securities (ABS) market (Kelleher and Basil 2022). Today, similar pressures are mounting in the financial
system in China, where earlier attempts to reduce the shadow banking sector did not reduce financial
fragility. The debts accumulated by local banks through shadow banking facilities domestically, as well as
the debt exposures internationally, are threatening the China’s growth prospects in 2022–2023.
In other words, not only were the risks of the unregulated system of shadow banking not addressed
in the wake of the GFC, but they were magnified in the decade that followed. Today, shadow banking
poses new challenges to financial stability and is likely to require new intervention by the central banks in
2022–2023. In the context of the uncertainty of global growth prospects and high inflation expectations,
such interventions may not be as forthcoming as they were during the two previous financial crises. The
situation is much starker in the developing countries.
The large role of the shadow banking sector means central banks have limited capacity to control
credit expansion in large segments of the financial system. That is even more true for central banks in
many developing economies, as they have more fragile financial systems, higher debt denominated
in foreign currency and greater exposure to commodity price shocks. In fact, many of them began to
raise interest rates already in late 2021 (figure 1.7), but the inflationary pressures have not abated, and
the financial vulnerabilities have continued to build.
A recent analysis of 129 monetary policy tightening episodes over the period 1985 to 2018 has shown
that hard landings are more likely when monetary tightening is preceded by a build-up of (household)
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indebtedness – as is the case now (BIS, 2022). Hard landings are also historically associated with low
real interest rates before the start of the tightening cycle. To be precise, the average real interest rate
at the start of tightening cycles that end in hard landings is 0.4 per cent, compared to 1.4 per cent at
the start of those that end in soft landings. Given that real interest rates were relatively low at the start
of the current monetary tightening cycle, the initial conditions do not augur well for a soft landing.
Figure 1.7 Nominal interest rates, selected emerging economies, July 2021–May 2022 (percentage)
I
South Africa Brazil Mexico
12
10
0
Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun
2021 2022
Source: Bank for International Settlements (2022).
Today, inflation is caused by a mixture of disruptions in global supply chains, high (container) shipping
costs, the impact of war on key sectors, higher mark-ups, commodity-market speculators and the
ongoing uncertainty of an evolving pandemic. In this situation, central banks cannot bring inflation
down at a socially acceptable cost. Instead, supply-chain disruptions and labour shortages require
appropriate industrial policies to increase the supply of key items in the medium term; this must be
accompanied by sustained global policy coordination and (liquidity) support to help countries fund and
manage these changes (TDR, 2022; Gallagher and Kozul-Wright, 2022).
In the meantime, policymakers should seriously consider alternative paths of action to lower inflation
in socially desirable ways, including strategic price controls, better regulation to reduce speculative
trades in key markets, targeted income support for vulnerable groups and debt relief.
If monetary tightening in the advanced economies continues over the coming year, however, a global
recession is more likely, and, even if it is looser than the 1980s, it will almost unavoidably harm potential
growth rate in the developing economies. The permanent damage to economic development in these
countries will not only be substantial but will also leave the ambition to achieve a better world by 2030
dangling by the most precarious of threads.
3. Global stagflation redux: bad news on the doorstep

The decade following the GFC brought the global economy to its current precarious state. The period
was characterized by low levels of capital formation, weak (and in many cases falling) productivity
growth, stagnant wages and flagging aggregate demand. Since 2010, government budgets have
been kept on a tight leash (TDR, 2021). Yet financial markets remained buoyant, as central banks
maintained a loose monetary policy, with efforts to normalize their balance sheet proving ephemeral
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and in some cases (as in the 2013 taper tantrum) counterproductive. Profits also remained high, with a
large-firm bias, benefitting from weak regulatory oversight and a policy environment geared to lowering
production costs, with wages in particular showing little sign of picking up even as unemployment
dropped (chapter III).
In this high-profit-low-investment environment, financial engineering became an instrument of rent-
seeking behaviour, particularly among larger international corporations. Thanks to their market power,
they have often generated income from the manufacture of scarcity rather than the production of
goods or delivery of services (TDR, 2017; 2018). The spread of such behaviour through knowledge
monopolies, mergers and acquisitions, government procurement contracts etc. has been accompanied
by systematic tax avoidance, including the channelling of profits through offshore tax havens, the
accompanying growth of illicit financial flows and the widespread use of leveraged buyouts and share
buybacks. In many cases, this has led to a growing divergence between large cash-rich corporations
and small cash-strapped firms and an accompanying trend towards more highly concentrated markets
(Akcigit et al., 2021). These trends have locked in and in some cases exaggerated the high levels of
inequality that had emerged prior to the GFC (TDR, 2017; 2018; 2021).
The scarring effects of these trends reflect what some observers have dubbed “super-hysteresis”
whereby external shocks lead not only to a permanent loss of output due to recession but also to
a permanent reduction in the potential growth rate because the decline in capital formation (and
in aggregate demand) lowers labour productivity growth. In many developing countries, this
threat has been amplified by a process of stalled industrialization (and in some cases, premature
deindustrialization) rooted in the rapid liberalization of both the capital and current accounts under
structural adjustment programs in the 1980s and 1990s, which has led, in turn, to an even greater
dependence on commodity exports as a source of foreign exchange.
As noted in previous Reports, the slowdown in growth in the second half of the decade did little to
dampen the irrational exuberance in financial markets, further stretching the balance sheets of both
firms and households and creating new sources of fragility. This decoupling of finance and the real
economy was particularly evident in developing and emerging economies, as capital inflows from
advanced countries intensified after a sudden stop in 2013, driven by a search for higher yields.
By the end of the decade, on a wide variety of measures of debt sustainability, there were clear signs of
growing trouble ahead, unless growth picked up sharply or significant debt relief could be agreed upon
(TDR, 2019). Neither happened with the onset of Covid. At the end of 2015, the IMF classified 29 low-
income (Poverty Reduction and Growth Trust (PRGT) eligible) countries as in high risk of, or already
in, default; by 2019, there were 52, and in 2022, that figure had risen again to 59 (UNDESA, 2022).
The Covid shock in March 2020 was quickly and predictably registered by sharp turmoil in financial
markets, forcing the leading central banks to inject an unprecedented $9 trillion into them by the
end of the year, approximately nine times the amount injected between late 2008 and 2009. This
included liquidity support to financial institutions, direct credit lines to corporations and in the case of
the Fed, extended swap lines to select central banks in other countries, thus earning it, somewhat
hyperbolically, the title of the global lender of last resort (chapter III). However, the Fed’s move steadied
financial markets.
With Covid, governments were obliged to reassess their spending priorities, as the health and safety
of their citizens took precedence over narrower economic goals. With a mixture of voluntary social
distancing and mandated lockdowns – particularly in the developed world – in place, governments
had little option but to put a floor under household spending through stimulus checks, enhanced
unemployment benefits and housing support, and extend financial support to businesses through tax
relief, loan guarantees and job retention schemes. As a result, government spending surged, largely
through increased transfers to households and businesses, albeit with considerable variation across
countries, particularly between developed and developing countries, reflecting their differing fiscal
space and sovereign debt issuing capacities.
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Despite their scale and the support extended to people in the most precarious economic situations,
these programs had little redistributive impact, reflecting pre-existing inequalities and interests (Tooze,
2021). Even with historically low (and in many cases negative) interest rates and the willingness of
central banks to assume private sector risks, investment, both public and private, remained subdued,
further locking in the supply-side weaknesses that had emerged during the previous decade. Moreover,
as central bank support triggered a surge in stock markets, the boom was skewed towards larger
firms in select sectors, notably high-tech and pharmaceuticals, whereas many in the old economy
remained in difficulty, further propelling the polarization of the previous decade (TDR, 2022).
I
In this sense, today’s combination of slowing growth and rising prices is rooted in the constraints
and contradictions of the financialized capitalism of our times, which are quite unlike those of 1970s
managed capitalism. The policy agenda needs to respond accordingly, beginning with a much more
pragmatic approach to bringing down inflationary pressures.
B. GROWTH PROSPECTS THROUGH THE FOG

OF WAR AND INFLATION
Two and a half years after the Covid shock, with many parts of the world economy still fighting the
pandemic, a new round of shocks has complicated the policy landscape. The V-shaped Covid shock
and recovery left many global supply chains disrupted, triggering wide inventory fluctuations and
multiple production bottlenecks. In the first phase of the pandemic, the demand for goods soared,
and the demand for services collapsed. Then, as countries eased their health-related restrictions on
the economy, the demand for services recovered even as the demand for goods remained high.
The two processes put upward pressure on both producer and consumer prices, even before the war
in Ukraine, pushing inflation in advanced economies above established monetary targets and in many
emerging and developing economies to a level not seen since the first Gulf War in the early 1990s.
Even though the risk of another mutation of the virus cannot be discarded, combatting inflation has
pushed public health down the economic policy priority list, particularly in advanced economies.
The increase in inflation sparked a debate about whether the Covid stimulus policies were too
expansionary in some countries, especially in the United States, or whether the problem was the
inevitable consequence of an ongoing adaptation to a new post-pandemic production and consumption
structure. In the end, the response has been driven more by policy routine and political expediency
than measured assessment.
Starting in mid-2021, the inflationary pressure led some countries to begin tightening monetary policy
to fight the secondary effects of the unbalanced recovery (box 2.2). Monetary tightening gained
momentum in the beginning of 2022, when the start of the war in Ukraine triggered another adverse
global supply shock. Fuel and food prices, which were already rising, shot up further. For oil, this was
clearly the consequence of speculative trades, as the price increases far outpaced any changes in
supply and consumption. Supplies of some key grains and fertilizers were disrupted, and consumer
prices accelerated everywhere (chapter II). As of mid-2022, even previously low-inflation economies
were facing inflationary pressures, dangerously close to double digits, which, in the absence of other
policy measures, forced their central banks to raise short-term interest rates, at a pace not experienced
in decades.
In the second half of 2022, higher short-term interest rates and the end of any remaining Covid-related
fiscal and financial stimuli are expected to further constrain income growth across much of the global
economy, leading to a “growth recession” – conventionally defined as annual global output growth
below 3 per cent at both market and purchasing-power-parity prices. This echoes what happened
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after the GFC, when many countries were quick to adopt austerity budgets, dampening the budding
economic recovery. But unlike then, today’s situation is led by monetary tightening, with the threat,
against a backdrop of higher debt levels and inequality, of greater macroeconomic volatility and more
country heterogeneity (making the consequences of the Fed’s rate increases vastly different from
country to country). Compared to early 2021, when the economic policy debate revolved around a
shared ambitious policy agenda of inclusive recovery and the building of resilience to future shocks,
the prospect of coordinated policy programs that would make the global economy fairer and more
sustainable has dimmed. With the partial exception of the United States, plans for the energy transition
have been largely put on hold, while countries scramble to increase supplies of coal, oil and gas in order
to contain fuel and electricity prices, especially in Europe. High food price inflation and exchange-rate
volatility have undermined the livelihoods of millions of people, especially in low- and middle-income
countries, upending any plans to tackle high levels of inequality. Many liquidity-constrained economies
are now allocating their limited fiscal space to emergency price subsidies, sacrificing public investment
in infrastructure and welfare programs, while advanced economies are once more warning of a fiscal
cliff and raising the spurious claim of the expansionary effects of austerity (chapter III). Finally, the war in
Ukraine and the growing United States-China rivalry are pushing the world towards a conflictual multipolar
configuration, diminishing the hope, at least for the moment, of a more cooperative global order.
These policy trends notwithstanding, a path to overcome the current economic setbacks and
achieve the SDGs is still available. It requires simultaneously dealing with the urgency of the cost-
of-living crisis and the necessity of advancing structural transformation towards a greener economy,
while addressing a deteriorating growth outlook by boosting productive investment and expanding
redistributive measures to bolster local markets and boost the confidence of firms and households.
Elements for such a program are considered further in Section C below and in chapter III.
1. Global growth and inflation outlook

Based on the United Nations Global Policy Model, the world economy is expected to grow 2.5 per
cent in 2022 (table 1.1). This is 1.0 percentage points below the rate projected for this year in the Trade
and Development Report 2021 but broadly in line with our March update (TD R, 2022). The downward
revision from last year derives from three factors:
I - The policy stimulus enacted in 2020 and 2021 proved less effective than expected. In particular,
in the bounce-back from the recession, the fiscal and financial stimuli turned out to be smaller
than expected (TDR, 2021: box 1.1), with a weaker impact on growth. This made the subsequent
policy tightening (both fiscal and monetary) more recessionary than it would have been had the
recovery been stronger.
II - The supply response of key goods and commodities was insufficient to match the post-
lockdown demand surge. This outcome is unsurprising; many governments were reluctant to
boost public investment and employ an active industrial policy, thus leading to a situation where
the “policy tapering” underway (to liquidate excess central bank assets) was compounded by the
interest rate hikes meant to counter inflationary pressures.
III - Unexpected headwinds coming from the war in Ukraine brought down growth in the Russian
Federation and Ukraine and also triggered a swing in commodity prices (mostly abated by now)
and are now acting as an adverse supply shock in both advanced and developing economies.
The ongoing war in Ukraine and geopolitical tensions are adding to economic anxieties.
The TDR update in March 2022 already factored in the possible consequences: energy and
commodity shocks, trade disruptions, financial and exchange rate instability, inflationary
pressures, forced migration and unstable remittance flows. Since most of these consequences
have so far played out as anticipated, our projection is largely unchanged from 6 months ago.
But this also serves as a reminder that the most critical problems faced by the global economy today
predate the war in Ukraine.
12
Table 1.1. World output growth, 1991–2023 (annual percentage change)

Revisions for 2022 against TDR March
1991– 2000– 2009– 2015– Reported Revision
a a a a b b
Country groups 1999 2009 2019 2019 2019 2020 2021 2022 2023 March 2022 for 2022
World 9 3.3 3.0 3.0 2.6 -3.4 5.8 2.5 2.2 2.6 -0.1
Africa 2.4 5.5 3.0 2.9 2.8 -2.6 5.1 2.7 2.4 1.8 +0.9
North Africa (incl. South Sudan) 3.0 5.2 1.6 3.8 3.1 -3.7 7.4 3.0 2.4 2.2 +0.8
South Africa 2.0 4.0 1.7 1.0 0.1 -6.3 4.9 1.4 1.3 1.1 +0.3
I
Sub-Saharan Africa (excl. South Africa and South Sudan) 1.9 6.3 4.3 2.8 3.3 -1.0 3.7 2.8 2.6 1.8 +1.0
America 3.4 2.5 2.1 1.9 1.8 -4.3 5.8 2.1 1.0 2.4 -0.3
Latin America and the Caribbean 3.3 3.4 1.6 0.4 0.0 -7.2 6.6 2.6 1.1 2.3 +0.3
Central America (excl. Mexico) and Caribbean 2.9 4.4 3.4 3.1 2.3 -8.6 7.8 3.7 2.5 3.5 +0.2
Mexico 3.0 1.9 2.7 2.1 -0.2 -8.3 4.8 1.8 1.4 1.3 +0.6
South America 3.5 3.9 1.0 -0.5 -0.3 -6.6 7.0 2.7 0.7 2.4 +0.3
Argentina 4.6 3.8 0.9 -0.3 -2.0 -9.9 10.2 4.1 -0.8 4.6 -0.4
Brazil 2.9 3.6 0.7 -0.4 1.2 -3.9 4.6 1.8 0.6 1.3 +0.5
North America 3.4 2.3 2.2 2.3 2.3 -3.5 5.6 2.0 1.0 2.4 -0.4
Canada 2.8 2.3 2.1 2.0 1.9 -5.2 4.6 3.2 2.2 3.0 +0.2
United States 3.5 2.3 2.2 2.3 2.3 -3.4 5.7 1.9 0.9 2.4 -0.4
Asia (excl. Cyprus) 4.4 5.6 5.1 4.7 3.7 -1.1 6.2 3.5 4.1 3.8 -0.2
Central Asia -4.4 8.2 5.1 3.9 3.5 -1.5 5.2 3.6 3.5 0.2 +3.5
East Asia 4.4 5.6 5.2 4.8 4.1 0.4 6.5 3.2 4.3 3.9 -0.7
China 11.0 10.6 7.5 6.7 6.0 2.3 8.1 3.9 5.3 4.8 -0.9
Japan 1.2 0.9 1.2 0.9 -0.2 -4.5 1.7 1.0 1.8 2.0 -1.0
Republic of Korea 6.8 4.9 3.1 2.9 2.2 -0.7 4.1 2.2 2.0 1.7 +0.5
South Asia 4.8 6.4 5.8 5.9 3.1 -4.5 6.8 4.9 4.1 4.0 +0.9
India 5.9 7.2 6.9 7.0 4.5 -6.6 8.2 5.7 4.7 4.6 +1.1
South-East Asia 5.3 5.4 5.1 4.9 4.3 -4.2 3.8 4.1 3.8 3.4 +0.7
Indonesia 4.8 5.2 5.3 5.0 5.0 -2.1 3.7 4.3 4.4 4.4 -0.1
Western Asia (excl. Cyprus) 4.0 5.0 4.0 2.7 1.5 -3.5 6.2 4.1 2.9 3.4 +0.8
Saudi Arabia 1.7 4.0 3.4 1.4 0.3 -4.1 3.2 6.6 3.9 4.8 +1.8
Türkiye 3.9 5.0 5.9 4.3 0.9 1.8 11.0 2.4 2.4 2.5 0.0
Europe (incl. Cyprus) 1.4 2.2 1.6 2.1 1.8 -5.9 5.5 1.2 0.5 0.9 +0.2
European Union (EU 27) 1.9 1.8 1.5 2.2 1.8 -5.9 5.4 2.0 0.6 1.6 +0.4
Euro area 1.9 1.6 1.3 2.0 1.6 -6.4 5.4 2.0 0.6 1.7 +0.3
France 1.8 1.6 1.3 1.7 1.8 -7.8 6.8 2.0 1.0 2.4 -0.4
Germany 1.6 1.0 1.8 1.8 1.1 -4.6 2.9 1.1 0.0 1.4 -0.3
Italy 1.5 0.7 0.1 1.1 0.5 -9.0 6.6 2.5 0.5 1.6 +0.9
Russian Federation -5.9 6.2 1.6 1.2 2.2 -2.7 4.7 -7.4 1.3 -7.3 -0.1
United Kingdom 2.6 2.0 2.1 2.1 1.7 -9.3 7.4 2.6 -0.9 1.3 +1.3
Oceania 3.6 3.2 2.7 2.6 2.1 -2.2 4.8 3.6 2.1 3.0 +0.6
Australia 3.7 3.3 2.6 2.5 2.0 -2.1 4.8 3.9 2.3 3.3 +0.6
Memo items:
Developed (M49, incl. Republic of Korea) 2.3 2.2 1.9 2.1 1.8 -4.5 5.2 1.7 1.0 1.8 -0.1
Developing (M49) 4.9 6.4 5.0 4.4 3.7 -1.7 6.8 3.7 3.9 3.7 0.0
Source: UNCTAD secretariat calculations, based on United Nations Global Policy Model; United Nations, Department of Economic
and Social Affairs (UNDESA), National Accounts Main Aggregates database, and World Economic Situation and Prospects (WESP):
Update as of mid-2022; ECLAC, 2022; Organisation for Economic Co-operation and Development (OECD), 2022; International
Monetary Fund (IMF), World Economic Outlook, June 2022; Economist Intelligence Unit, EIU CountryData database; JP Morgan,
Global Data Watch; and national sources.
Note: Calculations for country aggregate are based on GDP at constant 2015 dollars.
a
Average.
b
Forecasts.
13
Today’s growth performance points to a troubling pattern observed in the post-GFC decade, in which
the timing and size of policy responses were such that the recovery lost steam over time. UNCTAD
assessment is that the trend is worsening, with growth expected to decelerate further in 2023, to 2.2
per cent.
The estimated 2.5 per cent growth in 2022 is less than half the growth rate of 5.6 in 2021, when
economic activity resumed after the sharpest recession in living memory. Part of the growth deceleration
this year was to be expected, as countries used up their idle capacity once vaccine programs were
rolled out and lockdowns eased. A similar fluctuation happened after the GFC, with a strong recovery
in the year immediately after the shock followed by a subsequent slowdown. The distinctive feature
of the current episode is its exaggerated form. So far, the downswing and upswing have been wider
in 2020 and 2021, respectively, than in 2009 and 2010, and the post-bounce-back deceleration is
expected to be more abrupt in 2022–2023 than in 2011–2012 (figure 1.8).
Figure 1.8 Global growth cycles before and after the GFC and the Covid shock, global economy
(percentage change)
GFC (Year T=2009) COVID (Year T=2020)
-1
-2
-3
-4
Year T-3 Year T-2 Year T-1 Year T Year T+1 Year T+2 Year T+3
Source: UNCTAD secretariat calculations based on the United Nations Global Policy Model.
Further increases in global real interest rates are expected to reduce world output growth in 2023,
compounded by political divisions that continue to block compensatory fiscal action in advanced
Western economies and by foreign exchange constraints that do the same in many developing
economies. UNCTAD expects the world economy to grow just 2.2 per cent in 2023, but with risks
of a further drop if financial conditions deteriorate in leading economies and contagion hits emerging
economies. If such a low-growth scenario persists for two or more years, world output will be on
course for a slower expansion than after the GFC, itself substandard for many economies (table 1.1).
Our projections point to a worrisome trend whereby the slowdown in activity is unable to provide
decent jobs, is inadequate to generate incomes to overcome inherited (and excessively large) debt
14
burdens, is too unstable to offer long-term prospects for economic development and is deepening the
inequalities of income and wealth that had become entrenched even before the pandemic hit.
For developing economies, the deceleration is particular cause for alarm. Excluding China, the group is
projected to grow 3.0 per cent this year, below the pre-Covid average of 3.5 per cent, and diminishing
the room for rising per capita incomes. To put this into context, in the early 2000s, the last period of
sustained progress for industrialization and development, the group grew at 5 per cent per year on
average. China will slow down too, an estimated 4.2 percentage points less than 2021, although it
is projected to continue growing faster than other countries, at almost 4 per cent in 2022, and to
I
accelerate in 2023, one of the few countries expected to do so.
The current macroeconomic and financial conditions place developing economies in a vulnerable
position, as they are exposed to ever more frequent shocks from commodity markets, capital flows,
inflationary bursts, exchange rate instability and debt distress. Meanwhile, South-South trade has
weakened, and friend-shoring, increased market concentration, reduced policy space and a North-
centred climate policy weaken developing countries’ position in global value chains.
Developed economies are projected to grow 1.7 per cent in 2022 and 1.0 per cent in 2023.
On average, this is 0.5 percentage points below the mean of the pre-Covid period and 0.9 per cent
below the pre-GFC mean. The slowdown is particularly marked in the United Kingdom and the
European Union, especially in France, Germany and Italy. As discussed in previous Reports and the
section above, this is a reflection of policymakers relying excessively on monetary policy to manage
the direction of the economy.
While the global increase in inflation has sparked concerns about economic overheating in some
economies, in most G20 economies, real GDP is expected to be below its pre-Covid trend by the end
of 2023. Projecting average 2016–2017 growth into the future, we argue the world economy will still
be over 3 percentage points below its pre-Covid trend in 2023 (figure 1.9), with no sign of the gap
closing any time soon.
Figure 1.9 Covid recovery compared to pre-Covid trend, 2016–2023 (index numbers, 2016=100)
GDP Pre-Covid trend
125
120
115
110
105
100
95
2016 2017 2018 2019 2020 2021 2022 2023
15
Among the G20 economies, only Türkiye, Saudi Arabia and Argentina are expected to be above trend
next year, for idiosyncratic reasons that are not clearly sustainable. In Türkiye, persistent inflation makes
the current above-trend growth fragile. Some restrictive macroeconomic adjustment is expected in the
short term. In Saudi Arabia, the quick recovery is linked to the fluctuation in the world oil market, which,
in turn, reflects the increase in prices and Saudi output after the breakout of the war in Ukraine. And
in Argentina, above-trend GDP is actually a reversion to the mean because the economy contracted
0.6 per cent per year in the three years before the pandemic. The rest of the G20 countries will
continue their partial recovery in 2023, with the largest gap in the Russian Federation because of the
lasting negative effects of the war on the Russian economy (figure 1.10).
UNCTAD slow growth projections for 2022–2023 are subject to caveats. Domestic political decisions
and international coordination (or lack thereof) can make a difference for the better (or for the worse).
Progressive and coordinated policy actions in the direction of the SDGs could still propel the world
economy onto a sustainable and inclusive development path (chapter III).
Figure 1.10 Expected output gap in 2023 in G20 countries (percentage)
10
6.9
5.3
5
2.4
0
-0.5
-2.4 -2.6 -2.8
-5 -3.4 -4.1
-4.5 -5.1
-5.4 -5.7 -5.8
-6.6 -6.8 -6.8
-7.8
-10 -9.2
-12.6
-15
The Russian
Federation
Saudi Arabia
Euro area
Argentina
Türkiye
Australia
South Africa
Japan
Brazil
Republic of Korea
Italy
United States
Canada
China
Mexico
France
United Kingdom
Germany
India
Indonesia
On the downside, a lasting war in Ukraine, persistently high inflation, a Volcker-like shock to real interest
rates and heightened financial turbulence could push the world economy into a deeper recession,
followed by a long stagnation, with macro-financial complications in many developing countries and
some developed ones, especially in Europe, where the energy crisis is likely to bite hardest (Thompson,
2022) and the combination of currency union and fiscal disunion magnifies the risk premium paid by
some governments in times of crisis.
UNCTAD slow growth prognosis for 2022–2023 is midway between optimistic soft-landing scenarios
and pessimistic alternatives centred on deepening geo-political tensions and military escalation. As
of mid-2022, assuming the war in Ukraine turns into a political and military stalemate, with a growing
human toll but without further negative economic impact on the rest of the world, we expect inflation to
fall in the second half of 2022 and the beginning of 2023. A recession in Europe and a sharper growth
slowdown in the United States and China would pull commodity prices down faster and further reduce
16
inflationary pressures. At the same time, the appreciation of the dollar, driven by the interest rate hikes,
may generate recessionary shocks in developing economies, further slowing down world output and
prices in 2023. There is considerable contingency surrounding these trends. Still, according to the
IMF, global annual consumer inflation will peak at 9 per cent, in the third quarter of 2022, and then fall
rapidly to 4 per cent, by the end of 2023 (figure 1.11).
Figure 1.11 IMF global consumer inflation estimate and forecast, Jan. 2020–Oct. 2023 (percentage)
I
10
9
8
7
6
5
4
3
2
1
0
Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct
2020 2021 2022 2023
Source: IMF (2022) World Economic Outlook (July update).
Compared to the GFC, the Covid recovery has been relatively more inflationary for advanced economies
than for developing countries, where inflation rates are structurally higher. In developed countries,
inflation has been highly correlated (Schnabel, 2022). The rate of CPI inflation in the United States
increased from 1.5 per cent in January 2019 to 8.5 per cent in May 2022; CPI inflation in the European
Union rose from 1.4 per cent in January 2019 to 8.8 per cent in May 2022. In May 2022, the CPI
inflation rates for Germany, France and the United Kingdom were 8.7 per cent, 5.8 per cent and 9 per
cent, respectively, while Canada’s inflation rate in May 2022 was 7.7 per cent.6 In all these cases, the
main drivers of resurgent inflation turned out to be commodity prices and Covid-related bottlenecks in
global supply chains (Schnabel, 2022). Accordingly, in these countries, inflation measures that exclude
energy prices are considerably lower than the (headline) CPI inflation rate. However, while imported
inflation is already subsiding, commodity prices remain high as does the index of supply chain pressure
(chapter II), suggesting that there might still be room for consumer prices and nominal wages to keep
climbing. In the European Union, where a large share of wages is set in multi-year contracts, nominal
wage adjustments take longer to materialize than in the United States, where labour contracts have
shorter duration.
Figure 1.12 shows the monthly CPI inflation rates (from January 2019 to May 2022) for selected
developing countries. These were generally higher than in advanced countries, and with some notable
exceptions, they increased earlier. The economies in the figure are all relatively large commodity
importers: on average, commodities make up slightly less than one-third of their imports (in dollar
terms) from 2018 to 2020.
6
There is, however, a wide variation among developed economies with inflation in Japan in July 2022 annualized at
2.6 per cent but close to 23 per cent in Estonia.
17
Figure 1.12 Consumer price inflation, major emerging economies, Jan. 2019–May 2022 (percentage)
Brazil Chile Mexico Türkiye Argentina

12 70
10 60
50
8
40
6
30
4
20
2 10
0 0
01 - 19
03 - 19
05 - 19
07 - 19
09 - 19
11 - 19
01 - 20
03 - 20
05 - 20
07 - 20
09 - 20
11 - 20
01 - 21
03 - 21
05 - 21
07 - 21
03 - 21
05 - 21
01 - 22
03 - 22
05 - 22
07 - 22
01 - 19
03 - 19
05 - 19
07 - 19
09 - 19
11 - 19
01 - 20
03 - 20
05 - 20
07 - 20
09 - 20
11 - 20
01 - 21
03 - 21
05 - 21
07 - 21
03 - 21
05 - 21
01 - 22
03 - 22
05 - 22
07 - 22
South Africa Nigeria Egypt India Indonesia China

20 12
18 10
16
14 8
12 6
10
8 4
6 2
4
0
2
0 -2
01 - 19
03 - 19
05 - 19
07 - 19
09 - 19
11 - 19
01 - 20
03 - 20
05 - 20
07 - 20
09 - 20
11 - 20
01 - 21
03 - 21
05 - 21
07 - 21
03 - 21
05 - 21
01 - 22
03 - 22
05 - 22
07 - 22
01 - 19
03 - 19
05 - 19
07 - 19
09 - 19
11 - 19
01 - 20
03 - 20
05 - 20
07 - 20
09 - 20
11 - 20
01 - 21
03 - 21
05 - 21
07 - 21
03 - 21
05 - 21
01 - 22
03 - 22
05 - 22
07 - 22
Source: For Brazil, China, Chile, India, Indonesia, Mexico, South Africa and Türkiye: Federal Reserve Economic Data
(FRED); for Argentina: World Bank (World Development Indicators database); for Nigeria: National Bureau of Statistics
(Composite Consumer Price Index); for Egypt: Central Bank of Egypt (Inflation Data).
The share of commodities in China’s and Egypt’s imports is 38 per cent, and more than 50 per cent of
India’s imports are (primary) commodities including food and fuel. As a result, higher commodity prices
have a strong impact on domestic prices via imports. Recent estimates covering the past five decades
suggest a 50 per cent increase in oil prices (approximately the increase in 2021) is associated with
an increase in inflation of between 3.5 and 4.4 percentage points, with a lag of about two years (Choi
et al., 2018; Ha et al., 2019). These findings suggest that in emerging economies, as in advanced
economies, a considerable part of the inflation experienced in 2021–2022 has been caused by higher
commodity (oil) prices.
There is a possible silver lining to the past year of high inflation: it has pushed real interest rates, at
least for advanced economies, deep into negative territory (figure 1.13). As a result, if nominal interest
rates do not climb too much, the net cost of public debt (the real interest rate minus the GDP growth
rate) may continue to be negative or zero after the disinflation process, assuaging concerns about
sovereign debt and providing more room for expenditure plans, including for the energy transition.
18
Figure 1.13 10-year real interest rate in the United States, 2006–2022 (percentage)
2.5
2.0
1.5
1.0
I
0.5
0.0
-0.5
2006 2008 2010 2012 2014 2016 2018 2020 2022

Source: Federal Reserve Bank of St. Louis.
2. Multiple adverse supply shocks

As pointed out in TDR 2021, the Covid pandemic led to a sudden stop and a gradual reopening
of the world economy, causing serious disruption to global supply chains, trade logistics and key
international prices. The first part of the shock was clearly deflationary, especially for urban services,
with a combined fall in demand and supply. Then, as the economy started to adapt to health-mandated
lockdowns, the demand for goods recovered, creating supply and logistical bottlenecks around the
world which registered as price swings. Two key price indices, one for semiconductors (figure 1.14)
and the other for freight (figure 1.15), illustrate the point.
The increase in world inflation has also been driven by a deep V-shaped fluctuation in commodity
prices, as discussed in chapter II. For the moment, it suffices to say that the first impact of Covid was
deflationary for food, fuel and mineral commodities, but this phase did not last long. After a 30 per
cent fall between December 2019 and April 2020, the IMF world commodity index climbed almost
uninterruptedly until the beginning of 2022, with a cumulative increase of 187 per cent (figure 1.16),
driven by three main forces. First, the post-Covid boom for consumer goods and construction materials
was commodity intensive.
Figure 1.14 United States producers’ price Figure 1.15 Drewry world container index
index for semiconductors and other (DWCI) freight cost (dollars per 40 feet)
electronic components (index numbers,
1984=100)
59 10,000
58.5
58
8,000
57.5
57
56.5 6,000
56
55.5 4,000
55
54.5
54 2,000
53.5
0
2014 2016 2018 2020 2022 2020 2021 2022
Source: Federal Reserve Bank of St. Louis. Source: Drewry Supply Chain Advisors.
19
Figure 1.16 Commodity price index, 2014 Figure 1.17 Commodity food price index,
to 2022 (April) (index numbers, 2016=100) 2014 to 2022 (index numbers, 2016=100)
200 150
150
100
100
50
50
0 0
2014 2016 2018 2020 2022 2014 2016 2018 2020 2022
Source: IMF Primary Commodity Prices dataset. Source: IMF Primary Commodity Prices dataset.
Second, the initial reduction in global nominal interest rates to fight the Covid recession created an
incentive to speculate with any financial assets, including commodities. The quantitative easing of
2020 and 2021 led to more speculation and inflation in asset markets, from crypto currencies to oil,
food and minerals. Third, the war in Ukraine pushed fuel and food prices further up in early 2022,
initially in a context of low global interest rates.
As of mid-2022, the monetary tightening in the United States and the deceleration in world output
seem to have stopped the global inflationary trend in commodities. There is still much uncertainty
surrounding the consequences of the war in Ukraine for food and fuel prices, but with high interest
rates and slower demand growth, the most probable scenario for 2023 is a further, if more gradual, fall
in commodity prices. However, because the starting point of the disinflationary trend is very high, the
relative prices of commodities in terms of world per-capita income will continue to be high in the short
term. In fact, despite its recent fall, in June 2022, the commodity food price index was still 64 per cent
above its pre-Covid value (figure 1.17).
Food price inflation poses significant challenges for households in developing economies, as they
spend a larger share of their income on food. Higher food prices imply sharp decreases in real incomes
for the majority of low-income workers, whose wages do not increase with inflation, and may push
millions into poverty. Higher food prices alone are estimated to be pushing an additional 75 million to 95
million people into extreme poverty in 2022, compared to pre-pandemic trends (Gerszon Mahler et al.,
2022). Energy inflation may be even more detrimental with Oxfam (2022) warning that higher food and
energy prices and persistent crisis conditions may raise the number of people living in extreme poverty
by 263 million in 2022.
Higher food prices also force households in the emerging economies to lower their spending on non-
food items; hence, demand for manufactured goods and services will go down. The result will be a
slowdown of growth in non-primary sectors, if not a recession, and the stagflation may well trigger
social unrest and food riots, especially in foreign-exchange-constrained countries that are net food
importers.
20
In theory, high relative prices stimulate investment today and more output tomorrow, so the current
increase in food prices should be attenuated in 2023. In practice, because of the long-term effects
of global warming and the short-term implication of high fertilizer prices for the next harvest cycle
(figure 1.18), the normalization of the world food market is far from taken-for-granted, with the situation
in sub-Saharan Africa of particular concern. On top of the uncertain post-Covid adaptation of world
food supply to demand, the war in Ukraine has created an adverse supply shock for wheat and
fertilizers, pushing some countries to restrict their exports of the two products. In the absence of global
coordination, the localized war in Eastern Europe can lead to trade wars in the global food market.
I
The war in Ukraine and the economic sanctions against the Russian Federation have also caused
a major shock in Europe, with a record increase in electricity and fuel prices in 2022 and the risk of
rationing later in the year (figure 1.19).
Figure 1.18 Fertilizer price index, January Figure 1.19 Energy prices in the euro area,
1970–June 2022 (index numbers, 2010=100) 2014–2022 (index numbers, 2015=100)
300 160
250
140
200
120
150
100
100
50 80
0
1970 1980 1990 2000 2010 2020 2014 2016 2018 2020 2022
Source: World Bank Commodity Price data (The Pink Source: FRED database.
Sheet). Note: Data refer to the monthly Harmonized Index of
Consumer Prices: Energy for the euro area (19 countries),
which is not seasonally adjusted.
Box 1.2 Demand-driven and supply-driven inflation in the United States

In a recent analysis, the United States Federal Reserve Bank of San Francisco (Shapiro, 2022) decomposed
consumer price inflation into demand-driven, supply-driven and ambiguous components. Demand-driven
products are those for which unexpected changes in price and quantity happen in the same direction.
By analogy, supply-driven products are those for which unexpected changes in price and quantity go in
opposite directions. Whatever does not fall in one of the two categories is labelled ambiguous, that is, a
result of both supply and demand forces. Figure 1B2.1 shows the results for the United States personal
consumption expenditure (PCE) and can be summarized as follows:
• The first impact of Covid was a negative (disinflationary) demand shock. The supply component also fell
in early 2020, but it remained positive (inflationary).
21
• The demand-driven component of the United States PCE inflation turned positive in early 2021; as of
mid-2022, it was at running 2 per cent per year, the country’s long-term inflation target and twice its value
before Covid.
• Despite the recent surge in United States demand-driven inflation, supply shocks continue to be the
main determinant of United States consumer prices, accounting for more than 50 per cent of the 6.1 per
cent PCE annual inflation rate registered in June 2022. This raises concerns about an inflation response
based on interest rate increases, which are mainly effective on demand factors while having serious
consequences for developing countries.
Figure 1B2.1 Decomposition of United States consumer inflation, measured by personal

consumer expenditures (PCE), January 2017–July 2022 (percentage)
Demand-driven inflation Ambiguous Supply-driven inflation
6.5
6.0
5.5
5.0
4.5
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0
-0.5
2017
2018
2019
2020
2021
2022
Source: Federal Reserve of San Francisco.

Note: Data refer to year-over-year changes in headline PCE inflation.
3. Localized demand pressures

Differences in the magnitude of fiscal responses to the Covid crisis do not show up in differences in CPI
inflation rates. Figure 1.20. A plots net borrowing by the government (as a percentage of GDP) against
the CPI inflation rate during the years 2019–2021 for leading developed economies. The correlation
coefficient between net government lending and the CPI inflation rate is 0.14 and is not statistically
significant.
Most concerns about overheating after Covid have been concentrated on the United States for three
reasons. First, because of the initial deflationary impact of Covid and the increase in the average real
earnings (due to massive job loss among low-wage workers), real wages in the United States spiked
6 per cent above trend in early 2020 and remained high throughout the year. Then, in 2021, as the
economy recovered, and prices started to accelerate, real wages began to fall. The process is still
under way but, as of mid-2022, the purchasing power of United States workers has already fallen 3
per cent below its pre-Covid trend (figure 1.21).
22
Figure 1.20 Government borrowing and the consumer price index, selected developed
and emerging economies, 2019–2021
A. Developed economies B. Emerging economies

8 60
7
50
6
I
5 40
CPI inflation rate

CPI inflation rate
4
30
3
2 20
1 10
0
0
-1
-2 -10
-5 0 5 10 15 0 2 4 6 8 10 12 14 16
Net borrowing by government (percentage of GDP) Net borrowing by government (percentage of GDP)
Source: UNCTAD secretariat calculations, based on Federal Reserve Economic Data (FRED) database; European
Commission, Macro-economic database AMECO and Eurostat database; International Monetary Fund (IMF), World
Economic Outlook, October 2021; World Bank, World Development Indicators DataBank; and national sources.
Note: Dots represent observations for each country-year Selected developed economies are Canada, France, Germany,
United Kingdom, United States. Selected emerging economies are Argentina, Brazil, Chile, China, Egypt, India, Indonesia,
Mexico, Nigeria, South Africa and Türkiye.
Figure 1.21 Real wages, United States, 2015–2022 (index numbers, December 2015=100)
Real average hourly earning 2016-19 linear trend
111
109
107
105
103
101
99
2015 - Q4
2016 - Q1
2016 - Q2
2016 - Q3
2016 - Q4
2017 - Q1
2017 - Q2
2017 - Q3
2017 - Q4
2018 - Q1
2018 - Q2
2018 - Q3
2018 - Q4
2019 - Q1
2019 - Q2
2019 - Q3
2019 - Q4
2020 - Q1
2020 - Q2
2020 - Q3
2020 - Q4
2021 - Q1
2021 - Q2
2021 - Q3
2021 - Q4
2022 - Q1
2022 - Q2
Source: United States Bureau of Labor Statistics.
23
Second, the United States economy seems to have returned to full employment. The unemployment
rate of the whole labour force was just 3.6 per cent in July 2022, basically the same as in February
2020 when many economists thought the United States labour market was overheating. Since
the previous peak of unemployment happened at 4.5 per cent in early 2007, before the subprime
crisis started to unravel, any number below 4 per cent is thought to harbour dangerous inflationary
pressures. However, the employment-population ratio of prime-age workers (25 to 59 years) paints
a different picture. As of mid-2022, the United States was still one percentage point below the ratio
of early 2007 and was apparently turning downwards (figure 1.22), with the situation worse for those
lacking a college degree.
Third, United States consumer demand for durable and non-durable goods, as well as residential
investment, boomed after the Covid shock, but demand for services has yet to return to its pre-
pandemic trend (figure 1.23). In other words, there seems to have been a change in the composition
of household spending; this has caused production bottlenecks and wide inventory fluctuations in
the short run and will last until supply finally adjusts to effective demand. As of mid-2022, the sales
of consumer goods seem to have stabilized at a high plateau, and residential investment is falling
fast. Both changes will reduce further inflationary pressures in the United States, and, for 2023,
the monetary tightening by the Fed, the looming increase in unemployment and the reduction in
consumers’ confidence levels are expected to eliminate any remaining demand pressure created by
the Covid shock.
In the wake of the Covid-19 crisis, higher spending on social protection and lower revenues from
taxation led to higher public budget deficits in some emerging economies. Government deficits in 2020
(2021) ranged from 4.5 per cent (4.2 per cent) of GDP in Mexico to 12.8 per cent (11.3 per cent) of
GDP in India. The largest category of direct fiscal relief was cash transfers of various kinds; on average,
such transfers amount to 30 per cent of monthly GDP per capita, for an average of three months.
Much like advanced economies, the differences in the magnitude of fiscal responses to the Covid
crisis in emerging economies do not show up in differences in their CPI inflation rates (figure 1.20.B);
The correlation coefficient between net government lending and the CPI inflation rate is -0.18 and not
statistically significant.
Figure 1.22 Employment/population ratio, United States, 2007–2022 (percentage)
81
79
77
75
73
71
69
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022
Source: Bureau of Labor Statistics.

Note: Age range is 25-54.
24
Figure 1.23 United States private consumption and residential investment (index numbers, 2019=100)
Durable goods Non durable goods Services Residential Investment
140
130
I
120
110
100
90
80
2019 - Q1
2019 - Q2
2019 - Q3
2019 - Q4
2020 - Q1
2020 - Q2
2020 - Q3
2020 - Q4
2021 - Q1
2021 - Q2
2021 - Q3
2021 - Q4
2022 - Q1
2022 - Q2
Source: United States Bureau of Economic Analysis.
4. Wages and markups

Even when the source of high inflation is on the supply side, mainstream economic theory recommends
monetary tightening to stop the supply shocks from affecting workers’ expectations and reinforcing
higher wage claims, as these may create a destabilizing price-wage spiral. On a more practical level,
policymakers hope that through speculation and financial carry costs, a high dollar interest rate puts
negative pressure on international commodity prices and helps disinflation in the United States and
elsewhere, but usually at a large social cost in terms of unemployment and foregone output, depending
on the size of the tightening and the state of the economy.
To analyse the implications of the current monetary restriction we have therefore to check the state
of economic activity, especially the labour market, which is usually done by comparing nominal wage
growth to labour productivity. In fact, if unit labour costs (ULC) – measured by the ratio of the average
wage to productivity – are rising significantly, the monetary tightening needs to be larger, to produce
any effect on inflation, with significant damage caused to output growth and employment. Moreover,
in normal times, with balanced growth, stable relative prices, and fixed markups, the difference
between nominal wage growth and labour productivity growth should equal inflation. However, during
crises and adjustment periods, changing relative prices and moving markups add other short-term
determinants to inflation. When firms setting higher profit margins are, a source of higher prices,
monetary restrictions are a particularly inefficient and unfair response.
Data from OECD on ULC show a common pattern during the Covid shock in 2020, but a divergent
behaviour thereafter. More specifically, the first economic impact of the Covid crisis on most firms was
to reduce their productivity, which in the face of a constant nominal wage, raised the ULC. Then, as
25
economies recovered, labour productivity moved up and the ULC moved down. This cyclical pattern
emerged in the main OECD economies between early 2020 and early 2021, but then economies
diverged (figure 1.24). In the United States, nominal wage growth outpaced labour productivity,
pushing the ULC substantially up in late 2021 and early 2022 even as real wages declined. In the first
quarter of 2022, the ULC was up 7.1 per cent. In contrast, in the European Union, at the beginning
of 2022, annual growth rate of ULC was 2 per cent, in line with the region’s long-term inflation target.
In Japan, the ULC was practically stable in the beginning of 2020 (zero growth rate), also ruling out
excessive demand pressures in the labour market. The most remarkable case is the United Kingdom,
where the ULC growth rate shot up to double digits during the lockdown of 2020 and then collapsed
to negative double digits during reopening. The United Kingdom ULC continued to fall in first half of
2022, with nominal wage growth almost 3 points below labour-productivity growth on an annual basis.
Figure 1.24 Unit labour cost per employed person

(percentage change over respective quarter of previous year)
United States Euro area (19 countries)

7 8
6
6
5
4
4
2
3
0
2
−2
1
0 −4
2017 2018 2019 2020 2021 2022 2017 2018 2019 2020 2021 2022
Japan United Kingdom

8 25
6 20
15
4
10
2
5
0
0
−2 −5
−4 −10
−6 −15
2017 2018 2019 2020 2021 2022 2017 2018 2019 2020 2021 2022
Source: Organisation for Economic Co-operation and Development.
26
Changes in ULC, however, do not automatically translate into price level variations. Their transmission
depends on the firms’ decision to set a markup over production costs. In theory, prices can still go
up when the ULC goes down, provided firms are hiking their gross profit margins (EBITDA: earnings
before interest, taxes, depreciation and amortization) faster than the ULC is falling. Using the ratio of
corporate profits to gross production value (which includes intermediate consumption) as a proxy of
the aggregate markup margin, the recent behaviour of the United States economy shows a fall during
the first impact of the pandemic in early 2020, followed by a quick recovery in 2021. By mid-2022,
the ratio of corporate profits to GDP was 7 per cent, against 6.25 per cent before the pandemic
I
(figure 1.25). And between 2020 and 2022, an estimated 54 per cent of the average price increase
in the United States non-financial sector was attributable to higher profit margins, compared to only
11 per cent in the previous 40 years (Bivens, 2022; Konczal and Lusiani, 2022). High wage costs and
non-wage costs (for energy and fuel) cannot fully explain the recent price acceleration in the United
States. Procyclical markups have been a major factor. In this context, competition policy and price
controls have a critical role to play.
For most developing countries, data on non-wage costs and profit margins are patchy, but two
factors suggest dynamics similar to those in the United States may be at play. First, labour shares
have been falling overall in developing countries, pointing to a reduction of (real) unit labour costs
(chapter III). Second, the factors that drove up profit margins in the pre-pandemic period (TDR, 2018)
likely reappeared after the first Covid shock of 2020.
Figure 1.25 Aggregate markup, United States, 1st quarter 2017–2nd quarter of 2021 (percentage)
6.75
6.50
6.25
5.75
5.50
2017 - Q1
2017 - Q2
2017 - Q3
2017 - Q4
2018 - Q1
2018 - Q2
2018 - Q3
2018 - Q4
2019 - Q1
2019 - Q2
2019 - Q3
2019 - Q4
2020 - Q1
2020 - Q2
2020 - Q3
2020 - Q4
2021 - Q1
2021 - Q2
Source: UNCTAD secretariat calculations based on OECD data.

Note: Data refer to the ratio of corporate profits to gross production value.
27
C. OBSCURED BY MONETARY CLOUDS:

TOWARDS A MORE SUSTAINABLE AGENDA
In the decade following the GFC, an opportunity was missed to put the world economy on a more
stable, sustainable and inclusive growth path. Once the panic had been extinguished, the banking
system propped up and growth somewhat restored, advanced country governments immediately
began to cut spending, while central banks continued to prime financial markets with continued
purchases of assets from private actors (quantitative easing). With this backing, non-bank financial
institutions greatly expanded their portfolios (chapter III), while large corporations indulged in share
buy backs and acquired rival companies. Yet weak capital formation, wage stagnation and unchecked
wealth and income inequality held back a strong and inclusive recovery. Rising levels of indebtedness
in developed and developing countries alike and across all sections of the economy kept economies
ticking, although financial stress mounted, even before Covid struck.
The recent supply-driven rise in inflation has pushed many governments into a somewhat muddled
strategy. The emphasis is on interest-rate hikes, tempered to varying degrees by tax breaks and
subsidies and combined with a disjointed mixture of military build-up and cuts to social programs, in
the hope that “cooling down” some parts of the economy will restrain wage growth and stop runaway
prices. The promise is a soft landing in advanced economies and a return to pre-Covid normalcy
(chapter III). In developing countries, fiscal consolidation looks less ambiguous: it will likely be more
contractionary in hope of stabilizing financial markets, curbing capital outflows, halting devaluation and
boosting investor confidence. All of this, as outlined in this chapter, comes with a good deal of wishful
thinking.
While interest rate hikes can fight temporary inflationary pressures and help contain expectations, they
also, as noted earlier, add to household and business costs (Deleidi and Levrero, 2020). In this sense,
they will cause damage to the productive economy and increase exposure to future supply-side shocks,
perpetuating the line of policy action that privileges financial markets over non-financial businesses.
This is especially concerning as the current policy mix does not consistently include a strategy to
eliminate production bottlenecks, raise investment rates, increase productivity and rebalance budgets
in a progressive direction.
In theory, coordinated monetary action by the IMF and leading central banks can help reduce the risk
of financial shocks and, if a shock does occur, limit contagion. But if recent history is any guide, the
most probable scenario, particularly for developing countries, is one in which policy action is “too little,
too late”, taken only after crises have erupted and with a strong bias to creditor interests.
The world is facing a systemic crisis and only systemic action can solve it. Focusing solely on a
monetary policy approach – without addressing supply-side issues in trade, energy and food markets
– to the cost-of-living crisis may indeed exacerbate it. Under current supply-chain challenges and
rising uncertainty, where monetary policy alone cannot safely lower inflation, pragmatism will need to
replace ideological conformity in guiding the next policy moves.
The challenge is complicated by the legacy of forty years of predominantly neoliberal economic
policies in the main economies of the world that have left state capacity and international coordination
in poor condition. Fortunately, institutions can adapt fast; a point confirmed by the initial response
to the Covid-19 pandemic. With a focus on linking immediate macroeconomic policy challenges to
boosting investment in the SDGs and drawing on suggestions made in past Reports, policy programs,
appropriately tailored to local economic circumstances, should be built around the following elements:
28
I - Containing inflation (not cutting wages): Policymakers should avoid an undue reliance on
monetary tightening and foreswear a premature return to austerity budgets. The alternative to
a damaging rise in interest rates to bring down inflation requires a pragmatic mix. First, while
subsidies to ease the cost-of-living are important in the short term, price and markup controls are
paramount, as they also allow for overdue increases in real wages. This requires a reinforcement of
anti-trust measures and a reconsideration of regulation in specific markets (box 1.3). As detailed in
chapter III, these policies can be bolstered at a regional level, so that single countries are shielded
from external constraints, such as exchange rate movements and capital flows.
I
II - Managing growth (not mismanaging booms and busts): Monetary and fiscal rules need to
be better adapted, not just to respond to shocks, but also to support much-needed structural
changes in the economy, such as industrialization in developing countries and the energy
transition. Maintaining sustained job creation and industrial upgrading will require governments to
have sufficient fiscal space for the necessary investments and ongoing support measures. Liquidity
creation should always be allowed for development projects that guarantee, in the medium-long
term, higher income and tax revenues (TDR, 2021: box 1.3). This will require not only rethinking the
independence of central banks from any development and social goals but also considering, where
appropriate, new regional arrangements (chapter VI).
III - Investment first (second and third): There needs to be higher public investment in economic
and social infrastructure to boost employment, raise productivity, improve energy efficiency and
reduce greenhouse-gas emissions, in an internationally coordinated effort around common global
objectives. But crowding in private investment will also require taming financial institutions to make
sure they serve the broader social good. Industrial policies will also be required to target desired
sectors and guide investment, along with better capitalized public banks committed to lengthening
the investment horizon of private businesses, including through the productive leveraging of
reinvested profits.
IV - Levelling up: While anti-trust measures and incomes policies to boost productivity growth
can help achieve more equitable distribution of income, redistributive policies can help mitigate
unbalanced outcomes. These include the reinforcement of public service provisions and progressive
tax reform, such as wealth and windfall taxes, together with a reduction of regressive tax cuts
and loopholes. Clamping down on the use of tax havens by firms and high-wealth individuals will
require legislative action at both national and international levels. Interim efforts in this direction
could include a global financial register, recording the owners of financial assets throughout the
world.
V - A new Bretton Woods: In an interdependent world, calling for greater ambition from domestic
policymakers requires rethinking global economic governance from a development perspective.
Almost eight decades on from the foundational conference in New Hampshire, the international
financial architecture is struggling to address the imbalances and inequities of a hyperglobalized
world order. A stable multilateral monetary and financial system with require more timely balance
of payments and liquidity support, a swap facility open to all, a public credit rating facility and rules
for managing sovereign debt crises. A bolder agenda to scale up public development finance will
require an increase in base capital of multilateral financial institutions along with a reassessment of
their lending headroom and priorities, combine with stronger price and quantity-based controls and
incentives to ensure that complementary private finance flows towards productive transformation.
29
Box 1.3 Cereal killers: Cracking down on commodity market speculation

There is a good deal of evidence to suggest speculation is contributing to rising food and energy prices
(chapter II). The financialization of commodity markets, linked to the creation of tradable commodity
indexes by the big banks, was already visible with the commodity price boom and bust in the first decade
of the new millennium. The details of these price movements have been examined in previous Reports; the
conclusion was that the growing participation of financial investors in commodity trading for purely financial
motives was a contributing factor to price rises (TDR, 2011: chap V). Today, there is strong evidence that
the disconnect between financial speculation and commercial hedging is one important factor driving up
energy, food and commodity prices.
While a balance between speculators and commercial hedgers is necessary for price discovery and
sustained liquidity in regulated financial markets (ideally, this ratio is around 3 to 7), the participation of
large financial institutions – investment banks, pension funds, sovereign wealth funds etc. – in commodity
price bets has come to outstrip the role of commercial hedgers. Before 2002, the average composition
of non-commercial speculators in the United States oil futures market was 20 per cent; in 2009, it rose to
approximately 50 per cent. More recent estimates put it between 70 per cent and 80 per cent (Greenberger,
2018a). All the major oil companies, leading United States banks and private energy trading houses led
by Vitol, Trafigura, Mercuria and Glencore are involved in speculative energy trading (Juhasz, 2022). The
effect of the excessive speculation is overwhelming volatility in oil prices, often driving the price of a barrel
of crude oil $25 to $30 above what market fundamentals dictate (Juhasz, 2022). Likewise, speculative
activity by hedge funds, investment banks and pension funds has driven up wheat prices (box 2.3; Kornher
et al., 2022). The resulting super profits enjoyed by these firms stand in sharp contrast to the economic
hardship experienced by households in developed and developing countries alike, as the price of these
basic necessities has spiked.
Without undermining the positive role financial instruments can play in boosting liquidity and reducing
hedging costs in these markets, UNCTAD (TDR, 2011) proposed a series of market-level reforms that
could help reduce the distortions and volatility such instruments can introduce.
These included:
• Greater transparency in physical markets through the provision of more timely and accurate information
about commodities, such as spare capacity and global stock holdings for oil, and for agricultural
commodities, such as areas under plantation, expected harvests, stocks and short-term demand
forecast.
• A better flow of, and access to, information in commodity derivatives markets, especially with respect to
position-taking by different categories of market participants.
• Tighter regulation of financial market participants, such as setting position limits, to reduce financial
investors’ impacts on commodity markets; for example, proprietary trading by financial institutions
involved in hedging transactions of their clients could be prohibited because of conflicts of interest.
• Market surveillance authorities could be mandated to intervene directly in exchange trading on an
occasional basis by buying or selling derivatives contracts with a view to averting price collapses or
deflating price bubbles.
Progress on these fronts has been slow or has not advanced at all, leaving gaps and loopholes in the regulatory
system (Greenberger, 2018b) and limiting the space for policymakers to reduce the incidence of commodity
price volatility (Larsen, 2022). In the meantime, financial innovation and arbitrage strategies, especially those
deployed in over-the-counter (OTC) deals with financial swap contracts, have made the conceptual distinction
between commercial hedging and financial speculation more challenging (Chadwick, 2017).
30
In light of recent developments, revisiting earlier proposals and considering more radical regulatory steps
would be timely. Even within the existing legislation, the Commodities Futures Trading Commission (CFTC)
can discourage speculators by tightening position limits in energy futures markets to discourage speculative,
market momentum-based speculators, for example, limiting the number of shares or derivative contracts
that a trader or any affiliated group of traders and investors may own.
On top of introducing position limits, the CFTC should increase margin requirements, forcing a trader to
hold larger capital reserves for a given number of positions, making it much more expensive to corner
I
the market and gain from speculation. There also needs to be better oversight and control of clearing
platforms, with a possibility of disallowing those types of transaction that point to excessive speculation.
An outright ban on commodity index funds and compulsory premarket government licensing of complex
financial instruments (Chadwick, 2017) can be part of a strong regulatory toolset as well. These could shift
the burden of proof concerning the social utility and risks posed by a given financial instrument onto those
seeking to profit by its trade.
As previous experience shows, to be effective, these proposals need to be implemented systemically, in
line with other institutional measures aimed to protect the most vulnerable parts of the world population
from the crises driven by financial speculation, corporate arbitrage and market manipulation.
D. REGIONAL TRENDS
1. The Americas
The United States economy is decelerating. Growth will fall from 5.7 per cent in 2021 to 1.9 per cent
in 2022, and then continue to slide, reaching 0.9 per cent in 2023. This deceleration is driven by three
forces. First, the increase in real interest rates to reduce inflation is already slowing demand down,
especially residential investment and consumer demand. Second, the phasing out of the American
Rescue Plan’s fiscal stimulus adds a negative impulse to United States demand. Third, the adjustment
of asset prices to higher interest rates has imposed huge capital losses to United States firms and
families, reducing private demand temporarily. Most of the growth deceleration will happen between
mid-2022 and mid-2023, with a marginal recovery in late 2023.
Canada is expected to follow the United States fluctuation, but with a lower volatility because interest-
rate-induced capital losses have a relatively lower effect on the Canadian economy.
Recessionary dynamics are also at play in Mexico for 2022–2023. Growth in 2022 is expected to reach
1.8 per cent, even though the recovery in 2021 was only half-way back, after the sharp recession of
2021. Part of the slowdown is due to economic policy, as the Mexican government refrained from
adopting a large fiscal stimulus after the pandemic. For 2023, because of its close ties to the United
States business and monetary cycle, Mexican GDP is expected to decelerate further, to a 1.4 per cent
growth rate.
Similarly, after a brief recovery in 2021, the Brazilian economy is now at risk of an abrupt deceleration,
reaching 1.8 per cent growth in 2022. Regardless of 2022 election results, there will probably be a
negative fiscal impulse in 2023, which together with the lagged effects of monetary tightening, is
expected to reduce GDP growth to just 0.6 per cent in 2023.
31
Argentina is also on the way to a growth recession. Even if the momentum from 2021 contributes to
yield a robust 4.1 per cent growth in 2022, a sharp deceleration starting in the second half of the year
will bring about an economic contraction of about 0.8 in 2023. In addition to the global headwinds
created by higher international real interest rates, Argentina’s turn-around reflects the recessionary
impact of exchange-rate depreciation. The economy is at risk of entering a trap of high inflation and
sharp falls in real income.
Chile and Colombia have comparatively more diversified economic structures. Their respective
governments aim to shift economic policy towards social inclusion and employment generation, but
the global monetary tightening and the balance of payments constraints on Latin American economies
reduce their fiscal space.
Other economies of South America and of Central America and the Caribbean will, with some
differences among them, follow the trend of the larger economies, with moderate growth this year and
a deceleration in 2023.
2. European Union
France experienced two quarters of relatively strong growth, especially in agriculture and industrial
sectors, but it is expected to slow down the second half of 2022, affected by the slowdown in global
demand, the increase in interest rates that is already being felt on residential investment and the rising
cost of energy. France is one of a few countries in the region whose electricity production relies more
than 90 per cent on renewable sources and nuclear power; yet the increases in fuel prices have taken
a visible toll on private demand for goods and services. France is projected to grow 2 per cent in 2022
and 1 per cent in 2023.
Germany relies more heavily on fossil fuels for electricity production, with 24 per cent of electricity
deriving from coal and 18 from gas, for a total of approximately 44 per cent of electricity from fossil
fuels. The energy crisis and possible rationing of gas are expected to take a toll on manufacturing
activity, employment creation and, through rising costs, on households’ real spending. Meanwhile,
Germany’s export sector, a long-time driver of growth, is expected to suffer from the slowdown of
global demand in an environment of rising interest rates. The main drivers of Germany’s growth in 2022
have been external demand and fiscal policy, while the private sector has been dramatically reducing
its claims on real output. In 2022, growth is projected to reach 1.1 per cent. In 2023, with the fiscal
stimulus thinning down, the economy is projected not to grow.
The Italian economy experienced a growth rebound in the second quarter of 2022 after a flat first
quarter, mostly because of an increase in demand for services after the last Covid-related restrictions
were lifted in March and the strong activity in construction, buoyed by state subsidies. Industrial
production remains a positive factor but is expected to slow due to rising energy and component
costs, as well as subdued global demand. The net external position has turned negative because of
the price of energy imports. Overall, we expect Italy to grow 2.5 per cent in 2022 and 0.5 per cent in
2023.
Overall, the European Union is expected to slow down because of higher energy costs and subdued
global demand, with Germany and Italy particularly exposed. Inflation has been highest in Germany
and Spain, where incomes are still below pre-pandemic levels (-0.2 per cent from the last quarter of
2019 in Germany, -2.5 per cent in Spain). Various measures have been taken at the national level by
member countries to cushion the impact of the rising cost of living, in some cases funded by windfall
taxes on energy companies. While the disbursement of the Recovery and Resilience Facility fund
continues, with €100 billion in loans and grants disbursed out of €723.8 billion, no European Union-
wide provision to face the energy crisis has been announced.
32
3. The Russian Federation, Belarus, Ukraine

The strong rebound of the Russian economy in 2021 was short-lived. The full impact of the sanctions
imposed on the country following its invasion of Ukraine in February 2022 is yet to become clear.
While the effect of financial sanctions has already been registered, the impact of trade restrictions is
expected to become more acute in late 2022, after companies exhaust the stocks of their imported
inventories. The embargo on Russian oil imposed by the European Union which puts federal budget
revenues under pressure is due to come into effect in late 2022.
I
Reflecting this uncertainty, estimates of the depth and duration of the Russian Federation recession
in 2022–2023 vary. But despite continued state support of selected industries, redirection of exports
away from Europe and other traditional markets, a decline of GDP in the order of 7 per cent is
expected in 2022. More pessimistic readings, based on the absence of growth stimuli in an economy
heavily dependent on imports in key sectors and where pre-war growth has been driven by consumer
demand, see the recession continuing into 2023. UNCTAD expects that after the sharp contraction of
2022, the Russian economy may post a weak growth rate of 1.3 per cent in 2023.
The GDP of Belarus is expected to drop by about 4 per cent in 2022, as a consequence of the loss
of export revenues due to sanctions and a breakdown in logistical chains. While reliance on Russian
imports has helped to limit the effect of the crisis to individual sectors, IT and the external sector have
weakened in 2022. In 2023, the Belarussian economy is likely to show a growth rate of no more than
1 per cent.
Ukraine, in addition to humanitarian losses, faces an estimated cost of $10 billion per month for the
war, approximately half of which is covered by external finance. Estimates of the ultimate economic
costs of the war vary. While it is impossible to offer definitive estimates at a time of ongoing conflict, it
is apparent that the resilience of the economy is waning.
4. The United Kingdom

The economy of the United Kingdom grew rapidly in 2021, by 7.4 per cent, but still not compensating
for the contraction of 9.3 per cent with the Covid-19 shock. While the growth momentum continued
into the first quarter of 2022 (with an annualized growth rate of 3 per cent), a series of headwinds,
some resulting from Brexit and others from international conditions, are impacting the outlook.
Gross fixed capital formation, virtually stagnant in real terms since 2017, remains subdued. External
adversities stemming from sluggish global demand, exchange rate instability and yet unresolved Brexit
shortcomings are contributing to current account challenges. The stimuli from government spending in
response to the Covid shock started to weaken mid-2021, and all indications suggest fiscal tightening
will become the norm. At the same time, consumer demand is weakening due to the cost-of-living
crisis. Given these conditions, while the economy will exhibit an annual growth of 2.6 per cent in 2022
(on the heels of the inherited growth momentum), it is likely going to contract by 0.9 per cent in 2023.
5. East Asia
The East Asian region registered a strong recovery in 2021, but UNCTAD estimates a moderation in the
growth rate in 2022. Our baseline scenario envisages an expansion of 3.2 per cent this year, compared
to 6.5 per cent growth in 2021. A confluence of factors – including a significant increase in the prices
of the region’s imported commodities, as well as a softening in global demand for the region’s exports
and a tightening in international monetary conditions – is weighing on growth throughout the countries
in East Asia. For 2023, we expect growth to pick up moderately to 4.3 per cent.
UNCTAD expects a significant deceleration in economic activity in China in 2022, from 8.1 per cent in
2021 to 3.9 per cent, mainly because of the protracted lockdowns. Continued uncertainty weighs on
consumer spending, despite a loosening of credit conditions by the authorities. The property sector
33
is locked in an evolving financial crisis. While certain export industries have performed strongly (most
notably the semiconductor industry), others are seeing slowing external sales as international demand
weakens amidst growing inflationary pressures and monetary tightening.
State support has largely concentrated on the supply side of the Chinese economy. The government
has relied on boosting infrastructure investment and providing support to businesses, along with some
deregulation in the financial and real estate sectors. Monetary policy stimulus has been limited despite
subdued domestic inflation. The authorities have reduced the 5‑year loan prime rate for mortgage
lending and directed banks to increase lending. While these sets of policy measures will help to
buttress growth, they are not of the same scale as the stimulus measures applied in the last two years.
We expect growth in 2023 to yield 5.3 per cent, falling slightly short of the authorities’ annual target
of 5.5 per cent.
In Japan, growth of GDP in 2021 was 1.7 per cent, after a negative 4.5 per cent in 2020. It is estimated
that a relatively strong positive rate for the second quarter of 2022 will be followed by positive but
faltering growth in the next quarters, leading to an annual growth of 1.0 per cent in 2022. The economy,
which continues to rely on the growth of exports, is affected by the deceleration of growth in China and
a more generalized slowdown of global trade and high prices for imported commodities. These factors
together suggest Japan’s GDP growth will reach 1.8 per cent in 2023, allowing the level of economic
activity to surpass that of the peak of 2019 only towards the end of 2023.
In the Republic of Korea, growth is expected to slow following the robust bounce-back observed
in 2021, at 4.0 per cent, when a dynamic export sector and continued fiscal and monetary support
measures helped to propel economic activity. For 2022, we estimate a less dynamic expansion of
2.2 per cent. High household debt and increasing inflation are dampening consumption spending.
With inflation mostly imported, the impact of monetary tightening on prices will likely be very limited.
We expect growth to decelerate further in 2023 to 2.0 per cent, as weakening external demand
impacts the export sector; in addition, more restrictive fiscal and monetary policies are expected to
inhibit consumption and investment spending.
6. South-East Asia
South-East Asia registered a relatively anaemic growth of 3.8 per cent in 2021, far below the rate of
expansion observed in recent years. For 2022, the economic performance of the region has so far
been stronger, albeit uneven. UNCTAD estimates the region will grow by 4.1 per cent in 2022, yet
growing inflationary pressures and a subsequent tightening of domestic monetary stances, along with
more costly international financing conditions, will dampen activity. For 2023, we expect the region’s
growth rate to decelerate to 3.8 per cent in the context of sluggish growth of global trade and the
expected effects of tightened domestic monetary policy, as the region’s vulnerability to financial and
exchange rate instability weighs on policymakers’ minds.
UNCTAD expects the Indonesian economy to grow 4.3 per cent in 2022, after having registered a
relatively weak recovery in 2021. The stronger growth performance in 2022 is largely a result of the
lifting of Covid restrictions, favourable conditions for the export sector and the accommodative stance
of the Central Bank. Yet the pronounced increase in domestic food and energy prices was met by the
introduction of a temporary ban on the export of palm oil and increases in energy subsidies. For 2023,
UNCTAD estimates 4.4 per cent growth, as the positive impact of continued high prices for Indonesia’s
commodity exports will be somewhat tempered by a more restrictive monetary stance, dampening the
growth in activity.
In Malaysia, UNCTAD expects economic activity to pick up from 3.1 per cent in 2021 to 5.4 per cent
this year. This is partly thanks to the use of increased fiscal revenues – from the country’s commodity
exports to cushion imported inflation and export bans on certain agricultural products. Tempering this
broadly positive outlook is the country’s vulnerability to tightening international financial conditions,
34
due to its relatively high levels of external debt. As a result, we expect growth to slow to 3.5 per cent
in 2023, as more costly international financing conditions will only be partially offset by the continued
favourable terms of trade for the country’s commodity exports.
In Thailand, despite the expected expansion of 3.0 per cent in 2022, the recovery has been subdued.
The over-reliance of the economy on the tourism sector continues to weigh on activity: the shortfall
in tourism-related services exports, together with the increased cost of energy imports, has led to a
deterioration in the current account balance precisely as external financing conditions become more
costly. On the domestic front, increased inflationary pressures have proven detrimental to households’
I
purchasing power and have only been partially countered by government subsidies. For 2023, we
expect growth of 4.0 per cent largely thanks to tourism flows beginning to recover to their pre-
pandemic levels.
UNCTAD expects a strong 6 per cent GDP growth in Viet Nam in 2022. The dynamism of manufacturing
exports and services will drive the expansion, as international companies continue to start productive
operations in the country. Although weakness in private consumption will temper growth, and energy
and food prices will be high, we expect growth to remain robust in 2023, at about 6.5 per cent.
7. Western Asia
The Western Asian region will register a relatively strong growth rate of 4.1 per cent in 2022, substantially
above pre-pandemic rates. Revenues from energy exports have been further boosted by significant
increases in oil production volumes in line with the OPEC+ agreement’s gradual relaxing of output
restrictions. However, the higher import bill for both fuel and food products is putting a significant
strain on the region’s economies, and the situation is aggravated by the tightening of international
financing conditions. Meanwhile, in the region’s commodity-exporting countries, higher fiscal revenues
from energy exports have endowed states with greater resources to provide relief to households from
increased consumer prices, but in the region’s commodity-importing countries, households are being
squeezed, particularly by food prices, with very limited state support. We expect the region’s growth
to moderate in 2023 to 2.9 per cent, as a slowdown in international demand and increasingly tight
monetary stances will temper the expansion in economic activity.
In Saudi Arabia, UNCTAD estimates growth of 6.6 per cent in 2022. The strong performance will be
driven by the oil sector in line with the output increases contained in the OPEC+ agreement. For 2023,
we expect growth to moderate but to remain robust at 3.9 per cent. Increased fiscal revenues from
oil export earnings will continue to help finance the government’s ambitious public investment plans,
particularly for large-scale infrastructure projects. Continued tightening of monetary policy in 2023 to
respond to United States policy will prove a drag on growth.
Türkiye, having registered an extraordinary growth of 11.0 per cent in 2021, is expected to decelerate
abruptly in 2022 to 2.4 per cent. Weakening global demand and higher prices for imported commodities
will cause a deterioration in the current account deficit; meanwhile, inflation topped 70 per cent by
mid-2022, and this will dampen consumption growth. The sharp depreciation of the lira has added
further upward pressure on prices and increased the costs of servicing the country’s considerable
foreign-currency denominated debt. For 2023, we expect growth to remain constant at 2.4 per cent,
as a further softening of external demand, along with elevated prices for imported oil and gas, will
continue to complicate growth prospects.
8. Central Asia
In the Central Asian region, UNCTAD expects growth of 3.6 per cent in 2022, as external demand
will tend to weaken, but the rebuilding of European fossil energy stocks and elevated international oil
prices will continue to benefit the region’s energy exporters. A growth rate of 3.5 per cent is expected
35
for 2023, as fiscal support becomes more uncertain in a tight monetary environment and external
demand weakens.
In Kazakhstan, growth returned and reached 4.0 per cent in 2021. Fossil energy exports contributed
to narrowing the current account deficit, yet drought and higher global energy prices boosted inflation
Although inflation and continued monetary tightening will weigh negatively on economic activity, high
energy exports and revenues are expected to bring GDP growth up to 2.7 per cent in 2022. In 2023,
GDP growth is projected at 3.5 per cent.
9. South Asia
UNCTAD expects the South Asia region to expand at a pace of 4.9 per cent in 2022, as inflation
increases on the back of high energy prices, exacerbating balance of payment constraints and forcing
several governments (Bangladesh, Sri Lanka,) to restrict energy consumption. Moreover, the limited
and delayed progress in relaxing vaccine-related intellectual property (IP) rights continues to leave
the region vulnerable to future outbreaks. For 2023, UNCTAD expects the region’s growth rate to
decelerate slightly to 4.1 per cent.
India experienced an expansion of 8.2 per cent in 2021, the strongest among G20 countries. As
supply chain disruptions eased, rising domestic demand turned the current account surplus into
a deficit, and growth decelerated. The Production-Linked Incentive Scheme introduced by the
government is incentivizing corporate investment, but rising import bills for fossil energy are deepening
the trade deficit and eroding the import coverage capacity of foreign exchange reserves. As economic
activity is hampered by higher financing cost and weaker public expenditures, GDP growth is
projected to decelerate to 5.7 per cent in 2022. Going forward, the government has announced
plans to increase capital expenditure, especially in the rail and road sector, but in a weakening global
economy, policymakers will be under pressure to reduce fiscal imbalances, and this may lead to falling
expenditures elsewhere. Under these conditions, the economy is expected to decelerate to 4.7 per
cent growth in 2023.
10. Oceania
In Oceania, UNCTAD expects growth of 3.6 per cent in 2022, followed by 2.1 per cent in 2023.
The region’s performance is determined to a large degree by that of its largest economy, Australia,
which accounts for over 80 per cent of the region’s GDP. After rebounding 4.8 per cent in 2021,
partly on the back of recovering external demand, the Australian economy further benefitted from
spiking commodity prices in the first half of 2022. Like in many developed countries, the labour market
appears tight, but inequality is high, and poverty is on the rise. In 2022, Australia is expected to grow
by 3.9 per cent. Yet as longer-term challenges and new headwinds jointly erode domestic demand,
and external demand slows, growth will moderate to 2.3 per cent in 2023.
11. Africa
Africa’s economic activity is expected to expand by a moderate 2.7 per cent in 2022, following a
rebound of 5.1 per cent in 2021. This reflects several new challenges, including high international food
and fuel prices, financial shocks owing to the stronger-than-anticipated tightening of monetary policy
in advanced economies and acute risks of food insecurity in many parts of the region. As a result, an
additional 58 million non-poor Africans will fall into extreme poverty in 2022, adding to the 55 million
Africans already been pushed into extreme poverty because of the pandemic (UNECA, 2022). In the
context of a severe weakening of European and other trade partners, growth on the continent will
continue decelerating, down to 2.4 per cent in 2023.
In Nigeria, the economy grew 3.1 per cent, year on year, in the first quarter of 2022, compared with
4.0 per cent in the fourth quarter of 2021. This marks the sixth consecutive quarter of economic
36
expansion, partly on the back of oil export revenues absorbed by the non-oil sector, including services
and agriculture. In 2022, Nigeria’s economy is expected to grow 2.9 per cent, as result of weak oil
output caused by technical and security hurdles in a context of underinvestment.
In Egypt, domestic economic activity continued to expand relatively quickly in early 2022, driven by
activity in tourism, non-petroleum manufacturing and trade. Yet the country made a request to the IMF
for a new program in March 2022 when it came under new financial pressure. For the rest of the year,
economic activity is expected to soften owing to the negative spillover of the war in Ukraine, leading to
an annual growth forecast of 4.0 per cent.
I
In South Africa, growth in the first quarter of 2022 surprised on the upside, although a severe slowdown
is expected in the second quarter, with flooding in the southeast of the country. While private investment
has strengthened on the back of the recovery, public sector investment remains weak. Household
spending has continued to expand but is likely to soften in the second half of the year, with higher
inflation, lower asset prices and rising interest rates. Meanwhile, tourism, hospitality and construction
should see stronger recovery as the year progresses. Other headwinds include subdued investment
and business sentiment, elevated prices for food and key imported inputs, high indebtedness of the
middle class and increased volatility of capital flows, which compound longer-term challenges, such as
the high unemployment and inequality. As a consequence, the economy will show weak growth rates
of 1.4 and 1.3 per cent in 2022 and 2023, respectively.
Ghana and Tunisia are in talks with the IMF for emergency loans. In late May 2022, the IMF and
World Bank considered 16 low-income African countries to be at high risk of debt distress, while
7 countries – Chad, Republic of the Congo, Mozambique, São Tomé and Príncipe, Somalia, Sudan
and Zimbabwe – were already in debt distress. Bright spots, such as Côte d’Ivoire and Rwanda, are
expected to exhibit rapid growth in 2022. However, 33 African countries need external assistance for
food, and acute food insecurity is likely to worsen in the next months in 18 of these economies.
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Chapter II
II
Trends in International Markets
A. INTRODUCTION
The extent to which the global economy is fragmenting and the consequences for its growth and
stability are pressing questions for policymakers everywhere – and there are no clear answers.
A discernible trend is the emergence of a rigid and fragile global economy after the global financial crisis
(GFC). If this trend continues and becomes reinforcing, the damaging consequences for developing
countries are likely to be significant.
The vulnerability of developing countries stems from the way the key international markets on which
many depend have become both more concentrated and more volatile. This, as discussed in previous
United Nations Conference on Trade and Development (UNCTAD) reports, is particularly true of financial
markets, but the way innovative financial instruments, in the form of futures and options contracts,
swaps, derivative instruments and so on, have allowed a handful of market speculators to influence
the price of key commodities, such as food and energy, is clearly apparent in the current context.
The vulnerability of developing countries is exacerbated by the lack of global safety nets to cushion
the blow and repair the damage from unexpected shocks, such as the Covid-19 pandemic, and by
the lack of policy coordination to ensure their vulnerabilities are taken into account when systemically
important countries are pursuing their own policy agendas.
Given the unfavourable direction of the global economy outlined in the previous chapter, an immediate
concern is the dangerous level of debt distress facing a growing number of developing countries.
This is discussed in the next section. Section C explains how the breakdown of supply chains is
raising wider concerns about the strength and direction of trade flows, whilst section D turns to the
financialization of commodity markets.
B. GLOBAL FINANCIAL CONDITIONS AND

DEVELOPING COUNTRY VULNERABILITIES
Over the decade and a half since the global financial crisis, many developing countries have seen
their external financial positions deteriorate, first gradually and particularly since the Covid-19 shock
more precipitously. As of mid-2022, the IMF assessed 55 per cent of Poverty Reduction and Growth
(PRGT)-eligible countries7 to be at high risk of or already in debt distress – compared to fewer than
30 per cent in 2015. Overall, the IMF has warned that around 6 out of 10 low-income countries and
3 out of 10 emerging market economies are at or near debt distress.
Three immediate factors have been critical in pushing these countries further towards the financial
precipice. First and foremost, after many perfunctory announcements over the past ten years, United
States monetary policy has now embarked on a decisive tightening cycle that has seen the United
States 10-year Treasury yield increase almost six-fold between mid-2020 and mid-2022 (figure 2.1).
Given the continued dominance of the United States dollar in the world economy, this, as discussed
earlier, threatens to reverse the global economic recovery, not least through balance-of-payment crises
in the developing world prompted by United States dollar appreciations against their currencies and,
therefore, also an increase in the dollar-denominated values of their external debt obligations and
higher borrowing costs.
7
The 69 countries eligible to apply to the IMF Poverty Reduction Trust Fund (PRGT) include 25 low-income,
35 lower-middle income and 9 upper middle-income countries, based on World Bank income classifications.
According to the IMF Debt Sustainability Framework, 30 of these 69 countries were deemed to be at high risk of debt
distress and eight in debt distress, as of 31 May 2022.
42
Second, price hikes in some commodity markets add to inflationary pressures on a global scale. This
has negatively affected developing country commodity importers but has benefited some developing
country commodity exporters. While, for now, commodity prices for gas (United States), wheat and
oil have returned to near pre-war levels, uncertainty remains as to the extent to which continuation of
the war in Ukraine will affect commodity prices in the future. Third, the Covid-19 pandemic lingers on
in many countries. This includes high debt burdens left by the pandemic in developing countries that
remain unresolved.
Figure 2.1 Emerging market yield decomposition, 2007–2022 (percentage points)
Spread United States 10-year Treasury yield Implied emerging market yield
Average United States 10-year Treasury yield Average emerging market yield
12
II
Global financial crisis
10
Covid-19
8
0
2007 - H1
2007 - H2
2008 - H1
2008 - H2
2009 - H1
2009 - H2
2010 - H1
2010 - H2
2011 - H1
2011 - H2
2012 - H1
2012 - H2
2013 - H1
2013 - H2
2014 - H1
2014 - H2
2015 - H1
2015 - H2
2016 - H1
2016 - H2
2017 - H1
2017 - H2
2018 - H1
2018 - H2
2019 - H1
2019 - H2
2020 - H1
2020 - H2
2021 - H1
2021 - H2
2022 - H1
2022 - H2
Source: UNCTAD secretariat calculations based on ICE Bank of America (BofA) Emerging Markets External Sovereign
Index.
Note: The implied yield for external sovereign emerging market bonds equals the sum of the United States 10-year
Treasury yield and the spread as measured by the ICE BofA. The average spread (of around 3 percentage points
throughout the period) is measured by the difference between the two average yield lines.
1. Net capital flows to developing countries: mounting headwinds

The combination of these factors has resulted in renewed net negative capital flows from developing
countries since September 2021, bringing to a halt the rebound of net capital flows to developing
countries observed since the last quarter of 2020 (figure 2.2.A).8
8
Net capital flows refer to net non-resident inflows minus net resident outflows, including both private and official flows.
43
Figure 2.2 Net capital flows to developing countries, 2018–2021 (billions of dollars)
A. By type of capital flows B. By country or country group
FDI Portfolio Investment Sub-Saharan Latin America and the Caribbean

Derivatives Errors and omissions Europe and Central Asia China
Other investment Net private capital flow South Asia Middle East and North Africa
East Asia and Pacific (excl. China) Net private capital flow
250 250
200 200
150 150
100 100
50 50
0 0
- 50 - 50
- 100 - 100
- 150 - 150
- 200 - 200
- 250 - 250
2018 - Q1
2018 - Q2
2018 - Q3
2018 - Q4
2019 - Q1
2019 - Q2
2019 - Q3
2019 - Q4
2020 - Q1
2020 - Q2
2020 - Q3
2020 - Q4
2021 - Q1
2021 - Q2
2021 - Q3
2021 - Q4
2018 - Q1
2018 - Q2
2018 - Q3
2018 - Q4
2019 - Q1
2019 - Q2
2019 - Q3
2019 - Q4
2020 - Q1
2020 - Q2
2020 - Q3
2020 - Q4
2021 - Q1
2021 - Q2
2021 - Q3
2021 - Q4
Source: UNCTAD secretariat calculations based on national data.
Note: Developing countries are low- and middle-income countries according to the World Bank income group
classification. By region, the following countries are included: East Asia and Pacific (excl. China): Cambodia, Fiji,
Indonesia, the Lao People’s Democratic Republic, Malaysia, Mongolia, the Philippines, Samoa, Thailand, Timor-Leste,
Tonga, Vanuatu, Viet Nam. Europe and Central Asia: Albania, Armenia, Azerbaijan, Belarus, Bosnia and Herzegovina,
Georgia, Kazakhstan, Kyrgyztan, Republic of Moldova, North Macedonia, Russian Federation, Serbia, Tajikistan, Republic
of Türkiye, Ukraine, Uzbekistan. Latin America and the Caribbean: Argentina, Belize, Plurinational State of Bolivia, Brazil,
Colombia, Costa Rica, the Dominican Republic, Ecuador, El Salvador, Guatemala, Guyana, Haiti, Honduras, Jamaica,
Mexico, Nicaragua, Panama, Paraguay, Peru, Suriname. Middle East and Northern Africa: Egypt, Iraq, Jordan, Morocco,
State of Palestine. South Asia: Afghanistan, Bangladesh, Bhutan, India, Nepal, Pakistan, Sri Lanka. Sub-Saharan Africa:
Angola, Cabo Verde, Eswatini, the Gambia, Guinea, Lesotho, Madagascar, Mauritius, Mozambique, Namibia, Nigeria,
Rwanda, São Tomé and Príncipe, South Africa, United Republic of Tanzania, Zambia.
This initial rebound was driven by a confluence of developments. Increases in net inflows of foreign
direct investment (FDI) to developing countries in the last quarter of 2020, and again in the first and third
quarters of 2021, were a main feature of this recovery phase (TDR, 2021). By contrast, net portfolio
investment that had led the deterioration of net capital flows in the early phase of the pandemic,
remained subdued and volatile throughout 2021, after initial rebounds in the last three quarters of 2020
when global investors in search for yield triggered record net flows of $93 billion in the final quarter of
2020 alone (TDR, 2021). This pattern is driven mainly by non-resident portfolio flows to developing
countries. However, portfolio diversification by residents in emerging-market economies has become
an increasingly important component of net portfolio flow dynamics (JP Morgan, 2022). Finally, net
official flows, recorded under “other investment”9 played a significant role in the resurgence of capital
9
Other investments include currency and deposits, trade credits and advances, private and official loans (including IMF
loans and SDRs), guarantee schemes and other equities.
44
flows to developing countries in this period. Thus, the August 2021 allocation of special drawing rights
(SDRs) as well as emergency lending by the IMF and the World Bank were the main driver behind this
category’s positive contribution in the third quarter of 2021.
However, with the deterioration of global financial conditions from September 2021, net capital flows
to developing countries turned negative again in the last quarter of 2021, reaching $52.3 billion or
around 60 per cent of the highest net negative flows in the period of observation at the peak of the
Covid-19 pandemic (third quarter of 2020). The first quarter of 2022 saw a slight recovery from this
trend, with FDI inflows largely compensating for near record portfolio outflows of $108.8 billion due
to the sell-off of developing countries’ bonds and equities, in part triggered by the war in Ukraine.
This flight of portfolio capital was surpassed only in the first quarter of 2020 amidst the onset of the
Covid-19 pandemic.
Both the initial rebound of capital flows to developing countries as well as the recent negative capital
flow shock have affected developing country regions unevenly (figure 2.2.B). As previous reports have
II
stressed, this reflects not only the dynamics of net foreign liabilities, but also the build-up of foreign
assets by residents of large emerging market economies, led by China (TDR, 2019; 2021). Chinese
“other investment” outflows (linked to overseas deposits, bank loans abroad and trade credit and
advances) accounted for the bulk of “other investment” outflows from developing countries in the last
quarter of 2020 and the first quarter of 2021.
From end-2020, when the Covid-19 crisis was seen by some to gradually come under control, through
to the first quarter of 2022, South Asia was the recipient of the largest cumulative net capital inflows,
equivalent to $179 billion and led by large inflows of other investments. East Asia and the Pacific
(excluding China) recorded net inflows of $70.3 billion, linked mainly to high FDI inflows during this
period. Net inflows to the Middle East and North Africa were smaller, amounting to $36.2 billion, mainly
as a result of inflows in other investment.
The remaining regions witnessed more volatile net capital flows over this period, marked by differing
patterns. These were positive in Latin America and the Caribbean, a region that benefited from net
positive capital inflows of $121.5 billion since late 2020, with the bulk of these received since the third
quarter of 2021. Thus, in the first quarter of 2022 alone, FDI to this region more than compensated
for net portfolio outflows, resulting in net capital inflows of $40.7 billion. These amounted to only
$9.9 billion in East Asia and the Pacific in the first three months of 2022, hovered around zero in other
regions, and were strongly negative for China mainly due to portfolio outflows. Sub-Saharan Africa
was the only region experiencing net capital outflows throughout the period from end-2020 and into
2022, totaling $10.9 billion, due to portfolio and other investment outflows overshadowing official and
FDI inflows. This is especially concerning given the high degree of external vulnerabilities of the region.
The overall outlook for developing countries remains subdued for now. According to the most recent
data available for (selected) developing countries, the flight-to-quality from developing economies
continued unabated during the second quarter of 2022, reaching levels comparable to those following
the onset of Covid-19 pandemic by end-June (IMF, 2022b; Wheatley, 2022). This is also borne out
in the data on emerging market sovereign bond spreads. As figure 2.1 shows, these spreads –
an important indicator of sovereign financial risk and distress – have risen sharply between September
2021 and July 2022, following the United States Federal Reserve’s more aggressive stance on
monetary policy normalization in response to concerns about domestic inflation. Contrary to earlier
episodes of steeply rising emerging market sovereign bond spreads in the wake of the global financial
crisis and at the height of the Covid-19 pandemic, when 10-year United States Treasury bond yields
actually fell, the current episode is clearly driven by emerging market bond spreads moving in tandem
with the 10-year United States Treasury yield curve – a clear indicator of the central role played by the
tightening monetary policy cycle in the United States in mid-2022.
Worst hit by these deteriorating financial conditions are primarily frontier economies that already
suffered from severe balance of payment constraints and high external vulnerabilities from well before
45
the onset of the Covid-19 pandemic. Thus, for example, low- and middle-income countries, whose
external sovereign bonds traded in distressed territory in June 2002 had already seen their bond yields
rising to above 10 percentage points relative to the most common benchmark - the yield on 10-year
United States Treasury bills – in mid-2019 (including Egypt, Türkiye, Pakistan, Uganda and Zambia).
By contrast, for emerging market economies with larger and more liquid markets and with investment
grade ratings, sovereign bond spreads have been relatively contained (Curran, 2022). This now seems
to be changing to an extent, with external sovereign bonds of other larger emerging economies, such
as Brazil and Colombia, seeing their bond spreads on the increase, if not yet in distressed territory
(table 2.1). Given growing expectations of a United States (European Union) recession in 2023, the
most likely scenario will be one comparable to earlier crisis points, in which further rising sovereign
bond spreads with falling yields on 10-year United States Treasury bills.
But this only captures debt and financial distress in those developing countries that issue foreign
currency-denominated sovereign bonds above minimum thresholds required for inclusion in relevant
indices. Other assessment criteria include the IMF debt sustainability reports for countries eligible
to apply to its Poverty Reduction and Growth Fund and, of course, countries already in default or
undergoing sovereign debt restructurings as of July 2022. Table 2.1 provides a summary overview of
countries meeting one or several of these criteria, at the time of writing.
Predictably, these developments have also resulted in widespread currency depreciations across
developing countries in the first half of 2022 (figure 2.3). In addition to widening spreads of developing
countries’ external sovereign bonds, domestic currency depreciations further increase the servicing
costs of debt denominated in foreign exchange. In all, 90 developing countries recorded nominal
depreciations of their currencies against the dollar, of which 34 exceed 10 per cent. Countries with
major depreciations are either net food importers and/or those with long-standing high external
vulnerabilities. Those with only small depreciations are net commodity exporters or countries that
have embarked on a monetary tightening cycle ahead of advanced economies (box 2.1), since the
increased interest rate differential created carry-trade opportunities.
Table 2.1 Developing countries considered in or close to debt distress, mid-2022
Bond yields close to or above 10 IMF debt sustainability assessments

Undergoing sovereign percentage pointsrelative to 10- (in debt distress or at high risk of debt
In default debt restructuring year United States Treasury bills distress) for PRGT-eligible countries
as of 30 June 2022 as of 30 June 2022 as of 30 June 2022 as of 31 May 2022
Low-income Zambia Chad, Uganda, Afghanistan, Burundi, Central African
countries (LICs) Ethiopia, Zambia Republic, Chad, Republic of Congo,
Mozambique Ethiopia, The Gambia, Guinea-Bissau,
Malawi, Mozambique, Sierra Leone,
Somalia, South Sudan, Sudan
Lower Lebanon, Egypt, Cameroon, Cabo Verde, Comoros,
middle-income Sri Lanka Pakistan Djibouti, Ghana, Haiti, Kenya, Kiribati, Lao
countries (LMICs) P.D.R, Mauritania, Micronesia, Papua New
Guinea, Samoa, São Tomé and Príncipe,
Tajikistan, Zambia, Zimbabwe
Upper Suriname Dominica, Grenada, Maldives, Marshall
middle-income Islands, St. Vincent and the Grenadines,
countries (UMICs) Tonga, Tuvalu
Not classified Venezuela
(Bolivarian
Republic of)
Source: UNCTAD secretariat calculations based on IMF Debt Sustainability Framework (as of 31 May 2022), Refinitiv and World
Bank income classification 2022–2023.
Notes: As of 30 June 2022, Brazilian sovereign bond (10-year maturity to keep comparison with 10-year United States Treasury
bills) saw a spread of 9.9 per cent and Colombian bonds of 8.4 per cent (both up from previous year-on-year for date of 30 June).
46
2.3_New.pdf 1 30/12/2022 00:51:15

Figure 2.3 Nominal exchange rate depreciations against the United States dollar, selected
developing countries, January–July 2022 (percentage)
Sri Lanka 77.8

Lao P.D.R. 34.4
Ghana 32.1
Türkiye 31.4
Sudan 29.7
Malawi 25.4
Argentina 23.1
South Sudan 20.3
Egypt 19.8
II
Pakistan 17.5
Sierra Leone 17.3
Haiti 15.6
Source: UNCTAD secretariat calculations based on Refinitiv.

Note: Estimated change in per cent of the nominal exchange rate against the United States dollar between 1 January
2022 and 8 July 2022.
Box 2.1 Monetary tightening in developing countries

The combination of rising policy rates in advanced economies, higher domestic inflation rates and
depreciating currencies is severely limiting the policy space available to monetary authorities in developing
countries. This complex background explains the sharp contrast in terms of monetary policy responses
in the early stages of the Covid-19 pandemic relative to the situation in 2022. Between June 2019 and
May 2020, for a group of 72 developing countries, the median central bank policy rate declined from 5.0
to 4.5 per cent. At least 52 of these countries were able to cut rates during this period to support their
response to the pandemic. By contrast, between June 2021 and May 2022, the median policy rate for this
group increased from 4.0 to 4.9 per cent. At least 51 countries raised policy rates during this period (figure
2.B1.1A). This widespread tightening of monetary policy in developing countries is acting as a constraint
on the efforts of authorities to sustain economic recovery in the aftermath of Covid-19.
In the current context, one of the most important risks faced by developing country governments is an
overshooting of domestic monetary policy tightening. Central banks in these countries have tried to preempt
the expected increase of policy rates in the United States by raising their own rates from the second half of
2021 (TDR, 2022). However, with United States monetary tightening transmitting inflationary pressures to
developing countries through balance of payment crises and currency depreciations, compounded (until
recently) by price hikes in core international commodity markets, monetary authorities in these countries
come under pressure to extend the ongoing cycle of tightening, both in terms of rate hikes and duration
(World Bank, 2022a). High domestic inflation rates turn policy rates negative in real terms and, therefore,
broadly accommodative in many countries. An analysis of the situation for 56 developing countries shows
that in at least 35 cases, policy rates have turned negative despite the implementation of nominal rate
increases over the last 12 months ending in May 2022 (figure 2.B1.1A). This then calls for further monetary
tightening.
This thinking relies heavily on central banks’ wariness of the perceived risks of unanchored inflation
expectations and wage-price spirals (BIS, 2022). These risk preferences inform their inclination to pursue
47
further rate hikes despite both the lack of evidence on systemic build-ups of wage-price spirals and the
equally significant danger of triggering sharp domestic economic downturns (Storm, 2022). This dynamic
highlights the blunt nature of the use of monetary policy tools to tackle the often divergent causes of
domestic inflationary pressures (TDR, 2022).
Figure 2.B1.1 Monetary policy in developing countries
A. Changes in monetary policy, developing B. Real policy rates and changes in nominal policy
countries, 2020-2022 (number of countries) rates, developing countries, 2021-2022 (percentage)
Net policy rate cuts 8
Change in policy rates over last 12 months

No change in policy rates 7
PAK
PRY
Net policy rate increases
6
GHA RUS
5
PER
51 JAM AGO
COL
5 4
DOM
CRI
3 MNG EGY
155 18 UKR
MEX
2 MWI NPL
3 AZE NGA
LSO
GEO
ZAF
52 1 SRB JOR
PHL IND TUN
RWA ALB ZMB NAM
GTM MYS
0
-10 -9 -8 -7 -6 -5 -4 -3 -2 -1 0
June 2019–May 2020 June 2021–May 2022 Real policy rates (May 2022)
Source: UNCTAD secretariat calculations based on Refinitiv.
Notes: Panel A includes data for 72 countries with available data until May 2022. Panel B includes data for 56 countries with
available data until May 2022. The real policy rate is estimated as the difference between the policy rate and national CPI figure
for May 2022. Policy rates include reported central bank policy rates, discount rates or repurchase rates.
2. External debt sustainability in times of tapering

Clearly, these global financial conditions – and the United States monetary tightening cycle – put
already fragile debt sustainability in many, though not all, developing countries in further and acute peril
(UNCTAD, 2021). This is evident from the following brief analysis of the evolution of two core indicators
of external debt sustainability in developing countries.
The first of these – the ratio of total external debt stocks to exports (of goods and services, including
tourism revenues) – provides an indication of countries’ external solvency given the importance of
export revenues to service foreign-currency denominated debt obligations. For all income groups
(low- and middle- income countries, according to the World Bank income classification and excluding
China), this indicator rose from an average of 100 per cent in 2010 to 159 per cent in 2020 (figure 2.4.A).
By 2021, this figure had again fallen to 127 per cent, reflecting the much stronger growth in export
revenues compared to that of external debt stocks in this year. This is still 18 percentage points above
the average value for this indicator at the height of the taper tantrum crisis in 2013 (108 per cent),
but below the value for 2016 (142 per cent) when the first cycle of monetary tightening started. A core
danger of current tightening financial conditions is precisely that this recent positive development will
be reversed.
48
Disaggregating these data by income groups, low-income countries faced the most severe constraints
throughout, with their external debt stocks still exceeding their export revenues by a factor of 2 in
2021. Lower middle-income countries saw their external debt sustainability eroded substantially as
their ratio of total external debt-to-exports steeply from a relatively low value in 2013 (compared, for
example to upper middle-income countries at this stage) to 118 per cent in 2021 (and a factor of 1.5 in
2020). Unsurprisingly, upper middle-income countries have fared better on average but have also seen
their ability to service external foreign-currency denominated debt obligations through export revenues
decline over the past decade.
Most importantly, however, such group averages hide the fact that, in each income group, there can
be significant “outliers” – that is several often-smaller countries in much more dire straits than the
average picture would suggest. This is relevant since assessing the severity of debt distress in the
developing world needs to be informed by country experiences. Figure 2.4B-D therefore provides a
more detailed picture, at country-level, of changes in their ratio of total external debt stocks to their
II
export revenues between 2016 – when monetary tightening first set in – and 2020, the last available
year for country-level data. This shows quite clearly that the number of countries in each income group
– with often very different institutional histories, current policy frameworks and operating at different
per-capita income levels – whose position deteriorated in regard to this indicator is substantial (i.e. all
countries above the 45-degree line in figure 2.4B-D).
The second core indicator is the ratio of debt servicing costs on public and publicly guaranteed debt
to government revenues. This approximates the ability of governments to continuously service public
(rather than total) external debt obligations, reflecting not only governments’ ability to marshal domestic
resources for this purpose but also the changing costs of servicing such debt. As figure 2.5.A shows,
a steeply increasing share of government revenues was needed to service external public sector debt
obligations in the period 2010 to 2020. This is the case, on average, for all developing countries (low-
and middle-income countries according to World Bank income classification), as well as for specific
income groups, and is a clear reflection on the cost borne by many developing countries due to their
integration into international financial markets. This has proved a double-edged sword for many and,
especially, poorer and more vulnerable frontier developing countries: On the one hand, largely private
financing provided much-needed immediate relief from external financing constraints, not readily
available through multilateral channels. On the other, (re-) financing in international financial markets
has arguably worsened external financial constraints in these economies in the longer-term due to
their heightened exposure to market risks and associated high and highly volatile debt servicing costs.
While this situation saw some improvement in upper middle-income countries in 2021 – one that
is vulnerable to being reversed soon if adverse global financial conditions persist – there has been
little, if any, reprieve in low- and lower-middle income countries. By 2021, these countries’ public
sectors remained, on average, under high pressure to dedicate substantive and growing shares
of their government revenues to servicing their external debt servicing obligations, compared, for
example, to either the 2013 taper tantrum episode or the onset of monetary tightening in 2016. Here
again, individual country experiences across income groups are telling and relevant, as depicted in
figure 2.5.B for 2020 (the latest data available at country-levels). Clearly, a significant number of both
low- and middle-income countries have seen their external public debt servicing costs rise to well
above 20 per cent of their government revenue. This is not only not conducive to their own future
growth prospects, let alone their ability to respond to higher benchmarks for inclusive and sustainable
growth, but it is also destined to negatively rebound on global economic (inclusive and sustainable)
growth prospects.
49
Figure 2.4 Total external debt stocks to export revenues, developing countries, 2010–2021
(percentage)
A. Income group averages B. Upper middle-income countries
500
External debt to exports ratio (2020)
e
lin
LICs and MICs excl. China LMICs
e
re
g
de
UMICs excl. China LICs COL
45
400 ARG
ARM
250 JOR
GEO
JAM
CUB
ALB KAZ
DOM
200 300 DMA
MDA
ECU
150 TON
BIH BRA
GTM
200 ZAF TUR
MDV CRI
100 PRY PER
FJI ROU IRQ

MYS
UMIC external debt to export

50 100 CHN
AZE RUS
ratio (2020)
GAB SRB
THA
TKM MKD
GNQ BLR
0
LBY BGR
BWA External debt to exports ratio (2016)
0
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
0 50 100 150 200 250 300 350 400 450 500
C. Lower middle-income countries D. Low-income countries
500 500
e
e
MOZ
lin
lin
CPV
ee
ee
gr
gr
de
de
PAK
COM MNG BDI
45
45
LKA
BTN
400
RWA
KEN
400 GNB SOM ETH
ZMB
KGZ
NPL
SEN SLE
NER
300 VUT
AGO SLV
300 UGA
TZA
EGY
BLZ TUN LAO CAF
IDN
CMR UZB NIC
UKR
LICs external debt to export
200 CIV
BOL
HTI ZWE
200 ratio (2020)
NGA BGD MRT MDG
BEN WSM
MAR
LSO TGO
TCD
HND
IND
GHA LMICs external debt to export MLI
100
KHM
SLB
COG ratio (2020) 100
BFA
PHL
SWZ
MMR
DJI GIN
COD
VNM
DZA TLS External debt to exports ratio (2016) External debt to exports ratio (2016)
0 IRN
0
0 50 100 150 200 250 300 350 400 450 500 0 50 100 150 200 250 300 350 400 450 500
Source: UNCTAD secretariat calculations based on World Bank International Debt Statistics.
50
Such figures suggest that the deterioration of developing countries’ external debt sustainability was
more widespread across developing countries than indicated by the IMF LIC Debt Sustainability
Framework. However, and has mentioned, the countries with a particularly perilous position in the
three country groups are mainly economies which were already facing high pressures on their external
debt positions before the Covid-19 pandemic. The pandemic, along with increasing climate-related
shocks, the war in Ukraine and the current tightening of global financial conditions, has led them to the
brink of debt distress or to default.
This means that the current situation, although very worrying, is different from the 1980s and 1990s
when a few but very large developing countries faced acute financial and debt crises.
Figure 2.5 Servicing costs on public and publicly guaranteed external debt to government
revenues, developing countries and groups, 2010–2021 (percentage)
II
A. Income group averages B. Top 20 countries in 2020
LICs and MICs excl. China UMICs excl. China Somalia

Sri Lanka
LMICs LICs Angola
12 Gabon
Lao People's Dem. Rep.
Dominican Republic
10 Mozambique
Turkmenistan
8 Congo
Montenegro
Papua New Guinea
6 Panama
Ghana
4 Maldives
Senegal
Jamaica
2 Georgia
Jordan
0 Fiji
Tunisia
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
0 10 20 30 40 50 60 70 80 90 100
Source: UNCTAD secretariat calculations based on World Bank data.
3. Policy responses by the international community

This analysis reinforces the warnings raised recently by the United Nations Global Crisis Response
Group on Food, Energy and Finance. 94 developing economies, home to 1.6 billion people, are severely
exposed to at least one of the dimensions of the interlocked crises outline above. The Group has
emphasized that there is no way to respond to this challenge, without first addressing the deterioration
of financial conditions in developing countries. Unfortunately, policy and financial commitments made
by the international community in recent months have fallen short of what is required (United Nations,
2022a).
There are three relevant areas of multilateral action which require the implementation of additional
measures based on a renewed sense of urgency. These include the provision of official development
assistance (ODA), the allocation and effective deployment of SDRs and policies to effectively address
debt distress in developing countries.
51
First, there is an imperative need for developed countries to meet their ODA commitments while protecting
levels of assistance in key areas, including Covid-19 vaccination efforts and climate commitments,
and particularly to least developed countries (LDCs). In 2021, ODA reached $178.9 billion, equivalent
to 0.33 per cent of GNI of the members of the Development Assistance Committee (DAC) (OECD,
2022). This figure is problematic for at least two reasons. First, it is less than half of the established
commitment of 0.7 per cent of GNI. Over the last 50 years, the systemic failure of DAC members to
meet their pledges means that developing countries have lost over $5.7 trillion in developing financing
(OXFAM, 2020). Second, resources allocated to LDCs are under threat because of the declining share
of grant financing as well as the expected increase of in-donor country refugee costs (Eurodad, 2022).
Second, developing countries have made active use of their share of resources received through the
allocation of $650 billion in SDRs by the IMF in August 2021. At least 69 developing countries have
included SDRs in government budgets or have deployed them for fiscal purposes for a total of $81
billion since this allocation (CEPR, 2022). Additional resources are required that could be deployed
through different mechanisms. These include the operationalization of commitments to reallocate
SDRs towards the IMF Poverty Reduction and Growth Trust (PRGT) and the new Resilience and
Sustainability Trust (RST), a new emission of SDRs in 2022, and in addition, establishment of an SDR
development link in SDR allocations as long advocated by UNCTAD (UNCTAD, 1965).
Third, piecemeal measures to provide short-term debt relief are inconsistent with the magnitude of
the challenges faced by debt countries in terms of both existing liabilities and future financing needs.
Actions ought to focus on two broad areas. First, establishment a multilateral legal framework for
sovereign debt restructuring to facilitate timely and orderly debt crisis resolution with the involvement
of all official (bilateral and multilateral) and private creditors (TDR, 2015). The framework would facilitate
the provision of debt relief linked to a debt sustainability assessment that incorporates long-term
finance needs, including for the achievement of the 2030 Agenda and the Paris Climate Agreement
(TDR, 2019). Second, establishing a publicly accessible registry of debt data for developing countries
to address debt transparency challenges. Following the UNCTAD Principles for Responsible Sovereign
Borrowing and Lending, this registry would allow the integration of debt data by both lenders and
borrowers at the level of specific transactions in a way that ensures interoperability of data across
direct and indirect sources of reporting (UNCTAD, 2012; Rivetti, 2021; Eurodad, 2019).
Box 2.2 Developing countries’ sovereign defaults and restructurings in 2022

The deterioration in global financial conditions has not triggered a sharp increase in the number of
countries that are either in sovereign default or undergoing a debt restructuring during the first half of
2022. In total, there are five countries classified in default – Lebanon, Sri Lanka, Suriname, Bolivarian
Republic of Venezuela and Zambia – and a further three undergoing a debt restructuring as of July 2022 –
Ethiopia, Chad and Mozambique. Except for Sri Lanka, all the ongoing cases of default and restructuring
started in previous years. In the case of defaults, the duration of each open event remains below the
average length of a default over the last 50 years, estimated at 58 months (figure 2.B2.1.A). In contrast, in
the case of debt restructurings, the duration of each open event is already above the historical average,
estimated at 11 months (figure 2.B2.1.B).
The situation faced by these countries raises three pressing concerns. First, debt distress has already
caused a severe degree of economic and social disruption in these countries. Further delays in addressing
their debt challenges places them at risk of steeper economic output losses (Asonuma et al., 2019).
Second, the combination of elevated debt levels, higher interest rates and the growing likelihood of a
global economic slowdown or recession raise the risks of a renewed series of debt crises, as last seen
in the 1980s (World Bank, 2022a). As a result, a substantial number of countries might be effectively
prevented from mobilizing resources towards achieving the SDGs as they spend most of the rest of the
52
decade grappling with the consequences of debt distress. Third, the existing “non-system” for sovereign
debt resolution is not suited to address these problems (Ocampo, 2017). In the context of an increasingly
diverse creditor base, developing countries in debt distress are trapped by strategic creditor choices
which are more responsive to repeated inter-creditor disputes across countries than to the economic and
developmental considerations of a specific debt restructuring negotiation.
Against this background, efforts to enhance the G20 Common Framework (CF) can be considered a step
towards, but not a substitute, for a permanent and comprehensive debt restructuring mechanism (United
Nations, 2022a). Of the eight countries that are either in default or undertaking a restructuring in 2022,
four are eligible to join the Common Framework. This includes Chad, Ethiopia, Zambia and Mozambique.
The first three have opted to participate in the initiative since early 2021. With the exception of Zambia,
for which an Official Creditor Committee, including China, was eventually set up under the CF on 16 June
2022 and subsequently moved quickly to help unlock a $1.3 billion IMF loan to the country (Cotterill
II
and Wheately, 2022), the CF has achieved little progress so far to accelerate the process of debt crisis
resolution for participating countries.
Previous TDR reports have raised concerns over an approach to sovereign debt restructuring that focuses
on official bilateral creditor preferences as an effective way to address the manifold external debt challenges
faced by developing countries (TDR, 2015). Thus, for example, Zambia still will have to negotiate the exact
terms of debt relief under the CF as well as find a way to bring on board private creditors on comparable
terms.
Figure 2.B2.1 Developing countries’ ongoing sovereign defaults and restructurings in 2022
A. Developing countries in default B. Developing countries’ sovereign debt

restructurings in 2022
Historical
average Historical
length of average
defaulta length of
Sri Lanka May 2022 restructuringb
Ethiopia February 2021

Suriname November 2020
Zambia October 2020

Chad January 2021
Lebanon March 2020
Venezuela November 2017 Mozambique December 2019

(Bolivarian
Republic of)
0 20 40 60 0 10 20 30
Number of months since default event Number of months since restructuring event
Source: S&P Global Ratings (2022); Asonuma and Trebesch (2016).
Note: Panel A includes countries classified in default by S&P Global Ratings as of July 2022. Default date as reported by S&P.
a
Average length of post-default restructurings from default to debt exchange between 1978 and 2020, as defined by Asonu-
ma and Trebesch (2016). Panel B includes countries undergoing a debt restructuring, including participation in the G20
Common Framework (Chad and Ethiopia) or facing ongoing litigation (Mozambique), but which are not classified in default by
a rating agency. Restructuring date refers to application to the G20 Common Framework and start of litigation.
b
Average length of strictly and weakly preemptive debt restructurings between 1978 and 2020 as defined by Asonuma and
Tresbesch (2016).
53
C. TRENDS IN INTERNATIONAL TRADE

Despite the outbreak of war in Ukraine and subsequent sanctions imposed against the Russian
Federation, as well as continued lockdowns in China, affecting particularly Shanghai, world trade has
shown resilience in the first half of 2022.
Before the emergence of these new headwinds, there was a sense that other difficulties that had
hampered the movement of goods around the world since 2020 would gradually ease. Freight rates
started to decline after the third quarter of 2021 while the disruptions in international supply chains and
other logistical eased after it peaked in late 2021 (figure 2.6).
Figure 2.6 Global supply chain pressure index (GSCPI), January 2005–June 2022
(standard deviations from average value)
5.00
4.00
3.00
2.00
1.00
0.00
-1.00
-2.00
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
Source: Benigno et al. (2022).
Note: The index is normalized such that a zero indicates the index is at its average value, with positive values representing
how many standard deviations the index is above this average value (and negative values representing the opposite).
Robust merchandise imports – emanating primarily from Europe, the United States and parts of the
developing world, like “Emerging Asia excl. China” and “Latin America” – supported the growth of
merchandise trade in the first half of 2022 (figure 2.7). This partially reflected pent-up demand relating
to the legacy of the pandemic-driven spending shift from services towards goods that could not be
satisfied earlier because of the supply bottlenecks. It also resulted from other positive factors such as
the appreciation of the dollar in the case of the United States, the relative dynamism of intra-regional
trade in Europe, and favourable terms-of-trade effects in some large emerging economies due to
elevated energy prices.
Elsewhere, demand for foreign goods has been more muted. One notable case is China, where
monthly data show merchandise imports between January to May 2022 5.6 per cent below their
average during the same period last year. Meanwhile, CPB estimates also pointed to a significant
contraction in the imports of the “Eastern Europe / CIS” group, following the outbreak of the war in
Ukraine.
In terms of exports, patterns since the Covid-19 outbreak have varied. Within advanced economies,
by mid-2022, Asian exports stood way above their pre-Covid-19 levels. This contrasts with the United
States and especially the United Kingdom, where exports remain significantly below their historical
peaks. In between these two extremes stand Europe and the “other advanced economies”, laying
slightly above their pre-Covid-19 heights. Within the emerging economies, the picture is also mixed. In
China, “other developing Asian economies” and Latin America, the V-shaped recovery was extremely
54
rapid, while exports continued to grow afterwards. This led to average levels for the first five months
of 2022 that were between 6 and 14 per cent above their pre-Covid-19 maxima. Meanwhile, in “Africa
and Middle East” and in “Eastern Europe / CIS”, similar figures remained about 5 per cent lower than
their pre-Covid-19 peaks.
Figure 2.7 World merchandise trade, January 2005-May 2022 (index numbers, average 2010=100)
Exports Imports
World Advanced economies Emerging economies
180 180
170 170
160 160
150 150
140 140
II
130 130
120 120
110 110
100 100
90 90
80 80
70 70
60 60
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
Euro Area Advanced Asia excl. Japan United States
Japan United Kingdom Other advanced economies
180 180
170 170
160 160
150 150
140 140
130 130
120 120
110 110
100 100
90 90
80 80
70 70
60 60
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
China Emerging Asia excl. China Eastern Europe / CIS

Latin America Africa and Middle East
180 180
170 170
160 160
150 150
140 140
130 130
120 120
110 110
100 100
90 90
80 80
70 70
60 60
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
Source: CPB Netherlands Bureau for Economic Policy Analysis, World Trade Monitor database.
Note: Country group classification relies on Ebregt (2020).
55
Altogether, these developments contributed to an averaged year-on-year growth of 4.3 per cent in real
terms for world trade during the first five months of 2022, if one takes the simple average between the
growth of exports (3.0 per cent) and imports (5.5 per cent).
Turning to the components of exports allows a better grasp of the underlying patterns behind these
aggregates. For goods, estimates of world seaborne exports from Cerdeiro et al. (2020), which track
maritime merchandise trade by their respective vessels in real time, show the following. For the three
main types of vessels, containers, bulk and oil/chemicals,10 data show a significant synchronized
rebound taking place in the second quarter of 2022 (figure 2.8.A). Besides these three main vessel
types, gas shipments and vehicles also registered an upturn during the first half of the year. This
contrasts with foodstuff, the only vessel type that did not perform well during this period (figure 2.8.B).
This results mostly from the blockaded grain exports in the Black Sea, which affected net food-
importing countries in Africa and parts of Asia, since some of them are highly dependent on cereals
coming from the two countries currently at war (United Nations, 2022a). In late July, however, grain
shipments from Ukraine started again after an agreement with the Russian Federation was signed. At
present, it is still unclear how long it will take for exports to normalize but prices of key grains, including
wheat and corn, saw immediate falls and have already returned to pre-war levels.
Turning to trade in services, recent patterns from the subcomponents of this catch-all aggregate depict
a rather favourable picture after many of these sectors were hard hit by the pandemic. Starting with
tourism, the sector continues to recover at a strong pace. This is a boon for the largest component
of trade in services, which accounted for one fourth of this aggregate in 2019 before dropping to one
tenth in 2020 and 2021 during Covid-19. More precisely, international tourism saw a strong rebound
in the first five months of 2022, with arrivals reaching almost half the levels of the same period of 2019.
By regions, Europe and the Americas continued to lead the recovery. Europe welcomed more than
four times as many international arrivals as in the first five months of 2021. In the Americas, arrivals
more than doubled over the same period. Despite the strong rebound, arrivals remained 36 per cent
and 40 per cent below 2019 levels in Europe and the Americas, respectively. The Middle East and
Africa also saw strong growth of about 150 per cent in January-May 2022 over 2021 but remained
about 50 per cent below 2019 levels. Asia and the Pacific saw arrivals almost double, though numbers
were still 90 per cent below 2019, as some borders remained closed to non-essential travel (UNWTO,
2022a). In this context UNWTO has revised upwards its forecast for 2022 due to stronger-than-
expected results in the first quarter of 2022. It expects international tourist arrivals to reach 55–70 per
cent of 2019 levels in 2022 depending on the scenarios it considers for the rest of the year. In parallel,
the percentage of experts seeing a potential return of international arrivals to 2019 levels in 2023 has
increased from 32 per cent in January 2022 to 48 per cent in May, reflecting rising optimism among
tourism experts worldwide, building on strong pent-up demand, in particular intra-European travel and
travel from the United States to Europe (UNWTO, 2022b).
Turning to transport, which accounts for about one sixth of the total trade in services, the recovery
has continued over the course of 2021 and in early 2022. For air passenger transport services, IATA
data show that the seasonally-adjusted international revenue passenger kilometres (RPK) – an airline
industry metric reflecting the number of kilometres travelled by paying passengers – had exceeded
the 2019 levels for almost all main routes by the end of second quarter of 2022, after growing steadily
since the beginning of 2022. Two key segments differ strongly from this encouraging development:
“Asia-Europe” and “Asia-North America”. For these two routes, international RPKs were still severely
depressed (May 2022) at about 65 per cent below the 2019 level, despite progressing since January
2022 when this figure stood at 80 per cent.11 Meanwhile, trends in air cargo has shown an almost
opposite evolution. This specific service declined almost 10 per cent year on year in late 2021, early
10
Containers represent roughly half of the world maritime transport in terms of metric tons of cargo, while bulk and oil/
chemicals account for slightly less than one fifth of the total each.
11
IATA (2022). Air Passenger Market Analysis – May. 7 July. Available at https://www.iata.org/en/iata-repository/
publications/economic-reports/air-passenger-monthly-analysis---may-2022/
56
2022, after an intense activity during the first three quarters of 2021, which lay way above pre-pandemic
trends. Overall, under the current conditions, the revenues of the commercial airlines for passengers
are expected to reach $498 billion in 2022, compared to $607 billion in 2019, while for cargo, revenues
are forecast to $191 billion in 2022 from $100 billion in 2019.12
Figure 2.8 Metric tons of world exports by vessel type, 1 January 2020–7 June 2022
(index numbers, average 2019=100; 31-day centred moving averages)
A. Three main types of vessels B. Other selected types of vessels
Bulk Container Foodstuff Liquified petroleum and natural gases

Oil / Chemical Vehicules
130 130
II
120 120
110 110
100 100
90 90
80 80
70 70
60 60
50 50
2020–Q1
2020–Q2
2020–Q3
2020–Q4
2021–Q1
2021–Q2
2021–Q3
2021–Q4
2022–Q1
2022–Q2
2022–Q3
2020–Q1
2020–Q2
2020–Q3
2020–Q4
2021–Q1
2021–Q2
2021–Q3
2021–Q4
2022–Q1
2022–Q2
2022–Q3
Source: UNCTAD secretariat calculations based on Cerdeiro et al. (2020) and AIS data collected by MarineTraffic (available
at UN COMTRADE Monitor).
Note: Underlying data behind the 31-day centred moving average go until 22 June 2022.
In the other broad categories of trade in services, the recovery has continued across the board, with
export revenues in 2021 exceeding the 2019 figures, except for construction which remained 8 per
cent below its pre-pandemic level. Trade in “ICT” and “insurance and pensions services” registered the
largest growth over these two years, about 30 per cent. During the same period, “financial services”,
“personal, cultural, and recreational services” and “other business services” grew between 12 and 18
per cent.
Despite such positive development in the first half of 2022, the outlook for international trade is rather
grim as the global economy reached an important crossroad around midyear. In the second half
of 2022, risks remain mostly tilted to the downside and trade growth is expected to weaken. This
results from a combination of different factors including, inter alia, continued supply chain disruptions,
weakened demand tapering demand for consumer durables, unduly aggressive monetary policy, and
elevated freight charges. Such worries seem already visible in inventories and new export orders,
both leading indicators for trade, which were subdued in July 2022. Except for China’s new order
figure, which has rebounded in the aftermath of the recent lockdown, those of other major economies
have declined or stabilized below the 50-threshold, marking the difference between improvement and
deterioration. As a result, and despite the broad uncertainties that lie ahead, it is expected that global
12
IATA (2022). Industry Statistics Fact Sheet June 2022. 20 June. Available at https://www.iata.org/en/iata-repository/
publications/economic-reports/airline-industry-economic-performance---june-2022---data-tables/
57
trade will grow almost at par with the global economy in 2022, namely in the range of 2 to 4 per cent.
This would represent a sharp deceleration from the 2021 figure, whose current estimates point to a
range of 7 to 10 per cent in constant prices, depending on whether one considers world exports or
imports, given the challenges that trade statisticians are facing to get reliable price indices for these
variables since many countries still have to provide their final numbers for 2021.
Beyond 2022, the prospects for trade remain relatively weak, mirroring the expected deceleration of
economic growth discussed in the previous chapter and suggesting a return to the subdued long-term
trend prior to Covid-19.
Certainly, the Declaration at the conclusion of the 12th Ministerial Conference (MC12) of World Trade
Organization provided some positive elements and the reaching of an agreement suggested the
multilateral trading system remains relevant in difficult, as well as in good, times. However, many of
the elements were indecisive with the details still pending and it remains to be seen to what extent
they can boost international trade in the near future. The outcomes of value to developing countries
are mainly concerned with the emergency responses to food insecurity and the Covid-19 pandemic,
notwitstanding the resitance of some advanced economies to agree to waiving the TRIPS legislation
that could help developing countries combat the pandemic. Moreover, not being able to resolve the
issues around fully and well-functioning dispute settlement system poses an ongoing challenge to
multilateralism.
In this context, there is still a long way to achieve an inclusive, transparent, and development-friendly
multilateral trading system that serves the three pillars of sustainable development and allows developing
countries to have sufficient policy space to pursue pragmatic development policies adapted to local
conditions. In the pursuit of this objective, chapter IV of this Report argues that, while a constructive
and cooperative approach to multilateralism must remain paramount, open developmental regionalism
could support this transition.
D. COMMODITY MARKETS
While the market for commodities has been historically characterized by sharp movements in
international prices, the fluctuations observed since the onset of the pandemic in early 2020 have
been startling not only in terms of their magnitude but also in the sudden reversals in trajectories.
It is important to bear in mind that the effects of these abrupt price movements are not limited to
the returns to international investors, for whom commodities are just another form of financial asset.
Rather these swings in international prices are having a heavy and real impact on economies and
individuals, particularly in the developing world.
Not only are developing countries seeing an outsized impact of these price movements on their
current account balances – complicated further by the fact that any deterioration in these balances
necessitates financing precisely at a time of increasingly scarce and costly international financing
conditions – they are also experiencing a disproportionately large knock-on effect on domestic
inflationary pressures as these raw materials account for a far larger share of their consumer baskets
than those of developed countries. Ultimately, these sudden price swings are having a direct impact
on the welfare and livelihoods of some of the most vulnerable populations across the globe, both as
small-scale producers and as consumers of these basic goods.
Even before the outbreak of Covid-19, the last decade had seen a period of elevated volatility in
commodity markets, with multiple shocks causing both steep declines and rises in international prices.
This is in stark contrast to the first decade of the twenty-first century, during which a turbocharged
demand for commodities from a rapidly growing and industrializing Chinese economy produced a
58
considerable and sustained increase in commodity prices across the board. The heightened volatility
in commodity markets since the global financial crisis in 2008 has only been exacerbated in the last
two years by severe and largely unprecedented shocks on both the demand and supply side.
The outbreak of the Covid-19 pandemic in early 2020 precipitated an abrupt drop in commodity prices
as lockdowns were imposed and economic activity slowed to a crawl across the globe. The aggregate
commodity price index fell by 25 per cent from January to April (figure 2.9). While the fall in prices was
broad-based, energy commodities registered the largest drop (54 per cent), followed by metals (16 per
cent) and food (9 per cent). Thereafter, a rapid bounce-back in activity, particularly in China, coupled
with severe disruptions to supply, transport and logistics produced a sharp recovery in commodity
prices. The aggregate index rose by just over 50 per cent between April and December 2020, finishing
the year over 10 per cent above the level observed at the end of 2019.
The same factors driving the upward movement in prices in the latter half of 2020 continued into
2021. The aggregate index posted an annual increase of 54.7 per cent over the course of 2021
II
(table 2.2), with energy commodities again registering the largest change (85.8 per cent), followed by
food (29.9 per cent) and metals (20.7 per cent). These upward price pressures remained through the
first two months of 2022, as all commodity groups registered further increases.
Table 2.2 World primary commodity prices, 2008–2022 (percentage change over previous year)
Commodity groups 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022a
All commoditiesb 33.4 -31.6 24.3 28.6 -3.0 -3.7 -7.9 -36.2 -9.4 17.4 16.0 -7.4 -15.8 54.7 55.7
Non fuel commoditiesc 22.2 -17.8 26.1 18.9 -12.7 -6.5 -8.0 -18.9 2.3 9.1 -2.2 0.1 4.2 33.9 14.3
Non fuel commodities (in SDRs) c

18.3 -15.6 26.9 15.1 -9.8 -5.9 -8.0 -11.9 3.0 9.1 -4.2 3.0 3.5 31.1 19.2
All food 32.6 -10.4 12.0 24.0 -6.5 -9.6 -0.8 -15.6 3.6 -1.3 -6.5 -2.0 6.6 29.9 23.9
Food and tropical beverages 31.1 -2.2 11.6 23.6 -9.9 -9.1 3.8 -14.2 2.2 -1.6 -6.7 0.3 3.6 21,0 22.3
Tropical beverages 19.2 1.1 19.8 31.2 -22.4 -19.8 24.1 -10.3 -3.3 -3.1 -8.5 -5.1 4.8 28.3 49.8
Food 34.9 -3.2 9.1 21.1 -5.6 -6.0 -1.2 -15.4 4.0 -1.2 -6.1 1.9 3.3 19.0 15.1
Vegetable oilseeds and oils 35.2 -24.1 13.0 24.8 0.7 -10.5 -9.6 -18.8 7.0 -0.5 -6.2 -6.9 13.7 49.0 26.5
Agricultural raw materials 8.4 -16.4 37.0 24.5 -19.2 -8.8 -11.8 -13.3 -0.4 5.3 -1.8 -3.9 -2.1 13.5 5.5
Minerals, ores and metals 19.7 -12.9 33.6 20.5 -6.9 -9.5 -12.8 -17.2 4.6 11.3 1.3 6.2 15.5 20.7 5.3
Minerals, ores and non-precious metals 17.5 -25.4 39.0 12.2 -16.8 -2.0 -14.6 -24.8 1.4 25.7 2.6 3.4 3.7 43.6 7.9
Precious metals 23.4 7.5 27.5 30.8 3.4 -15.8 -11.0 -9.9 7.1 0.4 0.0 8.9 26.3 3.6 2.5
Fuel commodities 37.9 -38.6 23.1 32.0 -0.5 -1.2 -7.5 -44.4 -17.5 25.9 27.5 -12.6 -32.0 85.8 91.2
Memo item:
Unit value of exportsd 10.9 -9.4 4.4 11.9 -2.3 0.8 -1.2 -11.9 -4.0 5.1 6.7 -2.6 -0.5 15.0 n.a
Source: UNCTAD secretariat calculations, based on UNCTAD, Commodity Price Statistics Online; and UNCTADstat
Note: In current dollars unless otherwise specified.
a
Percentage change between the average for the period January to May 2022 and January to May 2021.
b
Including fuel commodities and precious metals. Average 2014–2016 weights are used for aggregation.
c
Excluding fuel commodities and precious metals. SDRs = special drawing rights.
d
Unit value of merchandise exports of developed countries (M49).
59
Figure 2.9 Daily commodity price indices by commodity group and product, Jan. 2015–July 2022
(index numbers, 2015=100)
Commodity groups Industrial metals
All commodities Industrial metals Iron ore Aluminium

Grains Energy Nickel Copper
400 400
350 350
300 300
250 250
200 200
150 150
100 100
50 50
0 0
2015
2016
2017
2018
2019
2020
2021
2022
2015
2016
2017
2018
2019
2020
2021
2022
Energy Grains
Natural gas Crude oil Soybeans Corn

Natural gas (Europe) Wheat
600 300
500 250
400 200
300 150
200 100
100 50
0 0
2015
2016
2017
2018
2019
2020
2021
2022
2015
2016
2017
2018
2019
2020
2021
2022
Source: UNCTAD secretariat calculations based on Refinitiv data.

Note: Price indices correspond to Dow Jones Commodity Index, except “Natural Gas (Europe)” which corresponds to
Hamburg Institute of International Economics (HWWI) Natural Gas Europe price index and “Iron Ore” which corresponds
to Credit Suisse Commodity Benchmark (CSCB) iron ore TR index.
The outbreak of war in Ukraine therefore came at a time of already historically high prices across the
various commodity categories, and it only exacerbated these upward price pressures. Moreover, the
war has had a truly global impact on commodity markets due to the key role played by the Russian
Federation and Ukraine in international food, mineral and energy supplies. The Russian Federation is
not only the world’s largest natural gas exporter, but also the second largest oil exporter, as well as a
leading supplier of aluminum and nickel. Likewise, both the Russian Federation and Ukraine are key
60
global suppliers of various grains. Between them, the two countries provide approximately 30 per
cent of world exports of wheat, as well as 20 per cent of maize and over 50 per cent of sunflower oil
(United Nations, 2022b). Perhaps even more crucially, the Russian Federation and neighboring Belarus
account for approximately 20 per cent of global fertilizer exports. A combination of factors generated
by the war, including production disruptions, interruptions to transportation links – particularly the
shutting down of Ukraine’s ports on the Black Sea – and the imposition of sanctions on Belarus
(before the war) and on the Russian Federation, have put a severe constraint on the supply of these
materials from these countries to the world. Though sanctions to the Russian Federation explicitly
excluded food and fertilizers, exports of these suffered declines due to a ‘chilling effect’ in the private
sector (foreign insurers, lenders, traders, and shippers) which, afraid of reputational risks, further
retaliatory action, often over-complied and ‘self-sanctioned’; a clear result of this was a noted increase
in trade transaction costs, in the form of higher interest rates, insurance premiums, and shipping
rates for goods coming from the Russian Federation, including grains and fertilizers. Speculation and
financialization of the markets have also played an important role as explained before (see box 1.3).
II
The result of which has been international supply shortages and acute spikes in prices, reflected in an
increase of 15 per cent in the aggregate commodity price index in the 2 months following the outbreak
of the war (figure 2.9).
While the increase in prices has been broad-based, certain commodities have been more affected
than others. As is customary, and consistent with the Russian Federation’s key role in global energy
supply, the most drastic spike in prices was observed in energy commodities, which rose by 25 per
cent in the two months following the war in Ukraine. Initial sanctions against the country did not target
the Russian Federation’s oil and gas exports, precisely for fear of unsettling global energy markets.
However, the potential for disruptions to Russian supply as well as avoidance of Russian crude by oil
traders owing to concerns of possibly violating financial sanctions imposed on the Russian Federation
economy alarmed oil markets, particularly as tight global oil supply – largely due to the very gradual
relaxing of output restrictions introduced by OPEC+ members as per the agreement reached in April
2020 despite a faster than anticipated surge in global oil demand since then – was already applying
significant upward pressure on prices. As a result, the price of the Brent crude oil benchmark rose
rapidly from just under 100 dollars on the eve of the war to over 120 dollars only two weeks later.
Subsequent announcements by the United States banning oil imports from the Russian Federation,
by the United Kingdom to phase out Russian oil imports by the end of the year, and by the European
Union to ban seaborne oil imports from the Russian Federation by the end of 2022, as well as
prohibiting shipping insurance for oil exports from the country, exerted further pressure on oil markets.
However, the release of 180 million barrels from the United States’ strategic petroleum reserves as
well as the readiness of both China and India to receive Russian oil exports – and thus take advantage
of the significant discount at which the country’s Urals brand of crude oil trades compared to other
benchmark prices – proved sufficient to ensure that global oil supplies did not tighten further.
For its part, the natural gas market has been particularly sensitive to the war given the dependence of
numerous European countries on natural gas supplies from the Russian Federation. Given the fixed
distribution systems (i.e. pipelines) required to deliver gas, ready substitutes for these energy products
are not easy to come by. There still exist different types of gas pricing: fixed, regulated or cost-related
mechanisms; prices linked to crude oil or oil products; market, spot or hub-based prices. In the United
States and the United Kingdom, privatization and market-based pricing was already well underway
by the end of the 1980s. In the European Union, the process started later: in 2005, nearly 80 per cent
of its gas was sold on an oil-linked basis, by 2018 that figure had fallen to around 25 per cent with
75 per cent of gas sold at spot or hub prices (and regulated prices had virtually disappeared) (Stern
and Imrisovic, 2020). Basically, even long-term contracts price the entire purchase based on the price
of the last barrel exchanged on the spot market. On the contrary, Asian markets, which used to import
70–75 per cent of LNG before the war in Ukraine, remain largely dominated by oil-linked or fixed pricing
(Stern and Imsirovic, 2020). Globally, spot prices dropped in 2019 due to large LNG supply. In the
61
European Union, that affected pricing of pipeline gas from Gazprom to the considerable advantage of
member states. Then, ahead of winter 2021/22, Asian economies rushed for new long-term contracts
securing greater volumes ahead of time and rely less on spot cargoes. So, what determined a good
deal for Europe in 2019 turned bad in 2021/22, well before the war in Ukraine and despite gas supply
based on long term contracts being fully guaranteed (Stern and Imsirovic, 2020; Sharples, 2021).
Hence, the liberalization of the gas market and the choice of market-based pricing rather than based
on cost-based agreements with producers has proved problematic for Europe, a move which Asian
countries have not yet made. As gas spot prices in Europe skyrocket, with the main beneficiaries
the Russian Federation and the United States, the region just became the first world importer of
United States LNG but still cannot avoid dependence on Gazprom supply (Celi et al., 2022). On the
contrary, countries which have been able to establish fairer long-term relationship with producers are
now enjoying lower energy prices and reliable delivery. Those who have maintained control of domestic
energy companies and/or their retail price formation have also been able to keep the distributive
implications of domestic inflation in check (Storm, 2022) as shown by the difference between the
GDP and the private final consumption expenditure deflator in Indonesia and China. The decision by
Germany to halt the Nord Stream-2 Baltic Sea gas pipeline project, as well as the European Union’s
pledge to reduce Russian gas imports by two-thirds by the end of the year and the intermittent shutting
off of gas flows to the continent by the Authorities of the Russian Federation has provoked a surge
in European natural gas prices, increasing by more than four-fold in April compared to levels a year
earlier (figure 2.9). Moreover, since the European Union’s commitment to reduce its reliance on Russian
natural gas supplies depends on the bloc increasing its imports of Liquefied Natural Gas (LNG) from
other countries, LNG prices have also registered increasing upward pressures since the outbreak of
the war. LNG prices stood almost 30 per cent higher in June compared to January, and over double
the level registered a year earlier in June of 2021 (UNCTAD secretariat calculations based on data from
Japan Import Price Index for LNG). These price movements are further increasing the import bills of
LNG-importing developing countries, and could even potentially price out some developing countries
from the LNG supplies on which they depend to meet their energy needs.
Perhaps the area in which the impact of the war has been most damaging to developing nations
has been in the precipitous rise in food prices. Even before the war broke out, however, food prices
were already approaching historic highs, with the subsequent adverse consequences for the most
vulnerable populations across the globe. Before the war, it was estimated that food insecurity touched
the lives of an estimated 800 million people around the world (FAO, 2022).
Since the Russian Federation and Ukraine are, respectively, ranked the third and seventh largest
producers of agricultural goods, the repercussions of the conflict on global food supplies and prices
have been widespread and considerable. While some countries, particularly in the case of the European
Union, have been able to make up for the shortfall on certain agricultural imports by tapping regional
producers or alternative sources, this has not been the case for most developing nations who lack the
regional partners and global presence to ensure the provision of additional agricultural stocks in times
of global supply squeezes.
The outsized impact of the war in international food markets is reflected in the sharp jump in the
aggregate price index of grains between February and April, at just over 16 per cent (figure 2.9).
The two countries’ key role in global wheat supplies translated into a surge of over 30 per cent in
international wheat prices during this period. Moreover, the shortfall in wheat supplies coming from the
Russian Federation and Ukraine has hit Africa and the Middle East particularly hard as these regions
rely on these two countries for an outsized share of their wheat imports. For its part, maize prices also
saw precipitous increases in the aftermath of the war, rising by more than 20 per cent in the following
two months. Largely unrelated to the war, soybean prices have also remained at elevated levels since
the beginning of the year due to adverse weather conditions in producing countries, namely Argentina,
Brazil and the United States.
62
In reaction to growing domestic price pressures on staple food items, a number of countries instituted
food export restrictions in an effort to bring down prices. While such measures may have provided some
relief in the short-term domestically, they have exacerbated upward price pressures internationally.
An important additional factor weighing on current and future food prices has been the disruption
to worldwide fertilizer supply from the war. As mentioned earlier, together the Russian Federation
and neighbouring Belarus account for a substantial chunk of worldwide fertilizer exports. The 2021
sanctions on Belarus international sales of potash – a key ingredient in fertilizers – have intensified the
already sharp upward trend in prices observed since mid-2020. According to data from the World
Bank, while the aggregated price of food rose by almost 80 per cent from May 2020 to June 2022,
that of fertilizers increased by just shy of 230 per cent over this same period (World Bank, 2022b).
Moreover, the introduction of a fertilizer export ban by China in an attempt to alleviate domestic price
pressures has only added to the tight supply conditions internationally. The scarcity and steep price
increases of fertilizers has important implications for food markets, as these factors will inevitably
II
translate into a reduction in their usage by farmers, thereby lowering crop yields and provoking a further
increase in food prices. The situation is even more dire for many small-scale producers in developing
countries, for whom the lack of access to or prohibitively high prices of fertilizers will translate directly
into increased hunger and poverty rates.
Like the developments in energy and food markets, industrial metals also registered sharp increases
since the war broke out in late February. The industrial metals index rose by 9 per cent between April
and February, with the price of aluminum and nickel (for both of which the Russian Federation is an
important global supplier) registering substantial increases.
However, true to the sudden reversals observed in the last two years, talk of a sustained upward trend
in commodity prices – with some analysts even prognosing another super-cycle similar to that seen
in the first decade of this century – was quickly quashed as substantial declines were observed in the
price of a range of commodities from April onwards. The aggregate commodity price index dipped by
12 per cent between April and July, with the prices of industrial metals and grains registering declines
of 28 per cent and 21 per cent, respectively. Grain prices by mid-year had returned to the levels
observed prior to the war, while in the case of industrial metals the downward movement in prices
brought price levels close to those prevailing at the beginning of 2020, prior to the pandemic. With
regards to energy commodities, the decline between April and July was more moderate, at just 1 per
cent. However, comparing energy prices from their peak in early June to their value at the end of July,
we observe a sharp decline of 18 per cent, with the notable exception of European natural gas prices
which have remained near historical highs (figure 2.9).
A confluence of factors lies behind this generalized retreat in commodity prices, chief among which is
a steeper than anticipated tightening of monetary policy in developed economies and a subsequent
deceleration in economic growth, thereby softening the global demand for these raw materials.
Similarly, a sharp slowdown of expansion of the Chinese economy, partly explained by strict lockdowns
in response to new Covid-19 outbreaks but also by more long-term challenges and weaknesses in
certain key economic sectors (see section D, chapter I), has dampened demand for commodities. This
is particularly so in the case of industrial metals for which Chinese demand is an outsized component
of global demand. On the supply side, two United Nations-brokered agreements with the Russian
Federation, Türkiye and Ukraine – the Black Sea Grain Initiative to get grains out of Ukrainian ports,
and the Memorandum of Understanding between the Russian Federation and the Secretariat of the
United Nations on promoting Russian food products and fertilizers to the world markets, managed to
ease upward price pressures on these products, and led to a 5-month streak of declines in the FAO
Food Price Index.
However, as important as these physical demand factors on recent price dynamics are the financial
factors lying behind price movements. The recent drop in prices points to the ever more financialized
nature of commodity markets. As commodities have increasingly become a financial asset, huge
63
quantities of money are traded daily on commodity futures throughout global markets, with investors’
decisions having an outsized impact on prices. In fact, part of the recent downturn in prices is crucially
linked to the impact of the tightening of monetary policy in the developed world on investors’ decision
calculus (see box 2.3). Successive rate hikes by the United States Federal Reserve between March
and July, totaling 225 basis points, have precipitated a significant increase in real interest rates. As
a result, in April real yields on United States Treasury securities moved back into positive territory
for the first time since March of 2020 and continued their upward trajectory, motivating investors to
shift financial investments away from commodities towards such positive yield-bearing assets. These
financial developments have played an important role in the recent retreat observed in commodity
prices.
Although the prices of various commodity groups had by mid-year returned to levels similar to those
observed before the outbreak of the war, it is important to remember that such prices do still represent
historically high levels. Moreover, the recent drop in dollar-denominated international commodity prices
has not translated into a significant easing of domestic inflationary pressures on these products in
many developing countries as rapidly depreciating local currencies – an inevitable consequence of
the abrupt tightening of monetary policy in developed economies – have kept local prices of many
energy and staple food products at exorbitantly, and often prohibitively, high levels. As a result, poorer
households in the developing world continue to suffer difficulties in covering their basic needs, while
governments in numerous developing countries see their already limited fiscal resources eaten into
due to the substantial energy and food subsidies they provide.
Looking to the latter part of 2022 and into 2023, heightened uncertainty on both the demand and
supply side will translate into continued volatility in commodity markets, further complicating the picture
for developing economies who are particularly vulnerable to such price swings. Broadly speaking,
commodity prices are expected to remain elevated through 2022 and 2023 due to a combination of
slowing growth and dampening demand that will be offset by continued supply and transportation
constraints, as disruptions resulting from the war are expected to have a long-term impact on the
supply of raw materials from both the Russian Federation and Ukraine.
Box 2.3 The war in Ukraine: a shock too far for global food systems?
The war in Ukraine has served as a powerful reminder that local disturbances can carry global consequences.
Between them, the Russian Federation and Ukraine are major exporters of vital agricultural commodities,
including wheat, maize and sunflower oil, as well as fertilizers (United Nations, 2022a). The disruption to
these markets has increased the pressure on international food supply chains, with demand, purchasing
power, distribution, and production already under stress even before the war began.
The war comes on the heels of over a decade of turbulence in global food markets. This period started
with several episodes of high and volatile food prices between 2007 and 2013. After 2015, the incidence
of hunger started to rise, despite remarkable progress in China (FAO, 2020). Then Covid-19 struck
at livelihoods, disrupting global and local food systems, although food workers were quickly dubbed
“essential” and some local systems could adapt quickly to the changed conditions and were able to
continue supplying food. Many governments in the world also helped food distribution systems by
providing pandemic relief to their citizens in the immediate aftermath of the economic lockdowns.
The war represented a distributional shock. Ukrainian grains, for example, were still there, ready to be
exported, but the primary export route via the Black Sea was abruptly closed. Initial uncertainty over how
long the war would last inevitably sent prices higher. Existing contracts lapsed and buyers and traders
scrambled to find new suppliers. The immediate implications of the supply shock were especially severe
for the Middle East and
64
North Africa, a region that imports most of its grain from the Russian Federation and Ukraine. Behind that
abrupt change, longer-term threats to agricultural production and storage in the region loomed large. The
war also sent energy prices soaring, affecting fertilizer production costs even as both Belarus (before the
war) and the Russian Federation’ fertilizer exports were cut off. High energy prices also make the whole
value chain more expensive, including the costs of food storage, processing and distribution.
The importance of exports from the region and uncertainty of how long the war would drag on also fueled
speculation. Excessive speculation on commodity markets likely amplified the price increases for grains
that followed the start of the war in Ukraine (Russell, 2022). Changes in futures prices for wheat were
even more extreme, increasing by 50 per cent in the globally price influential Chicago futures market in
February 2022, subsequently falling by 18 per cent in March.
Futures and forward contracts are normal market instruments, improving liquidity conditions by helping
II
participants involved in producing, trading or consuming those goods to arrange a set price at a determined
point in the future. Speculators have different objectives, betting on the direction of price movements.
When many speculators enter into trades on agricultural markets with the same assumptions around
crop, climatic and political conditions, they can amplify price movements in ways that are delinked from
actual and anticipated supply and demand.
The German research institute ZEF (2022) found that the share of non-commercial traders (speculators)
holding long positions (buying) in hard wheat and corn rose sharply to 50 per cent in early 2022, a situation
that often corresponds to price spikes. Lighthouse Reports, an investigative journalism NGO, reported
that in April 2022, investors pumped $1.2 billion into two major agricultural Exchange Trade Funds (ETFs
track market prices for a basket of commodities), compared to just $197 million for the whole of 2021.
Agricultural price indices are often a small share of the total ETF price index, but when energy prices are
weighted more heavily in the ETF index formula, agricultural prices follow energy price trends. The United
States and the European Union instituted some controls on financial speculation in physical commodity
futures contracts in the wake of the 2009 financial crisis, but the controls have been weakened since.
For people who live in low-income, import dependent countries, even short-lived exaggerated price
swings can have long term effects on food prices, increasing the incidence of food insecurity. Price
swings delinked from supplies, especially when amplified by investors’ expectations, disrupt planning for
future crops and food supplies. In addition, the opacity and high levels of concentration in supply chains
create the real risk that consumer prices will continue at historically high levels, even as farmgate and
export prices have started to fall. New approaches to diversifying risk, including the establishment of
grain reserves and encouraging planting of a broader variety of cereals suited to local climate and cultural
conditions, would increase the stability of food supplies and prices.
More comprehensive information about supply chains could aid that process. The Agricultural Markets
Information System (AMIS) was set up by the G20 after the 2007—2008 food price crisis to increase
transparency in markets. For the most part, countries utilize reserves to smooth out supplies to national
markets, although there are some important experiences with regional grain reserves in Asia, under the
auspices of ASEAN, and in West Africa. While exact information on food stocks is difficult to gather, AMIS
reports that “[l]ed by traditional holders of large public reserves such as China and India, grain stocks
in developing countries more than doubled between the mid-2000s and today (FAOSTAT, 2020).” Of
course, the existence of food stocks is not enough. They must also be available to stabilize markets.
IPES-Food reports that the greatest knowledge of how much grain is at any given place in the world at
any given time is knowledge held by private companies, in particular the “ABCD” of grain traders: Archer-
Daniels Midland, Bunge, Cargill and Louis Dreyfus (Farchy and Blas, 2021). With those firms accounting
for 70-90 per cent of global grain trade, their reserves are likely to be sizable. And with commodity
speculation mounting, they have a clear incentive to hold stocks back until prices are perceived to have
peaked (IPES Food, 2022).
65
On the demand side, financial speculators rushed into wheat futures, commodity swaps and agriculture-
linked exchange traded funds (ETFs), immediately following the start of the war in Ukraine. The share of
speculators in buy-side wheat futures contracts has increased from 23 per cent of open interest in May
2018 to 72 per cent in April 2022 (Agarwal et al., 2022). By April 2022, seven in ten buyers of futures wheat
contract were investment firms, investment funds, other financial institutions and commercial non-hedgers
whose aim was to profit from the rise in prices; Agarwal et al. (2022) find that investment firms increased
their presence in the buy side of the wheat futures market in Paris from 4 per cent of open interest in 2018
to 25 per cent in April 2022, and investment funds increased their presence from 1 per cent to 21 per cent
of open interest. Data from the CFTC also show increased speculative activity in wheat in the Chicago
Board of Trade (CBOT), as is clear from the strong growth in Exchange Traded Funds (ETFs) linked to
agricultural commodities in 2022. Financial investors are cashing in on rising food prices.
Public food stocks could play a role to stabilize markets and offset the concentrated power of the big
private traders. Debates on international food security and stockholding often pit arguments to use free
trade and global markets as the ultimate reserve against the long history of national public stocks as a tried
and trusted food security mechanism. In fact, stocks and trade can usefully be seen as complementary
strategies. If under perfect free trade conditions, public stocks create a market distortion, under actual
open trade conditions—a context rife with market failures and distortions, including highly concentrated
market power—public stockholding can be seen to offer important benefits. Ideally, public stocks will be
thoughtfully integrated into commercial markets, to limit the power of either government or the private
sector creating a widespread price shock. Note that stocks occupy a difficult terrain in economic policy
where commercial and public interests meet and to some extent collide. Neither a purely private sector nor
a purely government-controlled response is likely to prove as effective as policies that recognize the need
for co-existence. Public stocks can provide a form of collateral in open markets, protecting against supply
shocks that may curtail imports unexpectedly by bridging the gap before imports resume.
Some progress along those lines was made when countries at the WTO agreed in 2013 to refrain from
challenging the way India procured food for its public stocks program until the rules of the Agreement on
Agriculture could be revised to the satisfaction of all WTO members. The eventual negotiation of such a
solution is a necessary first step. Those rules should include safeguards to ensure that public stocks are
not dumped on international markets, where they could undermine farmers and food production in other
countries.
The Ukraine crisis also showed a new wave of export bans and restrictions on foodstuffs from exporting
countries. Things have eased a little since the spring of 2022 but the WTO rules in this regard remain
inadequate, deepening the qualms net food importers already experience in trusting their food security to
international markets (Espitia et al., 2022).
Other factors deepening the effects of higher food and fuel prices include the deepening debt crisis, a
problem that has never really gone away, but that has risen again sharply due to the pandemic and the
continued failure to force creditors to do something about the crippling effects public indebtedness has
across developing countries. An estimated 60 per cent of least developed and other low-income countries
were at high risk of or already suffering in debt distress, spending an average of 16 per cent of their export
earnings simply to service their external debt—and Small Island Developing States averaged more than
32 per cent (see section B above). In 2022, these countries have seen the cost of their food imports
rise, while their ability to pay has been eroded by the cost of servicing their debt, which has risen with
rising interest rates, a higher valuation of the dollar, and higher risk premiums due to increased volatility in
commodity futures and bond markets.
The crisis sparked by the war in Ukraine and the subsequent shocks to global supplies of grains and
fertilizers drives home the imperative for diversification in which countries grow critical food crops. The
unfolding climate catastrophe illustrates the need to diversify which crops are grown, both to respond to an
increasingly erratic climate and to improve nutritional diversity. Global cooperation on those issues, as well
as enhanced coordination on the regulation of markets, trade and reserves, could help to build resilience
against the future shocks that are certain to arise.
66
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68
Chapter III
III
South-Led Integration in a Fragile World
A. THE LONG SHADOW OF PAST

AND PRESENT MISTAKES
Chapter I has shown that 2022 and 2023 are set to be years of slowing economic growth, not just
compared to the exceptional growth numbers of 2021, but to the already downbeat predictions
of earlier this year. Whether or not this translates into a full-blown global recession, deteriorating
macroeconomic and financial conditions will heighten the vulnerability of households, businesses and
governments, particularly in the developing world, to any further shocks.
As argued in previous reports, a growth slowdown in any particular year may be triggered and
aggravated by specific events, but their intensity and impact depend on underlying trends that shape
the workings of the global economy and its responses to shocks. Key trigger factors this year have
been the war in Ukraine, the interest rate hikes adopted by leading central banks to bring down inflation
and the sharper than expected slowdown in China. These factors have ignited a highly combustible
pile of problems in financial, commodity and labour markets that can be traced to underlying trends. In
particular, financialization and corporate concentration have contributed to highly skewed patterns of
income distribution, rising levels of indebtedness and constrained investment (both private and public)
across the world, weakening global demand and growth prospects. In labour markets, fragmentation
associated with global supply chains, along with the weakening of trade union power, particularly in
developed economies, has contributed to subdued wage growth. Since the occurrence of rogue
events – such as health, military or environmental crises – can be mitigated but never completely
eliminated, leaving social and economic imbalances to fester bears a high risk.
For developed economies, the current slowdown of growth is concerning because it signals a return
to the sputtering recovery that followed the 2009 recession (TDR, 2020). Developing countries have
exhibited a more uneven picture, but even China, the strongest performer of the group for the last
20 years, is now growing at its lowest rate in decades. Everywhere, slower growth of GDP since the
middle of the last decade means incomes that barely keep up with population growth (figure 3.1) and
lower inducement to invest, including in industrialization and the green transition.
Figure 3.1 Real GDP per capita, selected countries and country groups, 2000–2022
(index numbers, 2000=100)
A. Selected developed economies and B. China and selected country group

country groups
Italy Japan European Union Developing Ec. excl. China China
Developed Economies
Developing Ec. excl. China
160 600
500
140
400
120
300
100
200
80 100
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
2020
2022
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
2020
2022
Source: UNCTAD secretariat calculations based on United Nations Global Policy Model and AMECO.
Note: Underlying data correspond to constant 2005 dollars. Aggregates were computed using market exchange rates
as weights.
70
B. THE ISSUES AT STAKE: COMPOUNDING

THE INEQUALITY-ENVIRONMENT DOOM LOOP
1. The inequality-recession loop
A look at the composition of demand for goods and services underscores challenges in income
distribution, investment, government spending on goods and services and in trade, confirming the
analysis of previous reports (TDR, 2019; 2021).
The share of total income accruing to wages is an important indicator of economic health, reflecting
the cost of labour relative to total costs and the level of inequality generated by the labour market
(before government transfers). As lockdowns suddenly reduced profits in 2020, labour shares across
the world increased. But that process was quickly reversed as economic activity picked up again
(TDR, 2020): record growth in 2021 was accompanied by a decrease of the labour share of income in
both developed and developing countries. This is a common occurrence when economies come out
of recessions: firms initially increase output by reducing idle capacity and underutilized work hours.
But the extent to which the labour share decreases as a result depends on how quickly wages react
to a tightening of the labour market. Strong labour representation can be expected to result in quicker
III
compensation increases. In fact, over the past 50 years, wage growth has weakened in subsequent
recoveries. This is particularly the case in developed countries, whilst in developing countries, wage
responsiveness is clearly higher than in 1970 (as signalled by an upward 50-year trend). However,
even in developing countries, wages’ response has been more muted in the post-2009 and post-2020
recoveries than in previous recoveries. Overall, at least since 2009, labour markets have been delivering
a more unequal distribution of income. Added to this, when wage data for 2022 are collected, they
are likely to show a loss in purchasing power which will be reflected in a lower labour share, following
higher inflation worldwide. Indeed, as seen in chapter I, wages are lagging price inflation in most parts
of the world economy.
Falling labour shares have, in many countries, been linked to export-driven growth strategies and
welcomed as signalling a country’s gains in competitiveness. This interpretation is misleading
(TDR, 2019; 2020). In fact, falling labour shares have also been the effect, not just a cause, of slowing
global growth: with weak domestic demand for consumption and investment, pressure has increased
on both developed and developing countries (whose investment and public spending have been
constrained) to compete for higher shares of export markets. Slowing global demand and GDP growth
have led to an ever-tighter race to the bottom. This phenomenon is hidden in years of upheaval, such
as 2009 or 2020, but emerges clearly in subsequent recoveries. What is also clear is that for this
process to be reversed and household demand to recover healthier growth rates, wage growth would
have to accelerate and remain higher for many years (Taylor, 2020).
In the past decade, a growing protectionist rhetoric in developed countries has echoed the concerns
of workers and smaller firms who have been on the losing side of the distributive struggle (Ferguson
et al., 2020; 2021). But this has not been reflected in a clear or consistent policy shift. Developed
countries have supported and protected specific domestic sectors, targeted key industries abroad,
and prevented developing countries from doing the same, continuing their push for asymmetric rules
in the World Trade Organization. However, these responses have not diminished the reach of the key
players, such as large corporations (both national and transnational) and financial investors, whose
dominant positions are protected by the rules (Baker, 2022), such as TRIPS. Thanks to their market
power, these corporate players continue to advocate for a global race to the bottom in taxation, welfare
and working conditions, influencing fiscal and policy space everywhere. In other words, protecting
firms does not translate to protecting workers or other segments of society.
71
Figure 3.2 Primary income distribution, developed and developing economies, 1971–2022
(percentage)
A. Labour shares B. Growth rate of average worker compensation

Developed economies Developing economies Developed economies Developing economies
(right axis)
63 55 7
6
62 54
5
61 53
4
60 52 3
59 51 2
58 50 1
0
57 49
-1
56 48
-2
55 47 -3
1971
1973
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
2015
2017
2019
2021
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
2020
2022
Source: UNCTAD secretariat calculations based on United Nations Global Policy Model.
Note: Labour shares are total income from employment (as a share of GDP) Aggregates are computed using PPP
weights.
2. Fiscal and monetary policies

Government spending on goods and services, a key driver of the level of economic activity, has been
decreasing as a share of national income for four decades. This has been the case in both developed
and developing countries, with pressures to “rebuild fiscal buffers” increasing after each recession,
based on the idea that discretionary but temporary fiscal expansions during economic shocks suffice
to keep the economy close to its optimal equilibrium level (TDR, 2021).
However, it has been amply documented that such counter-cyclical expansions do not generally allow
an increase in potential output, as this results from a stable growth of income, aggregate demand
and technical progress (McCombie and Thirlwall, 2004; Ocampo et al., 2009; Storm and Naastepad,
2012). A purely countercyclical approach to fiscal policy not only appears insufficient to face the
great challenges of reducing inequality and mitigating the impact of climate change, but also seems
detrimental to its own declared objective of fiscal sustainability (as opposed to an approach that admits
both countercyclical measures and enduring fiscal support to stimulate the creation of more capacity).
Decades spent in pursuit of balanced budgets have intensified the cyclical fluctuations of income and
employment, forcing governments and central banks to deploy large emergency disbursements in the
downturns, often inefficiently (TDR, 2021).
This endemic austerity, anchored to the dogma of expansionary fiscal contraction, has deprived
the global economy of critical demand support, especially after 2010, slowing down overall growth
and acting as a drag on consumption and investment. When growth rates are high, declining public
spending as a share of GDP (figure 3.3) may indicate that government spending is efficient (positive
multiplier) or that the economy is being driven by exports (which can support growth in a few countries
but not in the whole world) and debt-fuelled private demand: both unstable sources of growth. But
when growth rates are low, the declining trend is a clear sign that economies are deprived of sufficient
public spending.
72
Figure 3.3 Government spending on goods and services, developed and developing economies,
1980–2022 (percentage)
A. Developed economies B. Developing economies

Developing Economies China
24.0 24
23
23.5
22
23.0
21
22.5 20
22.0 19
21.5 18
17
21.0
16
20.5
15
20.0 14
III
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
2020
2022
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
2020
2022
The reversion to austerity post-2020 is still ongoing, but data indicate that it may be even sharper
than post-2009. Even in 2020, the year of massive fiscal packages, government spending slowed
down globally compared to 2019. The fiscal expansion in the recession year of 2020 has been smaller
globally than during the global financial crisis (GFC), a fact that can hardly be reconciled with the
needs of today’s global economy. Partly, this was because of the massive change in the composition
of fiscal spending: during the lockdowns of 2020, transfers had priority over public works and other
programmes that sustained labour demand. But in today’s spiralling climate and energy crises call for
massive state-led investment (both to increase energy efficiency and to develop supply of renewable
energy). China stands out in this context, as the only large economy not exhibiting a contractionary
“shark fin” pattern. Given its fast and steady progress in industrialization, growing living standards
and energy efficiency, it is no surprise that a growing share of total income has been devoted to
government spending on goods and services.
Underneath this global pattern, the differences between developed and developing countries are
remarkable. Developed countries and China still had positive growth of government spending in 2020,
although slower than in 2019. All other developing countries, on average, experienced a contraction
of public spending in absolute terms, although the contraction of GDP was even more pronounced.
This highlights the constraints developing countries are subject to in the global financial architecture.
The year 2021 saw a global acceleration of spending in absolute terms, for both developed and
developing countries, while early data for 2022 point to another downswing. One component of public
spending that has regained prominence this year is military spending. If military rivalry between major
economies intensifies, this category of spending is bound to gain increasing importance in the medium
term. But unlike the world war years, studies indicate that a military build-up today may prove a drag
on the economy, cutting into aggregate demand, as the main items of military spending have little
positive effect on the economy and tend to be financed with spending previously destined to more
economically impactful uses (Becker and Dunne, 2021).
73
Monetary policy has been at the forefront of macroeconomic stabilization efforts since the beginning of
the quantitative easing (QE) programs of the United States Federal Reserve (hereafter the Fed). When
the fiscal channel dried up in 2010 (after a short-lived stimulus) but growth and inflation remained low,
developed countries relied on large purchases of bonds and other securities by their central monetary
authorities to support long-term in 2010 credit creation, while maintaining the smooth functioning of
the money markets.
Within a few years, all major central banks developed their own QE programs, sometimes exceeding
the Fed’s both in value and as a share of GDP. Nonetheless, the role of the Fed has remained crucial
since dollar-denominated liabilities held by entities outside the United States and the trades necessary
to fund them have become even more prominent in the past decade: “US dollar funding remains
below its peak of a decade ago relative to the size of the global economy, despite having grown in
nominal terms. However, the share of international funding that is denominated in US dollars has risen
compared with other major international currencies, reaching levels last seen in the early 2000s and
making it the dominant international funding currency” (Committee on the Global Financial System,
2020).
In particular, a greater share of US corporate bonds is held by non-US-residents (Lysandrou and
Nesvetailova, 2022). Moreover, in a context of low interest rates, the search for higher yields made
dollar denominated bonds issued by emerging economies particularly attractive: “EMEs as a whole,
and China in particular, have become both larger borrowers and larger suppliers of US dollars,
especially via the bond market” and including issuance from offshore financial centres (figure 3.5; Shin,
2013; Committee on the Global Financial System, 2020).
Figure 3.4 Assets and liabilities of major central banks, developed economies, Jan. 2009–July 2022
A. Monetary base (percentage of GDP) B. Assets of the Federal Reserve (billions of dollars)
Euro area United Kingdom Securities Held Outrights: Securities Held Outrights:
Japan United States Mortgage-Baked Securities U.S. Treasury Securities
Loans Total Assets
200 900
800
150 700
600
500
100
400
300
50
200
100
0
0
Q2 - 2009
Q4 - 2009
Q2 - 2010
Q4 - 2010
Q2 - 2011
Q4 - 2011
Q2 - 2012
Q4 - 2012
Q2 - 2013
Q4 - 2013
Q2 - 2014
Q4 - 2014
Q2 - 2015
Q4 - 2015
Q2 - 2016
Q4 - 2016
Q2 - 2017
Q4 - 2017
Q2 - 2018
Q4 - 2018
Q2 - 2019
Q4 - 2019
Q2 - 2020
Q4 - 2020
Q2 - 2021
Q4 - 2021
2009-01
2010-01
2011-01
2012-01
2013-01
2014-01
2015-01
2016-01
2017-01
2018-01
2019-01
2020-01
2021-01
2022-01
Source: IMF, International Financial Statistics, Monetary and Financial Accounts, Central Bank, Monetary Base,
Domestic Currency and FRED, Federal Reserve Bank of St. Louis.
74
Figure 3.5 International debt securities outstanding, selected countries,

1st quarter 2000–1st quarter 2022 (billions of dollars)
A. China B. Brazil
Residents Nationals Residents Nationals
1200 300
1000 250
800 200
600 150
400 100
200 50
0 0
Q1 - 2000
Q1 - 2002
Q1 - 2004
Q1 - 2006
Q1 - 2008
Q1 - 2010
Q1 - 2012
Q1 - 2014
Q1 - 2016
Q1 - 2018
Q1 - 2020
Q1 - 2022
Q1 - 2000
Q1 - 2002
Q1 - 2004
Q1 - 2006
Q1 - 2008
Q1 - 2010
Q1 - 2012
Q1 - 2014
Q1 - 2016
Q1 - 2018
Q1 - 2020
Q1 - 2022
III
C. India D. United States
Residents Nationals Residents Nationals
1200 600
1000 500
800 400
600 300
400 200
200 100
0 0
Q1 - 2000
Q1 - 2002
Q1 - 2004
Q1 - 2006
Q1 - 2008
Q1 - 2010
Q1 - 2012
Q1 - 2014
Q1 - 2016
Q1 - 2018
Q1 - 2020
Q1 - 2022
Q1 - 2000
Q1 - 2002
Q1 - 2004
Q1 - 2006
Q1 - 2008
Q1 - 2010
Q1 - 2012
Q1 - 2014
Q1 - 2016
Q1 - 2018
Q1 - 2020
Q1 - 2022
Source: Bank for International Settlements.
As a result, the Fed’s decisions reverberate globally via at least three channels.
First, it is able to affect liquidity in key domestic and international markets. In particular through swaps
and repurchase agreements (repos) of various collateral from private domestic and public foreign
entities, it has repeatedly been able to prevent money market freezes, at least in the core of the global
financial system. However, it has been far less efficient in disciplining cyclical expansions of global
finance in a context of international capital mobility.
75
Figure 3.6 Net portfolio flows to emerging economies and Nominal Broad Dollar Index,
2nd quarter 2006–4th quarter 2021
Net portfolio inflow United States dollar index (right axis)

80 125
120
60
115
Index numbers, 2006=100

40
110
Billions of dollars
20 105
0 100
95
-20
90
-40 85
-60 80
Q2 - 2006
Q4 - 2006
Q2 - 2007
Q4 - 2007
Q2 - 2008
Q4 - 2008
Q2 - 2009
Q4 - 2009
Q2 - 2010
Q4 - 2010
Q2 - 2011
Q4 - 2011
Q2 - 2012
Q4 - 2012
Q2 - 2013
Q4 - 2013
Q2 - 2014
Q4 - 2014
Q2 - 2015
Q4 - 2015
Q2 - 2016
Q4 - 2016
Q2 - 2017
Q4 - 2017
Q2 - 2018
Q4 - 2018
Q2 - 2019
Q4 - 2019
Q2 - 2020
Q4 - 2020
Q2 - 2021
Q4 - 2021
Source: IMF (2020) Global Financial Stability Report and Institute of International Finance Capital Flows Tracker.
Note: Net portfolio inflows are a three-months moving average (smoothed).
Second, it affects the value of the dollar and, thus, the price of imports and exports domestically and
abroad. As a result, it also provides a floor for interest rates in other regions which cannot allow their
currencies to depreciate too much against the dollar to avoid over-exposure of their balance sheets to
dollar-denominated debt (figure 3.6). From the early 2000s until 2021, oil price movements provided a
mitigating factor, thanks to their negative correlation with the dollar (figure 3.7).
Figure 3.7 Dollar-euro exchange rate and crude oil price, January 1999–July 2022
Dollars to euro spot exchange rate (right axis)

Cushing OK WTI spot price
160 1.8
140 1.6
120 1.4
Dollars per barrel
1.2
100
1.0
80
0.8
60
0.6
40 0.4
20 0.2
0 0
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
Source: United States Energy Information Administration; Federal Reserve Bank of St. Louis.
Note: Crude oil price is Free On Board.
76
Third, it affects growth and private demand in the United States including imports, thus affecting global
growth.
During the Covid-19 crisis, the Fed’s accommodative stance and its activity in the international repo
markets avoided extreme stress in the global money markets and allowed central banks of developing
countries to reduce interest rates quite significantly. Indeed, while in many cases they themselves
engaged in asset purchases, it was mostly to control portfolio risk rather than to provide a stimulus,
which was predominantly supplied in the form of loans, including to public banks (figure 3.8; Aguilar
and Cantù, 2021).
Figure 3.8 Assets and liabilities of major central banks, developing countries, January 2009–July 2022
A. Monetary base (percentage of GDP) B. People’s of Bank of China - Assets

(trillions of RMB)
India Indonesia Foreign Assets Claims on other depository
Brazil Chile Total Assets corporations (Loans)
Türkiye South Africa
80 40
70 35
III
60 30
50 25
40 20
30 15
20 10
10 5
0 0
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
Source: IMF, International Financial Statistics, Monetary and Financial Accounts, Central Bank, Monetary Base, Domestic
Currency, and Surveys Based on Non-Standardized Report Forms (Non-SRFs), Monetary Authority.
However, as soon as the economy of the United States started emerging from the crisis and the Fed
signalled its intention to raise interest rates in May 2021, those favourable conditions reversed, forcing
premature interest rate increases in many developing countries, especially those most exposed to
dollar-denominated debt.
The Fed’s policy normalization aims at controlling the bubble in commodity prices and preventing higher
import and energy costs from spreading into the domestic distributive structure. The announcement of
May 2021 was followed by a crucial decision on the officialization of two standing repo facilities, which
had been functioning in a temporary mode for some months: one dedicated to United States domestic
primary dealers and soon to include additional depository institutions (Standing Repo Facility),13 and
one for foreign and international monetary authorities (FIMA repo facility).14
13
Acceptable collateral are Treasury securities, agency debt securities, and agency mortgage-backed securities.
14
“The FIMA Repo Facility allows FIMA account holders, which consist of central banks and other international monetary
authorities with accounts at the Federal Reserve Bank of New York, to enter into repurchase agreements with the Federal
Reserve. In these transactions, approved FIMA account holders temporarily exchange their U.S. Treasury securities
held with the Federal Reserve for U.S. dollars, which can then be made available to institutions in their jurisdictions. This
facility provides, at a backstop rate, an alternative temporary source of U.S. dollars for foreign official holders of Treasury
securities other than sales of the securities in the open market. A temporary FIMA Repo Facility was established March
31, 2020, and the facility was made a standing facility on July 28, 2021” (Board of Governors of the Federal Reserve
System, 2022)
77
The move showed that the Fed’s commitment to global financial stability remains unchanged. That,
together with the preparedness of the central banks of many emerging economies, has so far prevented
a repeat of the 2013 taper tantrum.
But the impact on the real economy cannot be stopped. With fiscal policy invariably muted, with crude
oil and gas still at elevated prices, the increased cost of credit is going to affect the most fragile sectors
and regions of the world economy through reduced investment, wages and employment growth and
liquidity stress, hitting hard the unemployed and low and medium wage earners everywhere, as well
as firms and governments with elevated external debt in developing countries (see previous chapters).
The (already restricted) macroeconomic policy space for emerging economies to respond to
the challenges of rising prices of food and fuels and increasing food insecurity will become more
constrained as monetary policy is tightened in the United States. The timing for this tightening of the
fiscal and monetary policy space could not be worse: many governments will be forced to withdraw
essential public support schemes which were introduced during the pandemic, just when a fresh cost
of living crisis undermines the livelihoods of millions of people across the world.
The appreciation of the dollar will move global demand away from United States goods and towards
goods produced in other economies (assuming exchange rates are flexible). While the stronger dollar
may lead to (export-led) expansion in some advanced economies (such as Germany and France),
many emerging economies will experience net contractionary effects from the nominal depreciation
of their currencies (Hirschman, 1949; Krugman and Taylor, 1978), mostly because the stronger dollar
will make the essential imports of food, fertilizers and energy more expensive, raising their trade
deficits and contributing to higher domestic inflation, which by crowding out demand for domestically
produced (non-essential) goods and services will weaken domestic investment and economic growth
(Storm, 2022). A stronger dollar has negative effects especially on real investment and real exports in
the emerging economies, primarily because the stronger dollar weakens the balance sheets of dollar
borrowers whose liabilities rise relative to assets. The result is a weaker credit position of and higher
risk premia for (exporting) firms in those emerging economies with relatively large external (dollar-
denominated) debts (Akinci and Queralto, 2021). These firms will suffer from a general tightening of
global dollar credit supply, including for trade credit (Storm, 2022).
Hence, while central bankers in the core of the international system focus pragmatically on avoiding
short term systemic instability, the real economy deteriorates, a fact that is increasingly overlooked by
policymakers. Indeed, there are sound reasons to believe the damage done in the short run will spill
over into permanent, long-run damage: monetary policy tightening will likely cause the growth rate
of potential output to decline. Higher interest rates lower aggregate demand which, in turn, leads to
reduced capital formation by firms. The decline in investment lowers the economy’s capital stock and
productive potential and depresses the rate of technological progress and productivity growth, because
technological change is embodied in new capital goods (Storm and Naastepad, 2012; Girardi et al.,
2020). In addition, lower demand leads to lower labour productivity growth, increasing the vulnerability
to wage-led inflation. Yet most economists assume long-run potential growth is determined by the
exogenous forces of demography (i.e. the growth of the effective labour force) and of technology
(i.e. exogenous total-factor-productivity (TFP) growth), and most believe monetary policy does not
influence these two exogenous supply-side drivers. It is no coincidence that the long-run “neutrality”
of monetary policy is a cornerstone of the dynamic stochastic general equilibrium (DSGE) models
commonly employed by central banks (Storm, 2021).
What is particularly worrisome is that the commodity price rally initially followed expectations of a
global growth rebound, but when the Fed’s moves, coupled with fiscal austerity and new international
disruptions, changed the economic scenario, many financial markets remained buoyant. The economic
recovery did not take place and speculators continued to profit.
78
3. The broken nexus between credit and capital formation

Despite the massive transformational challenge facing the global economy, investment rates across
the world have been in long-term decline with sluggish growth even in the best of time (figure 3.9).
This has resulted from two main factors: first, the general slowdown in growth, especially the relative
reduction of labour incomes, which has slowed down the expansion of household consumption and
investment; second, the accelerating process of financialization (TDR, 2018), which has led to the
un-anchoring of asset creation from capital formation. Making matters worse, investment is in a well-
known cause-and-effect relationship with growth, as it is strongly affected by expectations. If growth
is expected to slow, investment declines, fulfilling the expectation.
Figure 3.9 Private investment, developed and developing economies, 1970–2022

(percentage of GDP)
Developed Economies Developing Economies

excl. China
23
22
III
21
20
19
18
17
16
1970
1973
1976
1979
1982
1985
1988
1991
1994
1997
2000
2003
2006
2009
2012
2015
2018
2021
Note: Aggregates are computed using PPP weights.
Financialization has been fuelled by monetary and financial policies. For three decades, across
developed and developing economies, credit creation has outpaced and in some cases far outpaced
the creation of fixed capital, with the process continuing throughout the Covid-19 pandemic. While
major economies have been awash in credit that did not find productive allocation, banking and
financial regulation created many opportunities for financial speculation, including the fast-expanding
non-banking financial sector (figure 3.10). In this way, short-term speculative uses of funds have
outcompeted fixed investment and contributed to undermining confidence by increasing financial
instability.
79
Figure 3.10 Stock of domestic credit and of fixed capital, selected countries, 1985–2021
(percentage of GDP)
A. France B. Mexico
Stock of domestic credit Stock of fixed capital (right axis)
180 350 40 350
160 300 35 300
140 30
250 250
120 25
100 200 200
20
80 150 150
15
60 100 100
40 10
50 5 50
20
0 0 0 0
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
2015
2017
2019
2021
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
2015
2017
2019
2021
C. South Africa D. United Kingdom
100 350 250 350
90 300 300
80 200
70 250 250
60 200 150 200
50
150 100 150
40
30 100 100
20 50
50 50
10
0 0 0 0
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
2015
2017
2019
2021
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
2015
2017
2019
2021
E. United States
100 350
90 300
80
70 250
60 200
50
40 150
30 100
20
50
10
0 0
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
2015
2017
2019
2021
4. Balance of payments vulnerabilities15

The immediate policy challenges facing developing countries derive from two broad types of exogenous
factors: global shocks that affect the world economy at large and major macroeconomic or trade
policy changes in developed countries. These challenges are rooted in developing countries’ own
financial vulnerabilities and structural weaknesses linked to their role in the international trade and
capital markets. In fact, in general, semi-industrialized economies face a binding external restriction
on the long-term rate of expansion of their real GDP, reflected in the dynamism of their exports relative
15
This section is based on Moreno-Brid et al., 2022.
80
to imports. The trade balance sets a long-term upper bound to the average annual rate at which real
GDP can expand without sooner or later incurring a critical disequilibrium in the balance of payments.
Of utmost social and economic importance is that this upper bound is lower than the rate of expansion
of GDP required to, say, guarantee full employment and given the pattern of fixed capital accumulation.
The vulnerability of developing countries derives from their greater and more structural dependence
on imports, a more unstable export basket, a more polarized economy with high levels of informality
and a less reliable access to finance. Trade, in particular, is critical to development and potentially a
powerful conduit of industrial upgrading and diversification but, for countries that have little influence on
international prices and restricted access to large consumer markets, it is also a source of vulnerability
(Capaldo and Omer, 2021). When any of those sources of fragility comes to the fore, and the financial
outflows severely outpace the inflows, the foreign reserves might drain quickly, and the capacity to
borrow and spend (the fiscal space) is often severely impaired, as foreign investors lose confidence
and interest rates rise. At the extreme, when the solvency risk increases, the country might experience
a serious credit crunch and a capital flight, driving towards default. For instance, in absence of
appropriate policies that helped lowering import propensities, periods of expansion necessarily bring
about a deterioration of the current account balance, higher inflation and internal indebtedness. If
contextually, the government tries to run fiscal surpluses, it is the private sector that carries the burden,
at least until the solvency risk transmits to the public sector. But a balance of payments crisis can
emerge autonomously from the capital account, rather than from the current account: countries with
III
smaller and less developed financial and banking systems can be quickly overwhelmed by incoming
speculative capital flows and thus be driven to over indebtedness. Indeed, finance-driven boom-bust
cycles have, as discussed at length in previous reports, been the prime driver of financial and currency
crises in developing countries since the 1980s.
Among the challenges policymakers in emerging markets could face in this context, and to an important
extent are already facing, we identify the following ones:
I - Sudden and drastic slowdown in the rate of growth of exports: This can happen if the world
economy and trade lose impulse. The exports of a balance of payments constrained economy
will be affected differently, depending on the specific basket of exports of goods and services
and on the geographical composition of the main markets of destination. These two factors also
condition the vulnerability of different countries to the introduction of environmental restrictions on
certain products and commodities or of protectionist measures to favour the insourcing of selected
intermediate inputs and final products due to industrial policies or geopolitical considerations
(green-shoring, re-shoring, friend-shoring).
II - Sudden and drastic changes in the prices of exports or imports in international markets: The
current global context of high inflation has a very heterogeneous impact between and within
developing countries, benefitting or harming them depending on the effects on their terms-of-trade.
III - Rises in the benchmark interest rate in the developed world with the implementation of
contractionary monetary policies and the termination of QE.
IV - Higher country risk premiums in developing countries, due to specific national/regional
characteristics or to global shocks that detonate a “flight to quality” in short-term capital flows.
V - Excessive foreign debt repayment burden: A rise in the proportion of foreign debt that must be
repaid in the period of analysis may push a country to an insolvency crisis, in conditions where its
access to international credit becomes tightly rationed.
VI - A deterioration in the world financial markets´ perception of the developing economy´s
macroeconomic strengths and external debt repayments may make the balance of payments
constraint sudden and painfully binding, tightly rationing access to fresh financial resources. Recall
that changes in this regard capture major modifications in the assessment of relevant actors in the
81
world´s capital and financial circles regarding what is a “reasonable” magnitude of the country´s
current account deficit cum external debt repayments as a proportion of nominal GDP.
VII - Nominal exchange rate depreciations over and above the increase in domestic prices: Indeed,
in cases where this happens, the total value of the current account deficit plus external debt
repayments will increase as a share of nominal GDP measured in a common currency. If this
increase is high enough, it may trigger a balance of payments crisis.
In addition, a crucial factor to pay attention to when evaluating the role of capital flows and the financial
external restriction of the balance of payments is the cyclical behaviours of the nominal effective
exchange rate and its close correlation with risk sentiment. For the countries analysed below, the
correlation between these variables ranges from 0.4 to 0.6, indicating that when risk perception
deteriorates, a sharp correction in the exchange rate follows (figure 3.11).
Figure 3.11 Annual variations of the nominal exchange rate and Emerging Market Bond Index (EMBI),
selected countries, 2004–2020 (percentage)
A. Mexico B. Chile
Nominal exchange rate vis-à-vis the dollar
Country specific EMBI (right axis)
250 40 250
40
200
r=0.63 200 30 r=0.46
30
150
150 20
20 100
100
10 50
10 50
0 0
0
0 -50
-10
-50 -100
-10 -20
-100 -150
-20 -150 -30 -200
2020
2019
2018
2017
2016
2015
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2020
2019
2018
2017
2016
2015
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
C. Türkiye (2012-2020) D. Colombia

80 80 70 300
60 250
60 r=0.67 60 r=0.64
50
200
40 40 40
30 150
20 20
20 100
0 0
10 50
-20 -20 0
0
-10
-40 -40 -50
-20
-60 -60 -30 -100
2020
2019
2018
2017
2016
2015
2014
2013
2012
2020
2019
2018
2017
2016
2015
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
Source: Abeles et al., 2020.

Note: For the nominal exchange rate, an increase corresponds to a depreciation of the domestic currency vis-à-vis the
dollar. The correlation between the two series under the considered period is reported within the circle.
82
5. Losing ground in the fight against climate change

The pandemic has shown that breaking the link between economic activity and emissions is necessary
to stabilize the climate. As growth picked up again in 2021, emissions soared to a new high.
If the world is to overcome its multiple imbalances – not just climate change but development and
inequalities too – massive investment in transitioning the economy out of its dependence on fossil fuel
is necessary.
However, this will inevitably require an initial intensification of emissions (TDR, 2019), as the capital
goods required for a new energy and productive infrastructure are built. Developing countries, which,
in absolute but not per capita terms, became the leading group of emitters early this century, have
made tremendous progress in reducing the carbon content of their economic output. However, data
indicate that progress in the developed countries in “greening” their GDP has stalled, despite their
massive outsourcing of manufacturing to the global South.
Multilateral discussions on a global climate policy have continued but they have not yet generated
a workable compromise on the key issues of emission targets and financing. After the 2021 United
Nations Global Climate Change Conference (COP26), discussions on economic commitments,
including a New Collective Quantified Goal, doubling adaptation support, new financial instruments
and other national and global targets are intensifying. However, the distance between the ambitions
III
of developed countries and their willingness to lend commensurate support to developing countries
remains large.
Furthermore, the energy crisis and the geopolitical stresses of this year have generated a strong
appetite for cheap fuels and energy independence, both of which have already interfered with climate
policies. The immediate response to turmoil in oil and gas markets in many countries has been to
demand that energy companies produce more of both (Jenkins, 2022). Meanwhile, some companies
have claimed that more exploration and extraction are not financially viable in their structure of
corporate governance if prices dip below the high levels of early 2022 (Worland, 2022). This subjects
the government to opposing forces: on the one hand, the need to curb consumption of fossil fuels
to stop climate change; on the other, the incentive to slow down the energy transition to ensure the
energy sector ramps up production of fuels and reduces its costs.
With energy costs at record highs and investment weakening, enforcement of stricter emission
standards and other environmental regulation that can drive up production costs has fallen down
the priority list for many major economies (Bennhold and Tankersley, 2022; Eddy, 2022; Maclean and
Searcey, 2022). Many new rules that have been announced are set to enter into force in a decade or
further into the future. In contrast, international trade is one area where emission standards have so far
remained current, with items such as the Carbon Border Adjustment Tax discussed in several treaty
negotiations (Council of the European Union, 2022).
Proposals of trade restrictions based on embedded emissions echo a real concern about the large
contribution of merchandise trade to climate change, which occurs both by providing an incentive to
consumerism and by generating transport-related emissions. But these proposals pose two problems
that do not really make them effective as policy tools. First, they assume reliable data on emissions
embedded in international trade exist, while in fact, they are not yet available and given the complexity
of value chains, they may never be available with the necessary detail. Second, and more important
for development, the proposals would inevitably tighten the foreign exchange constraint that bedevils
international trade flows for all developing countries (TDR, 2021). While such proposals are formally
intended to work as incentives to decarbonize developing economies, in practice they paper over
the reality of economies that are structurally at a disadvantage in international exchange and struggle
to pay for imports, including costly productive inputs such as capital goods and energy. For most
developing countries, this is a compelling incentive to use domestic sources of energy as much as
possible, as the foreign exchange constraints pit development and climate goals against each other.
83
Figure 3.12 Carbon dioxide emissions, Figure 3.13 Variation of carbon intensity of
developed and developing economies, GDP, developed and developing economies,
1970–2022 (billion tons) 1975–2022 (percentage change)
Developed economies Developed economies

Developing economies Developing economies
40 2
35
1
30
0
25
20 -1
15
-2
10
5 -3
0 -4
2021
2018
2015
2012
2009
2006
2003
2000
1997
1994
1991
1988
1985
1982
1979
1976
1973
1970
2020
2017
2014
2011
2008
2005
2002
1999
1996
1993
1990
1987
1984
1981
1978
1975
Source: UNCTAD secretariat calculations based on Source: UNCTAD secretariat calculations based on United
United Nations Global Policy Model. Nations Global Policy Model.
Note: 5-year moving average.
As a result, proposals to tax embedded emissions have little hope of helping to win the climate fight
and are more likely to have two undesirable effects: further constraining industrialization in developing
countries in favour of primary sector activities, as explicitly discussed in recent trade negotiations
(Capaldo and Ömer, 2021), and pushing many developing countries into a sub-area of trade that
makes them dependent on other developing countries with smaller markets and looser environmental
requirements (Ömer and Capaldo, 2022).
Box 3.1 Global value chains and the wage share: what lessons from global and regional
trends?16
A stable labour share, i.e. the share of labour compensation in gross value added, was a stylized fact
of advanced capitalist development, based on the premise that productivity increases would accrue to
labour through commensurate real wage increases, keeping (tendentially) constant the share of wages
in net output (Kaldor, 1961). However, the labour share has experienced a steady decline in advanced
economies at least since the early 1980s. The process did not unfold within each country in isolation.
In fact, the early 1980s coincided with the start of an extensive deregulation of product, financial and
currency markets (hyper-globalization), a key component of which was the building of inter-country supply
schemes. Under such schemes, outsourcing and offshoring practices became prominent, to the point of
configuring global value chains (GVCs).
For developing countries, which became the suppliers to leading firms in industrial economies, the
process started in the midst of structural adjustment policies in response to debt crises; this implied the
dismantling of decades of import-substitution industrialization (ISI) efforts and a shift towards an export-
oriented strategy based on import liberalization (TDR, 2018). These trends accelerated in the 1990s and
16
This box is based on Wirkierman, 2022.
84
early 2000s, changing the nature of international specialization – with a focus on tasks of production,
rather than integrated final products – with an ensuing change in the international division of labour.
During the latest phase of hyper-globalization (1995 to 2007), the steep trend decline in the wage share
was mirrored by a notorious increase in trade integration in value-added terms, but from 2008–2009
onwards, the path became more erratic, reflecting the “great trade collapse” during the GFC, with a
speedy recovery which was again subject to a sharp contraction between 2014 and 2016. Yet the global
wage share maintained a declining trend (with a temporary increase between 2010 and 2015). Hence,
we now live in a world of declining global wage share with faltering globalization.
In short, the relationship between trade integration and wage inequality is complex and ambiguous.
Understanding and quantifying it is extremely important, however, as regressive functional income
distribution represents an obstacle for socially inclusive trade schemes.
A useful way to study the connection between GVC participation and the wage share is to compute the
wage share activated by alternative sources of foreign final demand. The intuition behind this approach
runs as follows. The wage share of a country is a linear combination of the wage shares of its industries.
Industries produce to satisfy final demand requirements at home as well as abroad. Hence, when a
foreign country demands final products which are either directly supplied by the domestic economy or
require domestic inputs to be produced, it is activating output at home, which generates incomes, wages
III
and, therefore, an associated wage share. But this domestic output activation across industries occurs in
different proportions according to the products composing each specific foreign final demand basket. For
instance, when a country in Latin America satisfies Chinese final demand, output from primary industries
will be activated in a greater proportion than if the final demand came from another Latin American
country, in which case mid-to-high-tech manufacturing products are produced (and traded) in a higher
proportion. Thus, if primary commodities and mid-to-high-tech manufacturing products are produced
by industries with different wage shares, there are distributive implications of deepening trade integration
with certain regions with respect to others. Moreover, given that the home country is often only an
upstream producer of certain inputs in a GVC, it is far from apparent what are the ultimate distributive
implications of final demand from certain foreign countries, especially when the domestic economy does
not have relevant direct trade linkages in final products with those economies, but rather mostly indirect
links by exporting inputs through others. Hence, given the different commodity composition of each final
demand basket associated to a foreign source of final demand, the wage share activated at home by
each foreign country will be different. This is crucial to understand the distributive profile of domestic vis-
à-vis international specialization.
Based on this methodology, it is possible to obtain several important results (Wirkierman 2022).
1 - Sectoral trends across countries: Between 1995 and 2018, there was a generalized decline in the
wage share across the high-tech manufacturing core of the economy, accompanied by mild increases in
the median wage share for diffused intermediate inputs. Moreover, there were considerable wage share
increases in agriculture, logistics, food and accommodation services and business services. That the
high-tech manufacturing core of the economy experienced sharp wage share declines alerts us to the
potential limits of technological upgrading: it has traditionally been argued that industrial transformation
towards high-tech manufacturing is a crucial pathway to inclusive economic upgrading. Indeed, looking
at the relationship between the technological content of a country’s final export basket and the wage
share activated by foreign final demand, i.e. the extent to which technological upgrading in GVCs is more
inclusive in distributive terms, we find counter-intuitive results, suggesting the potential for technological
upgrading in GVC participation to increase the activated wage share has diminished through time,
especially for the global North. Broadly speaking, however, the wage share distribution across countries
for each industry has become more “equally unequal” between 1995 and 2018. That is, compared to
1995, data points in 2018 seem to be more concentrated around a lower median wage share for the
majority of industries.
85
2 - Activation and appropriation of global income and wage shares in the global North and global South:
Over the same period, the global South caught up in terms of appropriated income shares for both
domestic and foreign sources of activating demand. Interestingly, the increasing share of global income
(i.e. relative growth) went hand-in-hand with an increasing wage share and vice-versa for the global North.
Importantly, in the global South, this growth-distribution nexus has mostly been for the income share
activated by domestic — rather than foreign — demand; in the global North losses have been sharper
for the wage share activated by foreign final demand, pointing to a cost-cutting mode of international
competition.
The global South has also been catching up in terms of the share of global income it activates: specifically,
it went from 25 per cent to over 40 per cent of appropriated income activated by foreign final demand.
But while in 1995, the global North activated almost 20 per cent (of the total 25 per cent), in 2018,
the share activated by the global South almost equalled that activated by the global North, hinting to
an important South-South trade integration through GVCs. Moreover, the global South increased the
share of income it activates in the North. This supports the argument that the “decline [in share of world
exports for advanced economies] was almost entirely due to the relative decline of North–North trade”
(TDR, 2018: 41). However, the right panel of figure 3B.1 suggests the catch-up of the global South in
terms of appropriated wages has been considerably slower than that in terms of income.
Figure 3B.1 Domestic income and wages activated by foreign final demand
A. Domestic income B. Domestic wages
North/North North/South South/North South/South

Inter/intra-area shares activated by the forein demand (in %)
100% 100%
90% 90%
80% 80%
70% 70%
60% 60%
50% 50%
40% 40%
30% 30%
20% 20%
10% 10%
0% 0%
2018
2017
2018
2016
2017
2015
2016
2014
2015
2013
2014
2012
2013
2011
2012
2010
2011
2010
2009
2009
2008
2008
2007
2007
2006
2006
2005
2005
2004
2004
2003
2003
2002
2002
2001
2001
2000
2000
1999
1999
1998
1998
1997
1997
1996
1996
1995
1995
Source: Wirkierman, 2022.

Note: Activated/Activating area.
3 - Aggregating countries into regional groups17 provides further insights into how the two different
sources of final demand (domestic vs. foreign) impact functional income distribution. Figure 3B.2 allows
to identify cross-regional differences in wage share trajectories. Moreover, by building a bilateral matrix of
17
Regions are: Regions are: NAM (North America), LAC (Latin America and Caribbean), WEUR (Western Europe), NEUR
(Northern Europe), SEUR (Southern Europe), EEUR (Eastern Europe), ZAF (South Africa), MENAT (Middle East, North Africa,
and Türkiye), IND (India), China (CHN), Developed Asia-Pacific (DASP), ASEAN (Association of Southeast Nations), ROW (rest
of the world). For details on the composition see Wirkierman, 2022.
86
wage shares activated by each foreign source of final demand, it is possible — for a given source region
— to identify the final output destinations activating the highest/lowest wage share and, at the same
time, identify those activating regions inducing relatively higher/lower wage shares on others. Results
evince the key regions in the global North (North-America and Developed Asia-Pacific) exert a downward
pressure on wage shares of other source regions. This may be reflecting power asymmetries between
lead firms and input providers along a GVC. At any rate, it is noticeable how regions in the global South
that have increasingly appropriated shares of foreign-activated global income – such as China (CHN)
and India (IND) – are also exerting a downward effect on wage shares of some of their trade partners.
In contrast, for some regions of the world economy, intra-regional integration exerts a positive effect on
foreign-activated wage shares. This is the case for Latin America and Southern Europe. This last finding
should lead to a serious consideration of the potential of such regional integration strategies to foster
inclusive growth.
Figure 3B.2 Wage share trajectories according to activating sources of final demand, domestic
and foreign, 1995–2018 (percentage of gross value added)
A. Developed regions
III
Domestic Foreign
65 65
60 60
55 55
50 50
45 45
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
Developed countries of Asia-Pacific North America Developed countries of Asia-Pacific North America
Northern Europe Southern Europe Western Europe Northern Europe Southern Europe Western Europe
B. Developing regions and countries

Domestic Foreign
65 65
55 55
45 45
35 35
25 25
15 15
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
ASEAN China Eastern Europe India ASEAN China Eastern Europe India
Latin America and the Caribbean Latin America and the Caribbean
Middle East, North Africa and Türkiye Middle East, North Africa and Türkiye
Rest of the world South Africa Rest of the world South Africa
Source: Wirkierman, 2022.

Note: See footnote 18 for the list of regions.
87
C. LESSONS FOR AN ALTERNATIVE HORIZON

The Covid-19 economic crisis arguably made the Fed the commander-in-chief of the global financial
and monetary system. In fact, the market for global dollar funding is a complex and geographically
dispersed network of financial relationships, which the Fed has transformed into the building block of
“a tiered system of international liquidity provision: the first tier including those whose credit is sufficient
for a swap line, the second tier including those who can offer acceptable collateral, and the third tier
including everyone else. It is a global dollar system, with the Fed operating as the de facto global
central bank providing international lender of last resort support to the system” (Mehrling, 2022: 2).
A main concern is financial stability, and activity focuses pragmatically on those markets that appear to
be systemically relevant. As a result, liquidity is not guaranteed everywhere, and pockets of gluts and
scarcity persist (Eren et al., 2020). This is particularly true during a monetary tightening, but periods of
financial expansion are not free from peril, especially for emerging markets that can attract disruptively
large speculative inflows of capital.
This dollar system has recently proven resilient to extreme and unexpected shocks, but it has also
failed to promote sustainable growth and prosperity. The pragmatism of the central bankers, who
are forced to safeguard the financial stability of an unequal and stagnant economy, is not free from
worrying consequences. Its success can buy the world some time, but it also inevitably intensifies the
unsound separation of the financial and real economy and of liquidity and solvency concerns. This
inconsistency became especially evident in 2021 when speculative increases in the prices of assets
and commodities appeared as economies were still far from recovering, triggering the premature
tightening. For all the pragmatism of its managers, the inadequacy of its underlying vision makes the
global dollar system vulnerable to shocks.
However, the current crisis is signalling a clear alternative direction which requires some degree of
de-linking from the global financial cycle, while relying on more patient capital funding that reconnects
credit with development (TDR, 2005; section III.B.3). Similarly, economic models that assign control of
price formation to speculative markets have proven particularly vulnerable and incapable of inducing
sound investment strategies. That is quite evidently the case for energy markets.
The oil market, for instance, has become very financialized since the end of the 1990s (Gkanoutas-
Leventis and Nesvetailova, 2015; TDR, 2011). It also remained a very concentrated market, with few
producers, who sometimes are also refiners and distributors, as in the case of vertically integrated
giants, such as Shell, ExxonMobil, Total, Chevron, BP, Eni and the like. Financial investors, as well
as oil companies, act speculatively. Producers sometimes reach common agreements to influence
global price, but these typically do not last very long. Oil pricing follows complex mechanisms based
on the determination of benchmarks and differentials (a discount or a premium to marker), where
most physical trade conditions remain private and undisclosed (Fattouh, 2011; Roncaglia, 2015; TDR,
2011).
In this context, the identification of market fundamentals is particularly tricky, as all the players,
including producers and refiners, act based on expectations, while accurate data about storage are
impossible to gather. The most important benchmark price, the Dated Brent, is determined by two
main companies, Platts and Argus, who record the deals for spot physical trade of Brent oil made
in a specific time window. When deals in that window are too few to offer an accurate picture, the
benchmark is determined by looking at the futures market. But whenever physical traders intend to
fix a price based on that benchmark, they will intervene in the needed time window and influence its
formation. Hence, high volatility in futures prices, which are observable in real time, does not always
influence physical trade but their price trend does, offering a market convention on fundamentals
based on which negotiations occur. To be clear, the market convention does not have to have any
relation with actual fundamentals, whatever they are defined to be (Keynes, 1930; Greenberger, 2018).
88
In other words, this system joins the worst of two models: the shadiness of price negotiations in
concentrated markets is coupled with of the risk of boom-bust dynamics, due to sudden shifts in the
prevailing conventions and expectations. Indeed, this system, to which we should add the privatization
and liberalization of national distribution networks in all developed countries, has produced times
of very low and very high prices (TDR, 2011). This instability is not favourable for most producers,
especially smaller ones and those based in developing countries, or for consumers, especially as the
energy sector has a pivotal role in climate change mitigation planning (section III.B.5). It is, instead,
highly profitable for speculative trading companies and vertically integrated giants.
The end of the commodity super-cycle in 2014, for instance, marked the beginning of a period of
extremely low prices. A game changer was the lifting of the ban on United States oil export in 2015 and
the normalization of the relations between the United States and Saudi Arabia. The price recovered
for a few years until 2020, when it dropped dramatically, partly because of a fall in demand and partly
because of the failure of producers to agree on a cut in production. Production actually increased, and
prices of some crudes even went below zero, with the market in deep contango (i.e. future prices were
much higher than spot prices) and companies running out of storage space and resorting to floating
storage (Fattouh, 2021). This period was financially debilitating for many producers – and this explains
their reluctance to engage in further production as prices started their climb in 2021.
Large state producers, such as Saudi Arabia, Qatar and the Russian Federation, are often accused of
strategically holding onto reserves or production. However, the de-centralized shale oil sector in the
III
United States appears to be equally hesitant to increase production when prices increase, citing Wall
Street investors’ pressure as the main reason (McCormick, 2022). The story of gas is very similar and
perhaps even more telling (chapter II).
Figure 3.14 Global crude oil production, 2018–2021, and prices, 2012–2021
Global crude oil production U.S. Crude Oil (million barrels per day)
Global oil price (right axis) Cushing OK WTI spot price FOB monthly (right axis)
Global crude oil production (million barrels/day)
105 120 14 140
12 120
100 100
10 100
95 80 US$/barrel
US$/barrel
8 80
6 60
90 60
4 40
85 40
2 20
80 20 0 0
2022-Q1
2021-Q4
2021-Q3
2021-Q2
2021-Q1
2020
2019
2018
2022
2021
2020
2019
2018
2017
2016
2015
2014
2013
2012
Sources: OPEC, World Bank, United States Energy Information Administration.
89
1. Regional financial arrangements

As argued in previous Reports, overcoming the challenges discussed above – related to distribution,
on a global scale. In the current system, international payments arising from trade are made in common
currencies, used for domestic payments and financial transactions alike. This allows countries to retain
a surplus or deficit indefinitely and makes some currencies (especially the dollar) scarce, establishing
a foreign exchange constraint and making currency markets critical for the global economy. A solution
is to establish a closed system for trade and investment payments in which any trade surplus has to
be spent on imports or foreign investment, as Keynes advocated as early as the 1940s (Kaldor, 1964;
Kregel, 2016).
A short-lived example was the European Payments Union (1950 to 1958), abandoned as European
trade became more global. Short of a global clearing union, multilateral institutions can establish
provisions to prevent imbalances from becoming unsustainable, as the Bretton Woods institutions
were meant to ensure.
Unfortunately, existing multilateral institutions have not been able to deliver the needed support,
especially for developing countries. This is why these countries have long sought regional cooperation
agreements that may help ease their constraints. These can be categorized as follows (Fritz and
Mühlich, 2019; TDR, 2015):
I - Regional funds for short-term balance of payments shortfalls: In practice, all these funds have proven
throughout three decades to be too small to significantly withstand balance of payments crises.
II - Regional payment systems to reduce exposure to exchange rate fluctuations and promote inter-
regional trade: These are mostly customs unions and payment systems that target transaction
costs. They mainly exist in Latin America, although initiatives to introduce payment systems in
Africa have been discussed for a long time.
III - Coordinated exchange rate policies aimed at stopping large exchange rate fluctuations and
beggar-thy-neighbour macroeconomic policies.
Several agreements exist for planned monetary integration. With differing timelines, these mechanisms
are all aimed at establishing a common currency and common exchange rate policies among member
countries, mainly in Africa. However, they have remained largely at a pre-implementation stage, as
members have not met the timelines agreed-upon in terms of economic convergence. The decade
after the GFC has left most countries participating in these agreements hesitant to cede sovereignty
and embark on the requested macroeconomic convergence programs.
Since the mid-1990s, financial cooperation among developing countries has increased, especially
involving China, India, Brazil, Republic of Korea, Saudi Arabia and the Bolivarian Republic of Venezuela
(chapter VI). This type of cooperation includes grants and concessional loans (either interest-free or
at rates well below market) but sometimes also transfer of commodities, as the Bolivarian Republic of
Venezuela has done with several Caribbean countries (TDR, 2007). In China’s case, significant activity
has been performed by the ExIm bank.
2. Steering the world economy onto a sustainable path

The above points to a clear outlook for the medium term: the world economy will remain fragile unless
macroeconomic policies change course. This section explores medium-term economic prospects
under two different policy scenarios. The scenarios are constructed using the UN Global Policy Model
(GPM), an empirical framework of analysis of macro-financial dynamics, trade, fiscal, monetary,
employment policies, demography and carbon emissions. It is based on a database that is consistent
with principles of national accounting, global aggregation and stock-flow generation. It is estimated
econometrically in panel-time series data.18
18
See https://unctad.org/system/files/official-document/tdr2014_bp_GPM_en.pdf and https://mobilizingdevfinance.org/
tool/unctad-global-policy-model-gpm.
90
A “hands-off” scenario: comfort in conformity?

In one scenario, the policy stances of the past several years (decades, in some cases) are assumed
to continue. Here, policymakers accommodate but do not actively interfere with market forces, based
on an established playbook. According to that playbook, inflationary pressures are contained by
rising interest rates; supply bottlenecks are alleviated by free trade and interventions that prop up
profits (e.g., striking down a windfall tax on gasoline producers); income inequalities are mitigated by
access to education and deregulation of labour markets, encouraging competition while enlarging the
labour force; financial instability can be reduced when insolvent operators are not bailed out by states
but held accountable for any wrongdoing; and government debt problems are corrected by cutting
government outlays and by privatizing its assets.
Pressure to enter this “hands-off” scenario is strong in the real world. Most policymakers are wary of
deviating from the orthodox playbook, afraid this may scare away investors who wield more power in
financial markets than the government itself. The smaller the economy, the greater the disparity of power
between the state and the well-coordinated network of domestic and international conglomerates.
Even in large economies, corporations have considerable leverage over policy choices (Sciorilli Borrelli,
2022). Following the status quo seems prudent.
In this scenario, developing economies cannot preserve sufficient policy space to support development,
unless they happen to be on the right side of a commodity boom or a geopolitical fault line, nor do
III
they coordinate to respond to the policies adopted by the geopolitical blocs of major economies on
trade, finance and climate. Developing economies are severely affected by the weakening of global
demand, financial pressures, trade restrictions and any additional burden implied by climate policies
(in the North).
“South-led way”
The hands-off scenario is tied into a vicious circle. Increasing disparities of power, wealth and income
lead to repeated crises and eventually consume policy space. But this is only true to the extent that
those disparities are considered inevitable. In fact, three factors point to an alternative policy paradigm.
First, our projections indicate that continuing with the status quo leads to worsening macroeconomic
performance. The empirical analysis in this section highlights the mechanisms and outcomes that
are triggered by continuing the current policies in an already weak global economy. Medium-term
prospects are gloomy.
Second, widespread financial and climate instability is bound to hit both developing and developed
economies. The remedies offered in the orthodox playbook do not match the scale of these crises. No
major economy, and certainly not a developed economy, can avoid the difficult decision (i.e. unpopular
in the markets) of abandoning the hands-off approach.
Contrary to a common tenet of the financial press, debt and balance of payments crises in the South
are not simply the result of government dysfunction. They are more likely a side effect of the policies
adopted by the major central banks to avoid financial meltdown in times of market turmoil, especially
after the GFC, when quantitative easing and other forms of liquidity expansion found ready financial
traders, corporations and governments under pressure to roll over crushing debt (Ghosh, 2022; Green,
2022; Roubini, 2022). The unstable evolution of today’s debts has been set off by this policy approach.
The evolving climate crisis adds a daunting dimension to this outlook, because of its irreversibility:
the IPCC indicates that once a critical threshold of global warming is crossed, no realistic mitigation
policies can prevent a vicious cycle of ecological self-destruction. The scientific guidance is that such
a critical turning point is only a few years away (IPCC, 2022).
None of these crises are explored in the scenarios, as their timing and consequences cannot be
predicted. But the urgency they create for a shift in policy approaches cannot be emphasized enough.
91
Third, policymakers in the South share critical common ground to be capable to question the
asymmetries and biases in international trade and finance that favour large corporations from advanced
countries (TDR, 2018). Leveraging this shared interest opens a space for a South-led way to counter
the status quo.
Global economic forces and the orthodox policy playbook incentivize policymakers to compete with
other countries rather than cooperate. In a typical “fallacy of composition”, economies are often
pushed to compensate for diminishing trade gains by cutting costs and trying to increase their share
in export markets. For decades, especially for economies with relatively low degrees of specialization,
potential partners in international cooperation have also been fierce competitors in the global markets.
Since the 1990s, coordination between governments has increasingly taken place within multilateral
institutions, but with little actual coordination occurring beyond developed countries. This process
has not served developing countries. On the one hand, international institutions overseeing financial
arrangements (such as the IMF, the World Bank or the BIS) do not ensure fair representation to
developing countries (either on executive boards or in membership), and the direction given to them, to
a large extent, reflects the policy priorities of developed countries. On the other hand, the WTO, despite
its more representative governance structure, has so far failed to conclude a development agenda, and
the few agreements made have been heavily influenced by asymmetric power relations. Meanwhile,
North-South cooperation has increasingly taken the form of bilateral or more recently, mega-regional
trade and investment treaties, which have reinforced trade dynamics historically dominated by the
North. The critiques of such agreements are known (chapter IV; Capaldo and Izurieta, 2018).
This experience provides fresh motivation to find different arrangements, with a stronger focus
on the interests of the global South. Sections III.A to III.B highlight the common challenges faced
by developing countries and show how international coordination is informed by the interests of
developed economies. Increasing awareness of this reality is fertile ground for new forms of South-
led arrangements, and these, in turn, may be stepping stones towards a more ambitious multilateral
agenda.
Hence, a South-led way must take a South-South perspective as its point of departure, building
on the observed patterns of cooperation in trade, of industrial diversification, finance and exchange
rate management among economies of the South. The scenario identifies the conditions for more
successful and sustained achievements in a coordinated policy strategy guided by a development
perspective.
This type of coordination, even if with explicit South-South bias, implies the involvement and cooperation
of Northern economies. After all, trade, finance, technology and climate require global coordination. But
developing economies should reach global goals starting from their specific conditions and operating
under specific constraints. Seen from this perspective, the empirical scenario offered below implies
a concrete policy shift which acknowledges current institutional and macro-financial constraints and
accordingly leaves room for involvement of more advanced economies (which could be much greater if
they adopted measures to contain the tendencies towards market concentration and financialization).
The difference from earlier North-South agreements in this simulation exercise is the core assumption
of a well-defined Southern agenda as the benchmark for agreed policy decisions. Finally, the scenario
incorporates the fact that the period of analysis (from the present to 2030) is too short to expect full
achievement of desired goals. It should thus be regarded as a template to begin steering the global
economy in a more sustainable direction.
92
Four distinctive features19 of this scenario help explain the empirical outcomes presented below.
The first feature is that it is centred on policies to advance a coordinated industrialization. Partially
cut-off from intellectual property (IP)-dominated technologies of the advanced economies and with
limited access to international reserve currencies to pay for imports of capital equipment, developing
economies manage their structural transformation by developing their industrial sectors at a pace
consistent with their potential and that of their partners within the same fora. This has two implications.
For one thing, industrialization will only move away from employment-intensive technologies gradually
and partially. This will facilitate the de-informalization of large sections of their labour force, consistent
with the development of social, education, health and caring services (Cimoli et al., 2009). For another,
it requires a proactive government with a clear developmental agenda which will also contribute to
alleviate inequalities of income (TDR, 2012).
The second characteristic of the scenario is the cooperation on finance and technology to sustain
the path of trade integration and industrialization, repairing the broken link between credit and
development (see section III.B.3). The emphasis is on recognizing that in the current global institutional
set up, finance and technology are dominated by advanced economies. As they are at a disadvantage
in these two aspects, economies in the South need alternative levers. As the experiences detailed in
Chapter VI of this Report show, such levers range from a “managed” framework for trade, as opposed
to “free-trade”, to innovative forms of finance and exchange payments that can eventually be oriented
III
towards formal “South-South clearing unions” (Kregel, 2016). Accordingly, if trade among Southern
economies grows quickly, a significant portion of their total trade flows will be paid in either their
own domestic currencies or through regional currency mechanisms. Considering that the instability
of payment flows results not only from exchange rates but also from international prices, the financial
institutions set up at a regional level can be geared to accommodate the underlying principles of
“commodity reserve currencies” (Kaldor, 1964; Ussher, 2011). Part of the regional funding available
can be increasingly allocated to regional buffer stocks that can help stabilize prices without totally
disrupting the prices’ responses to productivity, technology advances and demand. Based on these
mechanisms, which are assumed to evolve only over time, the growth of commerce will be tied to a
reduction of external imbalances, as well as the reduction of dependency on global finance. Regional
financing and currency mechanisms are assumed to help negotiate workout paths for debts owed by
developing economies to Northern financial centres and to provide financial insurance at the regional
level.
A third characteristic is a coordinated effort to maintain a pace of agrarian transition that is consistent
with industrialization, employment generation, food security and the need to avert environmental
degradation (linked to the fourth characteristic). There is sufficient evidence of employment-intensive
and traditional agriculture based on small and medium-size units providing food and agricultural inputs
and commodities for industrialization. In short, the simulation assumes a coordinated agricultural
transformation proceeding as an “agro-ecological model of industrialization à la Lewis”, where the rise
of productivity of agrarian labourers would be such as to avoid displacement that cannot be absorbed
in the growing industries and services, even if the scenario also envisages an expansion of social and
caring provision by the state (IPES-Food and ETC Group, 2021; Wise, 2020).
A fourth characteristic is the attention to strategies for climate change mitigation and adaptation.
The technologies and financing to which Southern economies have access do not warrant a self-
sustained transformation of their productive matrices. Only in so far as decisive and affordable
cooperation by the most advanced economies is ensured, can developing economies embark on
such transformation at a pace that can meaningfully contribute to global climate change mitigation.
But movements in this direction cannot happen overnight, even if advances in low-cost and effective
environmentally friendly technologies are currently available (Drahos, 2021). Thus, most developing
economies will continue to rely on relatively more carbon-intensive industries than their Northern
19
To be clear, such “features” are not changes in the model assumptions that were tested econometrically and eventually
drive the model behaviour. Rather, they represent “what if” policy changes that are imputed into the existing model
structure (see footnote 19).
93
counterparts, and in this scenario are assumed to set their environmental targets pre-conditioned on
the primary strategy of building the productive and urban infrastructure to facilitate social and economic
development. In addition, it is contemplated that an increasing amount of resources will be required for
climate adaptation. Considering that joining a global mitigation strategy is favourable for all economies,
the model simulation assumes a moderate increase of support from the most industrialized partners,
in the form of transfers of technology and aid. Knowing that the experience of “technology transfers” is
so far disappointing (apparent during the Covid-19 pandemic), this support is assumed to be marginal
but increasing over time. Thus, most of the contribution of the global South to a greener development
will result from the ecological-agrarian transformation and the avoidance or minimal use of fossil fuel
machinery and fertilizers, together with the emphasis on local production for the satisfaction of basic
needs.
3. Scenarios compared: climate catastrophe or climate change?

The hands-off scenario extrapolates from the structural patterns of production, demand, efficiency
and degrees of diversification in global energy and primary commodities. Projections are based on
a historical analysis of a reference database (UNSD, 2021) coupled with parameters of fossil-fuel
content.20
We use the observed historical patterns (1970 to 2020) to estimate the relations among the main
environmental variables, the economic, technological and financial conditions and the policies.
Coherently with the discussion in section III.B.5, despite several decades of debates, commitments
and pronouncements, the data show little progress.
Thus, assuming no meaningful change of policy direction through 2030, the outcomes of the hands-off
scenario show that instead of decreasing, annual global carbon production is set to increase 16.5 per
cent by the end of the decade, from about 17 billion (of “ton-equivalent”) at present to about 20 billion.
The carbon mix is such that the annual flow of CO2 emissions will easily surpass 41 billion tons (from
about 35 billion at present). An estimated increase of non-carbon energy production from the current
2.5 billion (of ton-equivalent) to 3.2 billion is not going to have a meaningful mitigation effect.
Figure 3.15 compares the main environmental variables in the two scenarios. Let us be clear: the
outcomes of the South-led way imply extraordinary policy measures that ought to be undertaken,
with due differences, by all countries and sustained over time. But extraordinary as they seem for the
world as a whole, our simulation is based on actual, albeit exceptional, experience: observed periods
of time, sufficiently long, when there were noticeable advances in our key indicators. In practice,
developed economies will show annual improvements of 6 per cent per year by reducing energy
content (and especially carbon) for any increase in unit of output (GDP), while developing economies
(in the aggregate) are expected to gain efficiency by 4 per cent per year.
As discussed in more detail below, these energy efficiency gains are still compatible with moderately
faster growth of GDP than in the baseline hands-off scenario and with sustained rates of employment.
However, to ensure a significant stabilization of energy production as economies in the South progress,
developed economies will experience a degree of growth moderation (Galbraith, 2014).
Efforts in terms of energy diversification include two aspects. On the one hand, all economies invest
to diversify production and use. The effort of industrialized nations is larger, but everywhere the extent
is comparable to a war-time military build-up. Inevitably, this implies a large involvement of the public
sector, as prices, subsidies and tax incentives alone have proven inadequate to generate the needed
private investment. In the design of the scenario, carbon taxes and other similar measures are fully re-
cycled in the public budget to support climate mitigation and adaptation policies, so that the ultimate
fiscal balance effect is neutral.
20
Offering a comparable analysis of primary commodity extractions, environmental degradation, atmospheric pollution
(directly or indirectly through technology) and so on would require a significantly more ambitious global model; therefore,
the scenario design does not include sector-specific assumptions about primary commodities in one scenario or the
other.
94
0
2
4
6
8
10
12
20
25
30
35
40
45
10
12
14
16
18
20
22
24
1990 1990 1990
1992 1992 1992
1994 1994 1994
1996 1996 1996
1998 1998 1998
2000 2000 2000
2002 2002 2002
E. CO2 emissions
2004 2004 2004 Hands-off baseline
2006 2006 2006
2008 2008 2008
2010 2010 2010
A. Total energy production
2012 2012 2012

2014 2014 2014
2016 2016 2016
C. Non-carbon energy production

2018 2018 2018
2020 2020 2020
South-led way
2022 2022 2022

2024 2024 2024
2026 2026 2026
2028 2028 2028
2030 2030 2030
0
20
40
60
80
100
120
140
160
4
5
6
7
8
9
10
11
12
10
12
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16
18
20
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24
1990 1990 1990

1992 1992 1992
1994 1994 1994
1996 1996 1996
1998 1998 1998
2000 2000 2000
2002 2002 2002
2004 2004 2004
D. Exports of energy
2006 2006 2006

2008 2008 2008
2010 2010 2010
2012 2012 2012
F. Cumulative CO2 emissions

2014 2014 2014
B. Carbon energy production
2016 2016 2016

2018 2018 2018
2020 2020 2020
Figure 3.15 Global environmental outcomes in two simulated scenarios, 1990–2030 (billion tons)
2022 2022 2022

2024 2024 2024
2026 2026 2026

2028 2028 2028
2030 2030 2030
95
III
On the other hand, international coordination is required to support development strategies in the global
South. In fact, for all the reasons given above, developing economies can only commit to a slower
pace of diversification. Notably, as the global economic structure of production will still rely on carbon
for some time, fossil-fuel exporting economies on the lower-income scale are granted greater quotas
to supply global markets than the wealthier exporters. Moreover, financial and technology transfers
from industrialized economies to the South, even if moderate initially, need to be part of the policy mix.
These coordinated measures are deemed to be more effective mechanisms than unilateral green-
shoring or “friend-shoring” measures, in so far as they include clear and transparent conditionalities,
such as measures for a slow decline in global prices (topped by carbon-taxes imposed by each
economy to help sustain environmental policies) and diversification away from their most polluting
sources.
With a coordinated push of this kind, we estimate the flow of CO2 emissions to decline to about
30 billion tons by the end of the decade, enough to escape from catastrophic IPCC scenarios.
4. Scenarios compared: trade, finance and macroeconomic stability

Section III.B.3 highlights the combination of threats to macroeconomic and financial stability faced by
developing economies, subject to structural balance of payments constraints.
As noted earlier, our modelling strategy was to rule out the case of a full-blown financial crisis, whose
specific triggers and spillovers cannot be reliably anticipated. That implies assuming away any systemic
shock to debt roll-over risk. On that assumption, the policy set up of the hands-off scenario delivers
slow GDP growth (as explained in more detail below) and even slower fiscal revenues growth. At the
same time, governments will face increasing spending claims for climate adaptation, development and
debt repayment. Global trade growth will continue to be inadequate; therefore, net export revenues,
especially of economies with low degrees of diversification, will be insufficient to maintain exchange
rate stability. Volatile currencies tend to be the main factor driving inflationary pressures and food
crises. The usual policy recommendation of cutting domestic wages and demand will, under these
conditions, make matters worse.
Thus, government debt ratios will likely increase by about 30 per cent in Africa and 60 per cent in Latin
America and the Caribbean (regional aggregates). Increases in debt-to-GDP ratios of nearly 30 per
cent can be estimated for Western and Central Asia (taken as a whole) and for South and East Asia
(as a whole, excluding China), though parting from lower levels. Needless to say, if we remove the
assumption about roll-over risk, and place these debt overhangs back into the real world of finance,
the situation could become unsustainable more quickly and if not addressed appropriately would
eventually solve itself in the most disruptive way. But, under the current scenario, an appropriate
and sustainable domestic and external debt restructuring is not conceivable. In fact, it would require
abandoning the very policy set-up that defines it: unfettered liberalization of global capital and trade
flows in the South, coupled with selective protectionism in the North.
In contrast, the South-led way assumes a series of new macro-financial and trade deals, following the
map of existing regional and subregional agreements (detailed in chapter IV of this Report). Hence,
the main accords are established by developing countries within their geographical regions. They are
designed to sustain a pace of industrialization compatible with the development of their agrarian sector.
Therefore, they are consistent with: (I) the provision of wage-goods (especially food and energy), (II) the
achievement of overall productivity gains and (III) overall increases of employment. This is an important
point, as unchecked development processes can trigger destabilizing influences between the two
sectors with ultimately self-defeating consequences.
In this scenario, economies grow sufficiently to increase the imports from the regional partners,
especially in the manufacturing and agricultural sectors but without reducing imports from elsewhere
(to avoid protectionist retaliations from other partners). The ensuing global increase of imports implies
that, domestically, import growth matches the growth of exports.
96
These are all dynamics that have been empirically observed through time. But the historical assessment
of regional South-South agreements also indicates that such processes are often derailed when
economies encounter external shocks due to movements of prices, exchange rates, international
interest rates and capital flows. Hence, the importance of the financial part of the agreements in this
scenario.
For the regional accords to succeed, they have to include mechanisms that facilitate transactions in
domestic currencies or in financial vehicles that can be supported on stable exchange rates. More
specifically, in a context of increasing South-South trade, establishing clearing unions between the
signatories of a trade deal can reduce exchange rate instability and external imbalances to the extent
that economies with a trade surplus can only use it to import goods in the currency of the deficit
partner. We also envisage implementation of some degree of capital controls to reduce dependency
on external finance, as this tends to increase the vulnerabilities of developing economies with no
palpable benefit for economic development.
Finally, next to cooperation on trade and finance between developing economies, the scenario
contemplates some involvement, even if more moderate, by the more industrialized economies. Again,
this element of the scenario is extrapolated from observed, if ephemeral, examples of cooperation. Thus,
depending on the strength of the pre-existing links, some developing countries will seek agreements
with the more industrialized economies of North America, Europe, China or Japan. The qualitative
difference from the past lies in the character of trade, which here aims at promoting industrialization,
III
food security, financial stability, employment and the achievement of climate targets in the South,
but brings benefits to the industrialized economies as well, such as improved financial stability and a
predictable path of growth of imports.
The main results of the regional accords are captured in figures 3.16, 3.17, and 3.18.
Figure 3.16 shows trade shares in manufacturing exports of developing economies within the regional
agreements, comparing the South-led way scenario with the hands-off baseline. Panels A and B shows
the shares of exports of developing economies in each region relative to the total imports of the same
group. Panel C shows the same measurement (exports on total imports of partner), but where the
trading partner is the aggregate of the more industrial economies involved in the regional accord. In all
these cases, the scenario yields tangible gains in terms of the trade of developing economies, as well
as moderate improvements in their access to the markets of industrialized partners. Worthy of notice
is the fact that the degree of the advances in regional trade is partially related to the strength of the
point of departure. Performance improvements in the manufacturing industries take time (investment,
capacity, development of networks etc.) and tend to proceed along with improvements in external
financial conditions and exchange rate stability.
The model scenario incorporates the existence of regional stabilization funds which the economies
use to target regional improvements in the net external asset position. The regional scope of the
objectives frees single countries of the need to maintain an aggregate equilibrium in their balance of
payments, which too often results in pressure to reduce the cost of labour and internal demand, to
reduce imports.
As long as the targets are consistent with the position of the group in the global context, this
mechanism should facilitate adjustments of intra-regional imbalances that avoid a mutually defeating
race to the bottom and help maintain inter-regional buffers. It combines a series of actions, conducted
in a collective and coordinated way: export promotion (which increases the flow of external revenues);
import moderation (which does not imply restrictions on initial conditions, as exports tend to increase
thanks to regional market access); exchange rate stability (thanks to the clearing unions); negotiations
conducted by the region to reduce debt services (regions tend to enjoy greater leverage than individual
economies); and capital control management to limit excessive financialization.
97
Figure 3.16 Shares or manufacturing exports by developing economies linked with trade accords
Developing countries’ share of developing countries’ intra-regional imports
A. Between developing economies B. Between developing economies
Developing America Africa Western and Central Asia South and East Asia
0.25 0.45
0.40
0.20 0.35
0.30
0.15
0.25
0.20
0.10
0.15
0.05 0.10
0.05
0 0
2030
2028
2026
2024
2022
2020
2018
2016
2014
2012
2030
2028
2026
2024
2022
2020
2018
2016
2014
2012
C. Developing countries’ share of industrialized

partners’ imports
Developing America Africa
Western and Central Asia South and East Asia
0.30
0.25
0.20
0.15
0.10
0.05
0
2030
2028
2026
2024
2022
2020
2018
2016
2014
2012
Results are presented for the aggregates of the four groups of developing economies in figure 3.17.
As the figure shows, debtor groups slowly reduce the weight of their net liability positions, while net
creditor groups reduce the relatively high accumulation of external assets. More granular data show
that in all cases (reductions of net liability or of net assets), de-financialization (decreases of both
external assets and liabilities) is the norm.
98
Figure 3.17 Net External position, developing regions, 2000–2030 (percentage of GDP)
A. Developing America B. Africa

Hands-off baseline South-led way
0 5
-5 -5
-10
-15
-15
-25
-20
-35
-25
-30 -45
-35 -55
2030
2028
2026
2024
2022
2020
2018
2016
2014
2012
2010
2008
2006
2004
2002
2000
2030
2028
2026
2024
2022
2020
2018
2016
2014
2012
2010
2008
2006
2004
2002
2000
III
C. Western and Central Asia D. South and East Asia
35 35
30 30
25
25
20
15 20
10 15
5
10
0
-5 5
-10 0
2030
2028
2026
2024
2022
2020
2018
2030
2016
2028
2014
2026
2012
2024
2010
2022
2008
2020
2006
2018
2004
2016
2002
2014
2000
2012
2010
2008
2006
2004
2002
2000
The management of exchange rates is modelled in a way similar to the modelling of external positions.
Regional, not country-level, targets are proposed, and these are achieved subject to the constraints
derived from trade, as well as the pressures on the balance of payments derived from accumulation of
assets and liabilities. The results are presented in figure 3.18.
Panel A measures the “gain” of the aggregate exchange rate of the developing economies of each
region relative to the hands-off baseline. The gain is calculated by measuring for each scenario the gap
between the nominal dollar exchange rate appreciation of the group of developing countries of each
region and the exchange rate appreciation of the group of industrialized economies partners in the
same region. Developing countries tend to experience considerable depreciations of their currencies,
as is the case for the ‘hands-off’ scenario, because of unrelenting balance of payments constraints.
The mechanisms set out in the South-led way scenario reverse that tendency and therefore the gap
with the exchange rate of industrialized partners is less negative. Hence, this yields a positive gain (in
some cases, the currency still depreciates, but it is still less than in the baseline).
99
The model results confirm initial intuitions: groups of developing economies in net liability positions
(Africa and Latin America) tend to be initially more vulnerable to global finance and therefore more
prone to exchange rate devaluations. Policies to reduce net liability positions of the region (discussed
around figure 3.17) and to stabilize exchange rates are generally more dramatic in order to achieve
desired targets; thus, their improvements over the baseline (gains) are stronger. The case of developing
countries in the Western and Central Asia region is likely influenced by the process of climate change
mitigation, discussed around figure 3.15. Exchange rate improvements in this case respond to oil
and commodity prices and the commitment to offer greater advances in the transformation of the
productive structure away from fossil-fuels, which tends to be more import-reliant and could not be
afforded at the required pace in the absence of exchange management measures.21 Meanwhile, the
pattern of exchange rates in developing economies of South and East Asia seems to be stable over
the mid-term.
Figure 3.18 Exchange rate and inflation gains, developing regions, 2020–2030
A. Developing economies’ exchange rates, B. Inflation gains (negative values reflect

relative to industrialized regional partners improvements)
Western and Central Asia Developing America Western and Central Asia Developing America
Africa South and East Asia Africa South and East Asia
2.5 0.5
2
0
1.5
-0.5
1
0.5 -1
0
-1.5
-0.5
-1 -2
2030
2029
2028
2027
2026
2025
2024
2023
2022
2021
2020
2030
2029
2028
2027
2026
2025
2024
2023
2022
2021
2020
Panel B shows the same concept of gains for inflation rates, but in this case, improvements are
shown as negative values. The gaps calculated in both scenarios measure the difference between the
estimated inflation rate of the group of developing economies in each region and the estimated inflation
rate of the group of industrialized partners in the same region. If the inflation rate of developing countries
in the South-led scenario falls faster than in the hands-off baseline relative to the fall experienced by
the industrialized partners, the gain shows as a negative number. The scenario yields, for all groups of
developing countries, significant improvements in this sense (more “negative” gains), except for South
and East Asia, as this region is broadly stable over the simulation period.
This is a very relevant result, confirming the observations made in the previous sections of this chapter
about the transmission from exchange rates to inflation rates for most developing economies. Along
with improvements in exchange rates (panel A), there are concomitant improvements in lowering
inflation rates (panel B).
21
Note that Saudi Arabia, part of this group, pegs its currency to the dollar.
100
5. Scenarios compared: economic growth and correction of global imbalances

In the hands-off scenario, structural problems are assumed to continue unresolved through the
mid-term. Developed economies, driven by a fiscal austerity bias, excessive reliance on monetary
policy, growing inequalities, weak investment and an unviable climate agenda, will show weak growth
performance and low rates of employment and will also be subject to instances of financial stress in the
wake of unsustainable processes. Developing economies in this scenario will be affected by a similar
combination of shortcomings, amplified by the transmission effects to which “balance of payments
constrained” economies are subject: trade imbalances, de-industrialization, financial instability and
debt overhang. In some instances, these economies will maintain respectable growth numbers for
some time, but pre-conditioned on rising indebtedness, excessive reliance on commodity extraction,
low productivity and poor employment conditions.
Fossil-fuel and mineral extracting developing economies, as well as some developed economies that
have outperformed the rest through combinations of export capabilities and domestic saving biases,
will attempt to maintain growth by relying on external demand. Unlike the episodes of global imbalances
in the past, this time around. the risks will be higher because the rest of the world, including some
major advanced economies, faces balance sheet stresses in both public and private sectors, and
asset valuations are dangerously high. Overall, economic growth will disappoint.
Alternatively, a South-led growth strategy focused on decent employment, investment for
III
industrialization and a sufficient provision of social and infrastructure support by the state thus seems
more compelling. But constraints from both environmental threats and financial vulnerabilities that
have been tightening over time cannot be ignored. The simulation strategy for this scenario is that
of proposing stimuli to growth that are known to be effective, like the promotion of income and
employment measures that help reverse the declining trends of wage shares, public spending in social
provision and infrastructure consistent with the promotion of investment, especially in shifting away
from environmental degradation, and credit provision directly linked to employment and technological
advances. At the same time, financial and natural resource constraints are incorporated into the
estimation of the growth possibilities. What also enters into the calculations is the need to correct
current account imbalances and repair the asymmetries of economic development between nations.
The growth performance of the two scenarios is shown in figure 3.19. Four graphs capture the patterns
of the Southern regional groups in the aggregate (as weighted average of the economies involved). To
(merely) approach the SDGs by 2030 and escape from vicious circles of insufficient income, sluggish
demand, financial vulnerability, de-industrialization and poverty, their growth rates will be tangibly
higher in the South-led way than in the hands-off baseline.
Meanwhile, counterpart industrialized economies grouped in the remaining four sets will achieve
more moderate increases in their growth rates.22 In the GPM estimations, stronger growth of these
economies will trigger greater risks of heightened financial vulnerabilities. The South-led scenario does
not contemplate a full rewinding of the highly leveraged global financial system or a full curtailment
of global monopolies, while the patterns in the historical data suggest faster growth in the developed
economies tends to be accompanied by, if not premised on, a deeper and more hazardous degree of
financialization. Likewise, given the targets of de-carbonization, the timescales required to revamp the
global production matrix and the achievements that are feasible on energy efficiency per unit of output,
it is clear that a faster rate of global growth will not be compatible with the parameters of sustainability
deemed by the scientific community. Thus, growth performance will be satisfactorily higher than in the
baseline but will be tempered by the forces of nature and by the macro-financial limits inherited after
decades of neoliberal policies.
22
In the GPM exercise a few industrialized economies (such as China and Europe) are part of more than one regional
accord with developing economies. But for global consistency, in figure 3.19 and ff. they are included only once.
101
Figure 3.19 GDP growth scenarios, selected country groups, 1990–2030 (annual percentage change)
Latin America and Caribbean Africa Western and Central Asia

8 10 12
6 8 10
4 6 8
2 4 6
0 2 4
-2 0 2
-4 -2 0
-6 -4 -2
-8 -6 -4
-10 -8 -6
2030
2025
2020
2015
2010
2005
2000
1995
1990
2030
2025
2020
2015
2010
2005
2000
1995
1990
2030
2025
2020
2015
2010
2005
2000
1995
1990
South and East Asia excl. China Developed America Europe
12 8 6
10 6 4
8
4 2
6
4 2 0
2 0 -2
0
-2 -4
-2
-4 -4 -6
-6 -6 -8
2030
2025
2020
2015
2010
2005
2000
1995
1990
2030
2025
2020
2015
2010
2005
2000
1995
1990
2030
2025
2020
2015
2010
2005
2000
1995
1990
China and the Russian Developed Pacific and

Federation United Kingdom
14 5
4
12
3
10 2
8 1
0
6 -1
4 -2
-3
2 -4
0 -5
2030
2025
2020
2015
2010
2005
2000
1995
1990
2030
2025
2020
2015
2010
2005
2000
1995
1990
The layout of current account balances for the two scenarios is shown in figure 3.20, according to the
same groupings. The chosen aggregations do not highlight the most extreme country-specific cases,
like the large surpluses of Germany (merged in the European Union group), of Japan and the Republic
of Korea (in the Developed Pacific and United Kingdom group), or the case of India (a large deficit case),
which is merged with economies of East Asia that have historically exhibited large surpluses. Yet the
presentation is sufficiently illustrative to draw two lessons. First, due to growing financial vulnerabilities
of a still highly leveraged global economy, macro-financial imbalances at present are generally more
contained than they were in the past two decades. Exceptions include the case of Europe, which
as a whole is tending to become a large surplus area (in the past, large surpluses in Germany were
102
combined with deficits in the other European Union economies). Another exception is Africa, which
was in structural deficit for several decades; it shifted to high surpluses during the commodity super-
cycle of the early 2000s but again showed very large deficits post-GFC.
The second observation is the contrast between the hands-off baseline and the South-led scenario, as
in the latter, imbalances will be contained or significantly reduced relative to the baseline. Europe will
likely reach surpluses of about 5 per cent of GDP by the end of the simulation period in the baseline,
but the surplus will shrink in the South-led scenario. Other cases of relevant surplus correction include
Japan (from 5 per cent of GDP in the baseline to 1.2 per cent of GDP in the alternative scenario) and
the Republic of Korea (from 4.3 per cent to 0.8 per cent of GDP).
Figure 3.20 Current account balance scenarios, selected country groups, 1990–2030
(percentage of GDP)

10 10 10
8 8 8
6 6 6
4 4 4
III
2 2 2
0 0 0
-2 -2 -2
-4 -4 -4
-6 -6 -6
2030
2030
2025
2025
2020
2020
2015
2015
2010
2010
2005
2005
2000
2000
1995
1995
1990
1990
2030
2025
2020
2015
2010
2005
2000
1995
1990

10 10 10
8 8 8
6 6 6
4 4 4
2 2 2
0 0 0
-2 -2 -2
-4 -4 -4
-6 -6 -6
2030
2025
2020
2015
2010
2030
2005
2025
2000
2020
1995
2015
1990
2010
2005
2000
1995
1990
2030
2025
2020
2015
2010
2005
2000
1995
1990

10 10
8 8
6 6
4 4
2 2
0 0
-2 -2
-4 -4
-6 -6
2030
2025
2020
2015
2010
2005
2000
1995
1990
2030
2025
2020
2015
2010
2005
2000
1995
1990
103
In the South-led scenario, Africa as a whole will manage to revert to external balance, in contrast to the
otherwise large structural deficits of nearly 5 per cent of GDP in the baseline. The South-led scenario
will also yield meaningful reductions of external deficits in North America (the United States alone will
reduce the deficit from 4 per cent of the baseline to 2.7 per cent in the alternative scenario) and in
India (the deficit will be reduced from about 4 per cent in the baseline to 1.2 per cent in the South-led
scenario).
As indicated above, the South-led scenario sets three mechanisms in motion to correct global
imbalances. First, trade regionalization with a focus on industrialization in the South, accompanied by
the mentioned regional currency mechanisms, has a direct effect on deficit reduction in developing
economies. Second, the measures towards de-financialization, regulation and capital controls work in
the same direction, especially helping developing economies. Third, the policy principle applied along
the simulation is that imbalances can be corrected more effectively by setting spending targets for
surplus economies than by making deflationary adjustments in deficit economies.
6. Scenarios compared: employment, distribution and the role of the State

The hands-off baseline assumes a continuum of stop-go policies to tame inflation by shocking
demand, containing employment and curbing real wage income. Together with the fiscal austerity
bias and the inclination to expect demand and activity to emerge from unfettered trade and financial
liberalization, the simulation indicates that the global employment rate will stagnate for the rest of the
decade, remaining at the low rate of 57 per cent. The distance from the averages of 62.1, 60.4, and
58.4 of the 1990s, the 2000s and the 2010s, respectively, is significant, all the more because of the
global projected increase in the percentage of the elderly population, from 9.6 at present to nearly
12 per cent by 2030; importantly, their incomes will depend on a diminishing proportion of those
employed. The global employment conditions, together with the increasingly concentrated structure of
global production and markup pricing, will cause a fall in the labour income share from about 53.8 per
cent at present to circa 52 per cent by 2030. This, apart from being socially explosive, implies a mix of
global deflationary pressures, debt overhang and constraints to policy space
By way of an alternative, the South-led route assumes a greater involvement of the public sector
everywhere, which by not being geared to short-term profit gains is best positioned to privilege
employment creation where this is lacking, adopt wage-income policies where welfare and domestic
demand are unsatisfactory and adopt supply-side inducements to lift bottlenecks in production,
trade, trade-finance and credit where supply-driven inflation bites. The global employment rate in this
scenario could rebound to nearly 60 per cent. This is not extraordinary; it would be close to what was
achieved by 2007 but instead of arriving on the back of a global financial bubble, it will be on the back
of an environmentally sustainable, state-led investment push which would crowd-in the private sector.
As indicated in figure 3.21, the employment outcomes of the baseline for developing groups are
disappointingly low. They are on a declining slope for Africa and Western and Central Asia, not
unrelated to the fact that most of these economies are heavily dependent on primary commodities and
energy extraction, known to be poor employment generators. In the other two groups of developing
economies there is a perceptible rise, but after the sharp downturn of the past few years. Hence, the
benefit of the South-led scenario; by being centred on industrialization and counting on the support
of the state, it would prove more effective at reversing the trend and promoting employment. For
the more industrialized economies, the gains in employment rates are meaningful but less striking,
partly because of the moderation of economic growth in these economies and partly because the
patterns in the historical data suggest a slower response of employment to economic recoveries from
recessionary episodes (“jobless recoveries”).
104
Figure 3.21 Employment rate scenarios, selected country groups, 1990–2030 (percentage)

72.5 72.5 72.5
67.5 67.5 67.5
62.5 62.5 62.5

57.5 57.5 57.5
52.5 52.5 52.5
47.5 47.5 47.5
42.5 42.5 42.5
2030
2025
2020
2015
2010
2005
2000
1995
1990
2030
2025
2020
2030
2015
2025
2010
2020
2005
2015
2000
2010
1995
2005
2000
1990
1995
1990

72.5 72.5 72.5
67.5 67.5 67.5
III
62.5 62.5 62.5
57.5 57.5 57.5
52.5 52.5 52.5
47.5 47.5 47.5
42.5 42.5 42.5
2030
2025
2030
2020
2025
2015
2020
2010
2015
2005
2030
2010
2000
2025
2005
1995
2020
2000
1990
2015
1995
2010
1990
2005
2000
1995
1990

72.5 72.5
67.5 67.5
62.5 62.5
57.5 57.5
52.5 52.5
47.5 47.5
42.5 42.5
2030
2025
2020
2015
2010
2005
2000
1995
1990
2030
2025
2020
2015
2010
2005
2000
1995
1990
As the case of employment creation, figure 3.22 highlights both the need to overturn the estimated
sharp decline of wage shares in the hands-off baseline and the effectiveness of an alternative
strategy based on industrialization, public sector support, financial stability and a transformation of
the productive matrix away from fossil fuels. Especially in developing economies, wage shares are
strikingly low, and this implies profit shares are strikingly high. A South-led way offers considerable
room for improvement, yet these economies will still remain at some distance from the patterns of
distribution in the 1990s, as well as from those observed in the more industrialized economies.
105
Figure 3.22 Labour income share scenarios, 2020–2030, selected country groups
(percentage of GDP)

53.5 52 53
53 51 52
52.5 50 51
52 49 50
51.5 49
48
51 48
50.5 47
47
50 46 46
49.5 45 45
49 44 44
48.5 43 43
2030
2025
2020
2015
2010
2005
2000
1995
1990
2030
2025
2020
2015
2010
2005
2000
1995
1990
2030
2025
2020
2015
2010
2005
2000
1995
1990
53 61 59
52 60 58
51 59 57
50 58 56
49 57
48 55
56
47 54
55
46 53
45 54
53 52
44
43 52 51
2030
2025
2020
2015
2010
2005
2000
1995
1990
2030
2025
2020
2015
2010
2005
2000
1995
1990
2030
2025
2020
2015
2010
2005
2000
1995
1990
China and the Russian Developed Pacific and United

Federation Kingdom
61 60
60 59
59 58
58
57
57
56
56
55 55
54 54
53 53
52 52
2030
2025
2020
2015
2010
2030
2005
2025
2000
2020
1995
2015
1990
2010
2005
2000
1995
1990
106
D. CONCLUSION
This chapter outlines a strategy for South-led industrialization and coordination aimed at avoiding
environmental meltdown and promoting employment generation globally, while rebalancing income
distribution and favouring development through a sustainable path. In this strategy, trade, finance,
credit and macroeconomic policies are coordinated and instrumental to the overarching goals of
employment generation (especially in the North) and green industrial development (especially in the
South). This is in contrast with the reality of increasing compartmentalization between key policy
areas, with fiscal policy, monetary policy and trade policy all aimed at different objectives and with a
systematic under-estimation of their regressive impact on income distribution and welfare (Wolf, 2022).
Results indicate that changing the course of the global economy towards a fairer and more sustainable
future will take time. We project growth to reach 2.3 per cent and 5.4 per cent by 2030, respectively,
in developed and developing economies. Thanks to the concatenation of industrialization and agrarian
development goals in the scenario presented above, we also project that an additional 530 million jobs
will be created globally, while with the current patterns and no policy change, the estimated increase
will be 330 million jobs. The focus on employment and the technical progress triggered by trade and
specialization in the South-led strategy would contribute to sustain increases in the share of labour
income across all economies, yielding gains of 1.7 and 2.6 points relative to the baseline, in developed
III
and developing economies respectively. Most importantly, the policy changes we explore will liberate
much needed policy space for developing countries and allow a successful energy transition.
The burning question concerns the political will. The experience of the last four decades does not give
much room for hope. Worse still, the accumulation of policy failures during the period have eroded
the initial conditions for a sustained and equitable recovery so much that even with the best of policy
efforts, the results are not likely to be sufficient to avert systemic economic, social and environmental
failure. But a window of opportunity is opened, and while the room for the global South to take
a leading role in changing the scenario – by leveraging its weight across key regions – exists, the
responsibility (and resources) for moving in the right direction still rests with the advanced economies.
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Chapter IV
IV
Regional Integration: Issues at Stake
A. INTRODUCTION
As crises affecting the global economy become increasingly more complex and intertwined,
policymakers at all levels of the multilateral system are seeking solutions that would safeguard against
future shocks and ameliorate existing inequities and asymmetries across the global economy. Global
issues require a coordinated response, yet inclusive multilateral dialogue requires a high degree of trust
among contracting parties that is difficult to attain in the context of global instability and growing geo-
political tensions. Moreover, the existing multilateral institutions established at the end of the second
World War have struggled to adapt to the challenges of the new millennium, including those posed by
new types of economic and financial crises.
New institutions of collective action that rely on selective participation, such as the G20, have proved
to be only a partial success. The talk of strengthening the global safety net increasingly appears to be
at odds with the growing number of developing countries caught in a vicious circle of recuring external
shocks, mounting economic distress, climate crises and deepening uncertainty. Meanwhile, financial
and corporate control over markets has become more sophisticated, while multilateral regulatory
approaches are weakened by political tensions, economic disparities and institutional rigidities.
As Part 1 of this Report has shown, this global landscape reduces the policy space available to all
national governments, but the problem is especially acute for developing countries faced with a myriad
of external shocks, internal challenges and scarce resources.
Regional integration – whether through market-driven processes or as government-led trade and
economic agreements, or a mixture of both – has long been advanced as a building block towards
more effective and inclusive solutions to problems of economic development, including trade, financial
integration and governance. In the past 20 years, this idea received new impetus from the growing
interest of many countries of the Global South in both intra- and cross-regional trade agreements.
The new phase of formal regionalism is paralleled by the greater role of South-South trade linkages in
the structure of global trade, as well as a more prominent role of South-led developmental banks in
financing regional development projects. But despite these shifts, key issues affecting development
paths and exacerbating existing asymmetries – including the impact of financialised markets, corporate
control and market concentration – often remain outside of the purview of formal regional integration
initiatives. This disparity brings up three key issues that are likely to play a central role in determining
future success of ongoing regionalisation efforts.
First is the issue of the gap between formal regionalism based on treaty signing, and developmental
regionalism that prioritises long-term, strategic national and regional developmental aims centred
around the structural transformation of economies and tied to an underlying framework of the
developmental state (UNCTAD, 2016). Although the distinction between formal and developmental
regional integration should not be taken as a rigid classification, it is particularly important in the
context of the growing scale and scope of regional trade agreements spanning many sectors (so-
called, “megaregionals”1), along with the retreat of the state from strategic economic management
and coordination. This raises the question of whether the current phase of formal regionalism driven
by a plethora of regional agreements and treaties has the capacity to deliver sustainable growth and
economic resilience in the absence of an established framework of development states reflected in
regional development models. Chapter 5 of this Report delves into this issue in depth, analysing
recent trends in trade regionalism across industry and services, and comparing them with the record
of successful developmental regionalism in Asia.
1
Mega-regionals are deep integration partnerships between countries or regions with a major share of world trade and
FDI. Beyond simply increasing trade links, the agreements aim to improve regulatory compatibility and provide a rules-
based framework for ironing out differences in investment and business climates.
114
Second is the issue of institutional resilience, adaptability and depth. These qualities are pertinent
to any type of institution-building for development, but are particularly relevant in the context of the
financial challenges of a climate-constrained world. Using the case of development finance institutions,
Chapter 6 analyses the main challenge for regional development banks (RDBs) in today’s global
context. Having evolved in parallel to the multilateral lending institutions and spurred further by the
economic rise of large developing economies in the opening decade of the millennium, RDBs if
better financed, as well as better coordinated in their policy priorities, can provide a larger and more
strategic role in development cooperation. This will also allow these institutions to be able to foster
resilience in the face of new type of external crises confronting the development work. Chapter 6
offers recommendations on how these institutions can best adapt to meet the needs of participating
countries.
Third, despite recent shifts, the expansion of regional trading areas and new challenges of multilateral
lending are vastly inefficient in the face of structural asymmetries in the global financial system and
corporate architecture which threaten to undermine regional developmental initiatives and diminish
the space for development policies. Chapter 7 of this Report investigates the effects on developing
countries of the North-South divide in the financialised economy of MNEs. Financialization, understood
as the growth and consolidation of financial and legal innovations driving corporate arbitrage globally,
is closely linked to the decreasing ability of national and regional host authorities to manage the
behaviour of global corporate groups investing in their regions, while the reorganization of global value
chains has been paralleled by finance-driven patterns of rent extraction, where developing countries
remain at a structural disadvantage.
This is an issue that is likely not only to define developing countries’ success in attracting international
firms but whether or not they can bend the activities of those firms to support local development
needs. It raises the question of what measures can developing countries undertake, at national as
IV
well as regional levels, to improve the regulation of global corporations, and regulate the phenomenon
of corporate arbitrage that deprives national economies of financial revenues necessary for long-term
stability and growth. This, as Chapter 7 of the Report shows, remains one of the steepest challenges
confronting authorities across the global economy, and where regional forums are only beginning to
tackle the problem.
B. REGIONALISM: CONCEPT, EVOLUTION,

CHALLENGES
International trade theory has tended to view regionalisation efforts with alarm. In the economics
literature, they are often associated with trade-diverting agreements that threaten the advantages of
full utilisation of factors of production in an open global trading system. In reality, more fundamental
forces, dating back centuries, have linked industrialization to regional development through the rise of
intra-industry trade.
These dynamics tend to generate economies of agglomeration and open channels for mutual learning
across political boundaries. Together, these forces can bring cumulative benefits that can help boost
productivity growth, but also encourage a higher degree of market concentration over time that allows
firms to further boost their profits. These accumulated advantages, in turn, spur domestic firms into
doing business abroad but also introduce their own economic asymmetries and distortions. Once
such forces are engaged, there is pressure from producers within the region to lower or remove the
various barriers to intra-regional trade, including bureaucratic red tape, conflicting legal restrictions
and administrative procedures, etc., as well as demands for better transport and communications
115
infrastructure. These various demands are likely to be accompanied by the creation of institutions for
closer regional cooperation, a process typified by post-Second World War European development.
For many developing countries constrained by the limited size of their own domestic markets, closer
economic ties with their neighbours have been seen as a possible route to establishing cumulative
advantages for their own fledgling corporations. However, the record is an uneven one, with only East
Asian economies exhibiting a more lasting process of growing successful regional ties and cooperation,
including, most recently, with China’s development model.
Politics inevitably plays a crucial role where governments are required to coordinate more closely with
each other in some policy areas and to give up certain policy options and resources in others. This has
often proved a major obstacle to a building regional integration particularly among countries in the early
stages of economic development. There are signs, after a series of false starts and disappointments,
that such integration is again gaining converts in parts of the developing world. Proposals to forge
greater consistency with respect to trade and investment policies are back on the agenda in both
Africa and Latin America.
In terms of the scope of regional arrangements, there is a familiar distinction between shallow and deep
regionalism – defined by the normative reach of the agreement between members and the type of
regulatory impact of the agreement. Shallow regionalism describes those Regional Trade Agreements
(RTAs) that merely concern the removal of tariff barriers, including partial scope agreements. Deep
regionalism, in contrast, means establishing far-reaching RTAs that go beyond trade liberalization,
to include trade of services, investments, competition, and public procurement, whilst also taking
on some features of a common market and focusing on regulatory issues (Kang 2016, p. 250).2
Shallow regional integration is seen as enabling participating countries to retain policy space over key
areas of the economy, while modern examples of deep regionalism are often seen as constraints on
national governments’ ability to form strategic approaches to economic growth, financial stability, debt
sustainability, public health and environmental protection (Thrasher, 2021) .
Deep integration projects can arise as a response to processes already underway in the corporate
sector, often triggered by earlier regionalisation schemes. Such projects are closely associated with the
institutional foundations of a common market and are based on common regulatory measures in trade
of services, investments, competition, and public procurement. The EU is the most obvious example
of deep regional integration, while NAFTA, prescribing coordinated regulatory provision of investment
and dispute mechanisms, is an example of deep North-South regional integration (Kang 2016). At the
same time, as both Euromed and NAFTA are free trade areas (FTAs), the distinction between shallow
and deep integration reveals that RTAs can be considerably different not only in terms of effectiveness
and scope (Capaldo, 2014)3, but also in terms of their impact on welfare.
For example, in the case of East Asia, deep regional integration has been driven on the one hand, by
the development of micro-level regionalized linkages (regionalization), including through the continued
expansion of international production networks and corresponding increases in intra-regional trade
and investment, and the growing number of international economic agreements that have been signed
among East Asian countries on a region-wide scale, especially after the region’s 1997/98 financial
crisis, on the other (Dent 2008).
As survey of regional integration initiatives in the developing world shows (figure 4.1), that regional
economic integration activity has been growing at both intra-regional and in particular, cross-regional
levels (figure 4.1.C), with agreements covering good and services growing since 2007–08 (figure 4.1.D).
For most areas of the global South, regional participation in RTA agreements increased manifold,
with Free Trade Areas and Economic Integration Areas exhibiting particularly strong growth since
2
Before the 1990s, most RTAs concluded between developing countries tended to be of a shallow integration nature
(Kang, 2016).
3
https://unctad.org/system/files/non-official-document/cimem5_2014_Capaldo.pdf
116
2007 (figure 4.1.A). Notably, these integration initiatives have increased at the level South-South and
North-South cooperation, while North-North types of integration initiatives have been largely static
(figure 4.1.C).
Figure 4.1 Regional trade agreements, by groups, 1958-2021
A. By type of RTA B. By kind of integration

CU CU and EIA EIA FTA Bilateral Bilateral; All Parties are RTAs
FTA and EIA PSA PSA and EIA Bilateral; One Party is an RTA
Plurilateral Plurilateral; One Party is an RTA
400 400
350 350
300 300
250 250
200 200
150 150
100 100
50 50
0 0
1958
1961
1964
1967
1970
1973
1976
1979
1982
1985
1988
1991
1994
1997
2000
2003
2006
2009
2012
2015
2018
2021
1958
1961
1964
1967
1970
1973
1976
1979
1982
1985
1988
1991
1994
1997
2000
2003
2006
2009
2012
2015
2018
2021
C. By development status and cross – regionalism D. By coverage
Developed-Developed IntraReg Developed-Developed CrosReg Goods Services Goods and Services
Developing-Developing IntraReg Developing-Developing CrosReg
Developed-Developing Intra-regional Cross-regional
400 400
350 350
300
IV
300
250 250
200 200
150 150
100 100
50 50
0 0
1958
1961
1964
1967
1970
1973
1976
1979
1982
1985
1988
1991
1994
1997
2000
2003
2006
2009
2012
2015
2018
2021
1958
1961
1964
1967
1970
1973
1976
1979
1982
1985
1988
1991
1994
1997
2000
2003
2006
2009
2012
2015
2018
2021
Source: UNCTAD secretariat calculations, based on Regional Trade Agreements Database, World Trade Organization
Note: Customs Union (CU); Free Trade Agreement (FTA); Partial Scope Agreement (PSA); Economic Integration Agreement
(EIA).
Within this broad trend many new, sub-regional economic areas were formed, often centred on the
underlying processes of regionalization and governance of a common resource. Their format varies
from trade partnerships to customs unions and common currency areas, but as a whole, these projects
parallel the expansion of South-South initiatives and trade flows, and are characterized by active
South-South economic links. This shift is also reflected in the changed structure of international trade
over the past 25 years, where the share of trade between the developed economies has declined
by nearly 15%, having been superseded by the growth in North-South (+14.1%) and South-South
(+4.6%) trade linkages (see figure 4.2).
117
Figure 4.2 Shares in global trade, 1995 and 2020
1995 2020
0,7
4.6
10.8 North-North
25.0 (+14.1) 37.1 (-14.9) North-South

16.2
52.0 South-North
South-South
16.5 20.8 (+4.6)
Non classified
16.4 (-0.1)
Source: UNCTAD secretariat calculations, based on UNCTADstat Database, Merchandise Trade Matrix.
Note: Imports are mirror figures as received exports.
C. DEVELOPMENTAL REGIONALISM:
KEY CHALLENGES
1. Trade and Developmental Regionalism: Issues at stake
Chapter 5 focuses on regionalism in trade and discusses its role in pathways towards open
developmental regionalism. This model is closely associated with shallow trade agreements that
do not unduly reduce the policy space available to developing countries to manage the trade-offs
that accompany any move towards closer integration with multiple countries. The strategies of open
development regionalism allow participating countries to implement the collective actions that arise
from closer cooperation and at the same time, to continue to support the broad range of goals of
an inclusive and sustainable development strategy. The model aims, first and foremost, at boosting
productivity growth and creating jobs through economic diversification and technological upgrading.
But an open and pro-active regional trade governance could also shield developing economies from
adverse global effects.
By itself, however, shallow regionalism cannot evolve into an institutional framework of open
developmentalism. Not only can the many rules and regulations in existing bilateral, regional and
multilateral agreements constrain the use of industrial and environmental policy, but trade regionalism
centred on formal treaty signing can, itself, jeopardize a more inclusive multilateral trading system.
In terms of rulemaking, open developmental regionalism would limit binding commitments to border
measures, whilst relying on cooperation and an adaptive policy mix that aims at regional harmonization
of behind-the-border trade measures as, for example, in the ASEAN model. Supported by institutions
of the developmental state and calibrated by cooperation in non-trade areas and regional regulatory
frameworks that manage the interface between the global and regional economies, open developmental
regionalism may thus also facilitate the management of the diverging interests and sensitivities of
118
developing and developed countries for a more inclusive and developmental international trade
governance.
In this respect, closer trade integration among neighbouring countries, the advance of regional
infrastructure projects, cooperation on industrial policies and shared legal frameworks can unleash
virtuous growth cycles and mediate the interface between global economic forces and domestic
needs. But the nature of competition, regulatory coordination and policy autonomy, are key to the
inclusiveness and sustainability of regional developmental projects.
Progress calls for the full use of the principles of special and differential treatment and common but
differentiated responsibilities. Without the application of these principles, it will be difficult for developing
countries to transit towards diversified and higher value-added activities in a world facing widening
inequality and growing ecological instability. This implies that developing countries will need to be
engaged in multilateral trade governance whilst capitalizing on the advantages of open developmental
regionalism in areas that do not lend themselves to trade rules, and/or where these countries do not yet
have the capacity to engage in binding multilateral commitments. In those areas, open developmental
regionalism can offer a bulwark against an increasingly challenging world order.
2. Institutional Adaptability: The Case of Regional Development Finance

Open regionalism requires a stable macroeconomic and financial environment that can support
productive capital formation and job creation. Such an environment should include policies and
institutions that foster the provision of long-term investment finance. The evolution of development
finance institutions analysed in Chapter 6 presents a case of institutions that can adapt to and respond
to the changing international landscape of risks, and, albeit to varying degrees, respond to policy
priorities of national economies.
IV
During the post-WWII period, Regional Development Banks (RDBs) have gone through three phases
in terms of their place and function in the changing global landscape of international finance (see
Table 4.1). As Chapter 6 points out, the current phase in the activity of regional development finance
is marked by a discernible shift in the views on the role of these financial institutions. It includes a
renewed attention to the ’ role of developing banks in providing “patient capital” for long-term structural
transformation, as well as counter-cyclical support in times of crises. Here, the lessons drawn by the
developing countries from the 1997-98 Asian financial crisis have proved particularly pertinent: the
meltdown of 1997 sparked a renewed interest particularly in Asian, but also more widely Southern-led,
multilateral financial institutions (Barrowclough et al., 2021; TDR, 2015).
Table 4.1 Evolution of the system of multilateral development banks, 1944–2022
Year Bank name Region Assets

WWII–1960s – Bretton Woods and the global view
1944 World Bank Global 263.8
1956 International Finance Corporation Global 94.3
1950s–1980s – Regional development banks and regional integration for development
1956 Council of Europe Development bank Europe 25.7
1958 European Investment Bank Europe 555.8
1959 Inter-American Development bank LAC 129.5
1960 International Development Agency WBG Global 184.6
1960 Banco Centroamericano de Integración Económica LAC 10.9
1963 International Bank for Economic Cooperation Asia Pacific 0.4
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Table 4.1 Evolution of the system of multilateral development banks, 1944–2022 (cont.)
Year Bank name Region Assets

1964 African Development bank Africa 13.1
1966 Asia Development bank Asia Pacific 191.9

1967 East African Development Bank Africa 0.4
1970 International Investment Bank Inter-regional 1.3
1970 Banco de Desarrollo de América Latina LAC 40.5
1970 Caribbean Development Bank LAC 1.7
1973 Banque de Developpement des Etats de l’Afrique de l’Ouest Africa 4.6
1973 Arab Bank for the Economic Development of Africa MENA 4.9
1974 Fondo Financiero para el Desarrollo de la Cuenca del Plata LAC 0.3
1974 Arab Fund for Social and Economic Development MENA 12.2
1975 Nordic Investment Bank Europe 34.9
1975 Banque de Développement des Etats d’Afrique Centrale Africa 0.7
1975 Ecowas bank for Investment and Development Africa 0.9
1976 OPEC Fund for International Development MENA 7.4
1977 Fonds Africaine Guarantie et de Cooperation Economique Africa 0.1
1977 International fund for Agricultural Development Inter-regional 9.0
1985 Shelter Afrique 0.2
1985 Trade and Development bank Africa 5.5
1989 Arab Trade Financing Programme MENA 1.2
1989 Pacific Islands Development Bank Asia Pacific 0.3
1989 Nordic Development Fund Europe 0.9
1990s–2000s – Regionalism and market-led development, global vertical funds, trust funds hosted by MDBs
1991 European Bank for Reconstruction and Development Inter-regional 68.0
1993 African Export and Import bank Africa 13.4
1993 Interstate Bank Asia Pacific 0.2
1993 North American Development bank LAC 2.0
1999 Islamic Co-op for the Development of the Private Sector Inter-regional 3.1
1999 Black Sea Trade and Development bank Europe 2.0
2005 Economic Coop. Organization Trade and Development Asia Pacific 0.7
2006 Eurasian Development bank Asia Pacific 3.7
2010 onwards – Regionalism and the rise of the South, the return of industrial policy
2014 New Development bank Inter-regional 10.4
2015 Banque Maghrébine d’investissement de Commerce Extérieur MENA 0.3
2016 Asian Infrastructure Investment Bank Asia Pacific 19.6
Source: UNCTAD calculations, derived from data drawn from the Data Visualization Index Agence Française de Développement
ADF and Peking University, Institute of New Structural Economics; Ocampo and Ortega (2020); Clifton et al. (2021); Barrowclough
et al. (2021) and bank websites.
Note: LAC stands for Latin America and the Caribbean; MENA for Middle East and North Africa
120
In terms of their scope and function, the RDBs continue to focus on their continent and region, and
to pursue market-oriented lending. At the same time, there is more caution about the neoliberal
approaches that rose to dominance during the 1980s, as a number of RDBs have rediscovered the
merits of a more interventionist, developmental policy.
The renewed interest in the strategic role of development finance includes the use of industrial policy.
Development banks have gone beyond simply correcting market failures or financial gap filling (as is so
often the rationale for supporting infrastructure) and are more involved in more dynamic and catalytic
functions of “market shaping” (Mazzucato and Penna, 2016) and strategic support (UNCTAD, 2016).
They also increasingly finance international public goods, both global and regional, especially in the
space of environmental sustainability or decarbonization (Marois 2021); including for example through
the emergence of dedicated green public banks (TDR 2021, p.150; Marois, 2021).
In some areas, RDBs increasingly involve sub-national actors such as localgovernments – suggesting a
somewhat different business model that goes beyond the geographical region for lending and towards
more interventionist market shaping activities. One example is the EIB – which was originated as a
sub-regional bank in Western Europe with a market-promoting function, and subsequently engaged in
industrial policy through the European Commission’s Investment Plan for Europe and European Fund
for Strategic Investment. The EIB was strongly involved in the European pandemic response, both in
terms of lending in general and in lending to R&D for a vaccine, in particular. Indeed, most RDBs played
a central role during the Covid economic and health shocks; sometimes out-lending the global legacy
DFIs such as the World Bank, especially at the start of the pandemic and associated lockdowns, or
significantly co-lending, demonstrating speed and flexibility in responding to their members’ needs
(Griffith-Jones et al., 2022).
This experience of RDBs during the Covid crisis presents important lessons for other crisis scenarios
that are likely to confront the developing countries in the climate-constrained world. These concern, for
IV
instance, decarbonisation and the shift to low-carbon or zero-carbon development path. The transition
will require not only resources beyond the scope of individual national banks, but also, co-ordination
and integrated responses across many countries. Hence after decades of being ignored, dismissed
or attacked, DFIs are now seen as a vital component of the multilateral development system and the
source of the long-term and reliable finance, provided on favourable terms, to support development.
For example, a recent OECD report (OECD, 2020: 32) argues that MDBs are the pillar of the multilateral
system, thanks to their unique capacity to leverage finances beyond their initial capitalization, as well
as their extensive field presence and operational capacities (ibid: 34).
Chapter 6 examines these and other challenges facing the creation and functioning of regional
financial institutions in supporting developmental regionalism. Despite their expansion over the years
financing remains a key issue that needs to be addressed in regional development programmes. The
capacity of these institutions and their role in regional economies remains constrained by precarious
funding sources, leaving them vulnerable to the effects of international crises and uncertainty. It is clear
that in order to be a viable part of developmental regionalism, RDBs need to be an integrated part
of a regional financial system, including liquid capital markets, appropriate regulatory mechanisms,
standard-setting bodies, as well as institutions supporting national currency markets and the financial
safety net. For most of the regional blocs constructing such a system remains a challenge. To what
extent new types of regional integration initiatives have the potential to overcome these and other
hurdles to institution-building, is discussed in Chapter 6.
121
3. The Challenge of financialization and corporate control to regional integration

Previous TDRs have delved at some length into the macroeconomic and structural aspects of
financialization and, in particular, analysed the gap between the continued expansion of the private
credit system and financial asset markets, and investment-led growth pathways available to the
developing countries (TDR 2016, 2017, 2019). Chapter 7 of this Report argues that an additional
set of barriers to the developmental gains from regionalization comes from the financialization of the
corporation itself.
More specifically, financialization, understood as the growth and consolidation of of financial and legal
innovation driving corporate arbitrage globally, is closely linked to the decreasing ability of national and
regional host authorities to control the behaviour of global corporate groups investing in their regions.
At the same time, the reorganization of global value chains has been paralleled by finance-driven
patterns of rent extraction, where developing countries remain at a structural disadvantage.
Chapter 7 analyses the consequences of this problem at several levels of global political economy
where, the multiplication of regional agreements and investment treaties has contributed to the
creation of a highly complex network of corporate and financial regulations. These, in turn, have been
conducive to the rise of the “fragmented firm”. Modern MNEs are organised as a network of entities
held directly or indirectly by parent through equity ownership.
In the context of developmental gains from regional integration, this means that while regional trade and
investment agreements may aim to encourage investment into the region, it is the way the investments
are structured through corporate subsidiaries that determines the economic impact of the investment.
This is particularly pertinent to developing economies seeking to attract productive FDIs.
Typically, as Chapter 7 details, MNEs can (and do) structure their investments indirectly, through
intermediaries, and ensure that considerable portion of operational activities take place outside of
the host market of the developing country. The reason they may do so is because certain countries
present them with a more accommodative regulatory environment, lower taxation, as well as other
advantages. Due to statistical anomalies associated with financial and legal innovation at the corporate
level, none of these outcomes are picked up in FDI statistics.
Chapter 7 of this Report argues that inner organisation of global corporations plays a key role for
development outcomes and the gains a host country or region can attain from private international
investment. The techniques of corporate arbitrage, enabled by financial and legal innovations, come into
conflict with national governments, especially in the context of developing countries, where corporate
groups effectively arbitrage national rules through access to investment treaties. The analysis reveals
a North-South divide in the registration of value creation in the global economy, with corporate players
mostly relying on the financial, accounting, and regulatory infrastructure offered to them by competition
states (the Netherlands, Luxemburg, OFC islands). As a result, the majority of developing economies,
despite their efforts, remain structurally disadvantaged in the global competition for capital.
the fiscal space of any host country. Advanced economies can potentially offset a significant part of
interest, and capital gains, which themselves tend to be boosted by higher rates of global corporate tax
this way. They also face an additional disadvantage in the long-term: their cost of borrowing is higher
than those of the advanced economies.
In the absence of a developed set of regulatory standards and a systemic framework of regulation,
developing countries need to build the relevant financial, accounting, legal and data expertise, with a
view of enhancing the visibility of corporate behaviour at the global level. Regional integration initiatives
122
have so far lagged behind in the reform of governance standards as a whole, and are yet to tackle this
dimension of the financial, corporate and market governance in a systemic way.
Chapter 7 calls for reform measures aimed at tracing corporate tax arbitrage to be connected with
closer policy attention to advancing FDI statistics. Similarly, corporate accountability measures in the
developed countries need to take a closer look at the role and type of corporate subsidiaries and
the nature of their de facto economic activity. The availability of reliable data on corporate financial
behaviour, professional expertise and dedicated regulatory mandate at national levels, can play a key
role here.
While some recent initiatives by international organizations do mark a major step towards global tax
justice and corporate transparency, these efforts have so far been evolving in isolation fromeach other.
A more integrated approach, aimed at comprehensive multilateral system of measures of corporate
and financial regulation, is needed to address the financial-corporate nexus of economic asymmetries
dividing developed and developing countries.
IV
123
REFERENCES
Agence Française de Développement ADF and Peking University, Institute of New Structural
Economics. Data Visualization Index.
Barrowclough D, Gallagher KP and R Kozul-Wright (2021). Southern-Led Development Finance,
Solutions from the Global South, Routledge, Rethinking Development. London and New York.
Capaldo, J. 2014. Mega Regional Trade Agreements: Implications for Inclusive Development. UNCTAD:
https://unctad.org/system/files/non-official-document/cimem5_2014_Capaldo.pdf
Clifton J, Diaz-Fuentes D and Howarth D, eds. (2021). Regional Development Banks in the World
Economy. Oxford University Press. Oxford.
Dent C. 2008. East Asian Regionalism, London New York: Routledge.
Griffith-Jones S, Barrowclough D and Mishra V (2022 forthcoming). Counter-cyclical responses: How
development banks helped the Covid-19 recovery, and lessons for the future. Research Paper for
the Finance in Common Summit 2022, presented in Abidjan. 19–20 October.
Kang Y (2016). Development of Regionalism: New Criteria and Typology. Journal of Economic
Integration, 31:2, https://www.e-jei.org/upload/JEI_31_2_234_274_2013600097.pdf
Ocampo JA and Ortega V (2020). The Global Development Banks’ architecture. Working Paper No. 6.
International Research Initiative on PDBs and DFIs Working Groups.
Thrasher R (2021). Constraining Development: The Shrinking of Policy Space in the International Trade
Regime. London, New York: Anthem Press.
UNCTAD (TDR, 2016). Trade and Development Report 2016: Structural transformation for inclusive
and sustained growth. United Nations Publication.
UNCTAD (TDR 2017). Trade and Development Report 2017: Beyond Austerity: Towards a Global
Green New Deal. United Nations Publication.
UNCTAD (TDR 2019). Trade and Development Report 2019: Financing the Global Green New Deal.
124
Chapter V
V
Trade Regionalism and Development
A. INTRODUCTION
Regional integration is often examined through a narrow trade lens, whereby reduced barriers to trade
are viewed an end in themselves, and attention is focused on the creation and diversion effects of Free
Trade Agreements (FTAs). This chapter takes a different approach, in that we see trade as a means
to development, not an end. More specifically, we discuss the developmental effects of regional trade
and trade agreements in the context of managing sectoral shifts to support a diversified economy and
productivity growth.
The chapter starts by examining regionalization and the developmental effects of intraregional trade,
measured by a higher degree of diversification and/or a larger share of domestic value added in
regional than in total trade. We underline that for regionalism to be development-oriented, it must be
part of a broader strategy promoting regional integration and cooperation across a range of non-trade
areas. Such a strategy may be called “open developmental regionalism” whereby formal rule-setting
is confined to border measures, and informal cooperation on behind-the-border measures and other
policy areas works to unleash regionalization dynamics that could support structural transformation.
The chapter also discusses the challenges posed to regional arrangements by the emerging digital
economy and climate change and whether and how regionalism can revitalise multilateralism, rather
than resulting in a fractured international trade system. It insists that a constructive and cooperative
approach to multilateralism remains paramount, and open developmental regionalism can be an
important tool to make the existing multilateral trading regime more inclusive, especially in new and
rapidly evolving areas, such as the digital economy and the response to climate change.
B. RECENT PATTERNS IN REGIONAL

TRADE: DEVELOPMENTAL IMPACTS OF
REGIONALIZATION
Trade has the potential to support national development strategies, especially if the related policy
prescriptions are not confined to rapid trade liberalization but embrace a more strategic and integrated
approach, including other key policy areas, such as macroeconomic and financial management, trade
support and industrial policies, to name a few (UNCTAD, 1964). Any attempts to maximize the benefits
and minimize the costs of trade integration are not independent of other elements that make up a
healthy economy, whether capital formation (both physical and human), quality infrastructure, financial
depth or technological innovation. In other words, international trade – including intraregional trade –
should not be considered an end in itself but a means to support diversification and industrialization
and innovation and productivity improvement more generally. Extensively researched success stories,
including reports by UNCTAD, back up this approach.1
Several arguments seek to explain why intraregional trade could provide a route to realizing wider
development goals (e.g., TDR, 2007, chap. 2, chap. 4). A “structuralist” approach posits that the
likelihood of trade having a positive impact is greater when it takes place among countries in the same
(developing) geographical region because of the advantages of proximity. Moreover, these entities
are often closer in terms of their initial development conditions, making for more equally shared gains
from trade; when the economic structure of trading partners is similar, gains from trade arise primarily
from “economies of scale” and learning effects, rather than from “comparative advantages” reflecting
pronounced differences in either technology or relative endowments. More trade can avoid the lock-
1
The research has been reviewed in previous reports (see TDR, 2002, 2003, 2016).
126
in effects resulting from trade based on comparative advantage – such as a strong reliance on raw
materials or an abundance of low-skill labour – and have the potential to promote export diversification
and accelerate industrial development. Key to understanding this potential is the fact that foreign
competition within a developing region is easier for both policy-makers and domestic firms to manage
when it takes place vis-à-vis competitors from neighbouring countries rather than firms from more
advanced countries, given the cost and capability gaps with the latter.
From a demand point of view, the gains from trade are more likely to be retained inside a region
when they result from intraregional trade than from extra-regional trade, as trade organized around
international supply chains is more prone to profit repatriations to headquarters of foreign multinational
enterprises (MNEs). Thus, under these circumstances, intraregional trade is expected to result in
greater multiplier effects than extra-regional trade.
Another argument derives from the political economy of trade agreements. Trade rules within developing
regions are often less stringent than those in bilateral or plurilateral trade agreements characterized by
power asymmetry among the participating countries. The risk that power asymmetries could lead to a
narrowing of national policy space for developing countries signing trade agreements is probably lower
when such agreements take place intraregionally.
Lastly, from a supply chain approach, the integration of countries into regional value chains may
strengthen industrial networks by moving inter-industry linkages from a simple hub-and-spokes cluster
to a more complex structure as witnessed in some East Asian countries around China. It is often
argued that it is easier to join an existing supply chain (especially if it is close geographically) than to
build one from scratch domestically as was done, for example, by both the Republic of Korea and
Taiwan (Province of China).
Notwithstanding these theoretical considerations, determining whether intraregional trade is more
conducive to development than extra-regional trade requires empirical analysis. The rest of this section
is devoted to this exercise. We review the composition and evolution of exports of different regional
groupings with three types of trading partners since 1995, first with respect to merchandise trade and
then services. The idea is that the benefits of trade for economic development cannot be measured
simply by the evolution of the total value of exports. Rather, they can be captured by a country’s
capacity to increase the production (and therefore, the export share) of the products or services more
V
associated with higher productivity, rising incomes and ultimately economic and social development.
In the first set of empirical exercises, we examine the composition of intraregional merchandise exports
and compare this to two types of extra-regional flows: first, exports to the (rest of) developing countries
and second, exports to the (rest of) developed countries. We consider five country groupings. Four
are in various corners of the developing world: Africa, the Association of Southeast Asian Nations
(ASEAN),2 the Commonwealth of Independent States (CIS) and Latin America and the Caribbean. The
fifth group is the European Union, which partly plays the role of a benchmark because its members are
advanced economies, and it has deep experience of regional integration. The choice of the European
Union should not be understood as a call for developing countries to replicate this specific experience,
however, as its initial conditions, its motivations, its timing and many other elements created a unique
process. Yet focusing on the European Union case yields relevant findings which could be useful when
comparing trade flows of other developing regions.
2
The choice of ASEAN rather than an alternative country grouping in (developing) East and/or South-East Asia reflects
its longstanding efforts to achieve regional cooperation. Although its origins reflected political considerations to promote
peace in what was then an area with recurrent conflicts, this group moved up a gear in terms of economic cooperation in
1992, with the signature of the ASEAN Free Trade Area (AFTA).
127
1. Trade in goods
Two main sources of merchandise trade data are considered in this analysis: “gross exports” from
UNCTADstat3 and the “domestic value-added content of exports” from OECD Trade in Value Added
(TiVA) database.4 Both sources provide data on aggregated bilateral trade flows, as well as more
granular data, thus allowing the decomposition of merchandise exports into three broad categories:
primary commodities, excluding energy; energy; and manufactures. Such decomposition sheds light
on our main question, with the underlying idea that a larger share of (domestic value added resulting
from) exports of manufactures is more conducive to development because of their better paid jobs,
their stronger linkages with the rest of the economy, in particular the amount of employment they
create, and their higher technological spillover to other parts of the economy, which, in turn, can lay
the basis for a strong export-profit-investment nexus (see TDR, 1996, chap. 2; TDR, 2003, chap. 4;
TDR, 2005, chap. 2).
It should be noted that each database has pros and cons. Using gross exports allows broader
coverage, especially for developing countries. UNCTADstat includes 218 jurisdictions, while TiVA
reports indicators for only 66 economies, plus an aggregate for the “Rest of the World”. The use of
gross exports as a proxy to measure the country capacity to move up the development ladder can
be misleading, however. Researchers have stressed for decades that a particular exported product
no longer coincides with an entire domestic production sector. On the contrary, when the product
is produced within an integrated international supply chain, the share of the value-added content of
exports coming from abroad can be large. Moreover, the classification of the final product as high-skill
and/or technology-intensive does not necessarily mean any particular sub-component of the chain
(and the exports that result therefrom) is characterized as such.
To circumvent this issue, we may rely on the domestic value-added content in exports as reported in
TiVA. Yet turning to TiVA data is not without cost either, as TiVA country coverage is extremely limited,
especially in the case of Africa and CIS, and to a lesser extent Latin America and the Caribbean (see the
note of figure 5.1 for more details). For these reasons, our empirical analysis considers gross exports
as well as TiVA trade flows. One positive aspect is that these two sources hint at similar conclusions.
Not surprisingly, the European Union and ASEAN have a much larger share of manufactures in their
exports (figure 5.1), but there are several other takeaways for the European Union exports. First, whether
we consider gross exports or domestic value-added content of exports, manufacturing exports still
represent the bulk of merchandise trade. This partly reflects the maturity of the economies. Second,
because the extraction of primary commodities such as minerals and energy is relatively modest, the
share of manufacturing exports appears even greater in the TiVA data (approximately 95 per cent) than
in gross exports (approximately 80 per cent). The fact that the bulk of these commodities is initially
imported from outside the region, especially to the Netherlands, before being re-exported elsewhere,
explains this difference. This feature is a reminder of the potential drawback of the use of gross exports
as a proxy for the production capacity of any economy and indicates the value of the TiVA data. A
comparison of the two types of data for the European Union (a group with complete and high-quality
data) shows that the rise of its exports to the developing world follows the same pattern (black line in
figure 5.1). Similarly, the share of commodity exports in gross exports rose between the late 1990s
and the early 2010s, and this trend also appears, albeit more modestly, in the TiVA data. These similar
patterns suggest it may be appropriate to consider gross export data if TiVA coverage is more limited,
especially if we look at the evolution of the shares, rather than their absolute levels.
3
See https://unctadstat.unctad.org.
4
See https://www.oecd.org/sti/ind/measuring-trade-in-value-added.htm.
128
Latin America and the Caribbean European Union CIS ASEAN Africa
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2009 2009 2009 2009 2009

2011 2011 2011 2011 2011
Share in total exports
2013 2013 2013 2013 2013

2015 2015 2015 2015 2015
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8S VIWXSJ HIZIPSTIHGSYRXVMIW
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129
V
Figure 5.1 Composition of merchandise exports, selected country groups and components,
1995–2020 (percentage) (cont.)
Domestic value-added content of exports

Primary commodities, excl. energy Energy Manufactures Share in total exports
Intraregional To (rest of) developing countries 8S VIWXSJ HIZIPSTIHGSYRXVMIW
100 100 100
90 90 90
80 80 80
70 70 70
60 60 60
Africa
50 50 50
40 40 40
30 30 30
20 20 20
10 10 10
0 0 0
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
2015
2017
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
2015
2017
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
2015
2017
100 100 100
90 90 90
80 80 80
70 70 70
60 60 60
ASEAN
50 50 50
40 40 40
30 30 30
20 20 20
10 10 10
0 0 0
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
2015
2017
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
2015
2017
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
2015
2017
100 100 100
90 90 90
80 80 80
70 70 70
60 60 60
50
CIS
50 50
40 40 40
30 30 30
20 20
20
10 10
10 0
0 0
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
2015
2017
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
2015
2017
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
2015
2017
100 100 100
90 90 90
80 80 80
European Union
70 70 70
60 60 60
50 50 50
40 40 40
30 30 30
20 20 20
10 10 10
0 0 0
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
2015
2017
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
2015
2017
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
2015
2017
100 100 100

Latin America and the Caribbean
90 90 90
80 80 80
70 70 70
60 60 60
50 50 50
40 40 40
30 30 30
20 20 20
10 10 10
0 0 0
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
2015
2017
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
2015
2017
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
2015
2017
Source: UNCTAD secretariat calculations, based on UNCTADstat and OECD TiVA databases.
Note: Country coverage for the “domestic value-added content of exports” (TiVA database) can be limited. Africa refers
to only 3 countries (Morocco, South Africa and Tunisia), CIS to 2 countries (Kazakhstan and the Russian Federation),
and Latin America and the Caribbean to 6 countries (Argentina, Brazil, Chile, Colombia, Mexico and Peru). The country
coverage for ASEAN and the European Union is complete. For “Gross exports,” “Primary commodities, excl. energy”
relates to the following codes of the SITC Rev. 3: 0, 1, 2, 4, 667, 68, 961 and 971. “Energy” refers to code 3, while
“Manufactures” corresponds to codes 5 to 8 less 667 and 68.
For “Domestic value-added content of exports,” “Primary commodities, excl. energy” relates to the following TiVA codes:
D01T03, D07T08 and D09. “Energy” refers to TiVA code D05T06, while “Manufactures” corresponds to TiVA code D10T33.
130
In ASEAN, the data paint a similar picture, with exports characterized by a large share of manufactures.
In fact, when measured using domestic value-added content, manufactures often generate more than
80 per cent of total merchandise exports, and this percentage is similar across partner countries.
It reflects the existence of a dense regional production network in manufactures that sources the
entire world, particularly in electronics industries, as well as the relatively low endowments of primary
commodities, especially in some of the largest economies: Malaysia, the Philippines, Singapore and
Thailand. More broadly, the outward-oriented development strategy and the strong reliance on net
exports after the 1997-1998 crisis played a significant role in shaping the export structure of this group,
notably in the first-tier newly industrializing economy (NIE) of this group (Singapore) and the three
second-tier NIEs (Indonesia, Malaysia and Thailand), which together still accounted for approximately
three quarters of ASEAN economic output in 2020.
The aggregate picture of ASEAN masks a certain heterogeneity within its members, however. In Brunei
Darussalam, for instance, the domestic value added of merchandise exports mainly comes from
energy-related products. Meanwhile, for Cambodia and Myanmar, the share of primary commodities
(including energy) is significantly larger in intraregional trade than in extra-regional exports, especially
those headed to developed countries. This reflects the demand emanating from their neighbouring
commodity-dependent countries.
Another salient element is the strong relative decline of developed countries as trading partners
over the last three decades. When considering the domestic value-added content of merchandise
exports, data show the share of developed countries as a destination of ASEAN total exports gradually
decreased from roughly 70 per cent in 1995 to about 40 per cent in 2018. Meanwhile, the share of
intraregional trade gained some percentage points. Yet the bulk of the reorientation of ASEAN exports
during this period was geared towards developing countries outside this group, especially China.
Turning to other developing regions where trade regionalization (and economic integration) has
remained comparatively subdued, we discover more heterogeneity in the export structure to the three
types of trading partners. In the case of Africa, the limited coverage in the TiVA data requires us to
concentrate on gross exports. The data suggest intraregional trade is more conducive to development,
as the share of manufactures is larger (about 40 per cent) for this trade than for exports either to the
rest of the developing world (only about 10 per cent) or to developed countries (20 per cent to 25
per cent), even though it remains significantly lower than in the European Union or ASEAN (for a
V
more detailed assessment, see TDR, 2019).5 Unfortunately, intraregional trade has remained low and
relatively constant in Africa, except during the last decade when its share increased slightly (see black
line in figure 5.1) to reach almost 20 per cent.
The most dynamic segment of Africa’s exports derives from its relationship with other developing
countries outside the continent, notably China. However, this extra-regional trade has been dominated
by a few primary commodities, sometimes almost reaching nine tenths of total exports to developing
countries outside the region. This concentration of Africa’s exports in primary and unprocessed goods
indicates the continent’s limited industrial production and processing capacities. If we replicate a similar
decomposition of exports for the numerous economic groups that coexist within Africa, similar pictures
emerge in the sense that for all these subgroups, the share of manufactures is greater in intraregional
exports than in extra-regional ones. Moreover, in all these cases, export geared towards the rest of
the developing world has been the most dynamic segment and has gained significant market shares,
to the detriment of the developed country partners. These observations appear, for instance, when
looking at the Common Market for Eastern and Southern Africa (COMESA), the Economic Community
of Central African States (ECCAS), the Economic Community of West African States (ECOWAS),
the Southern African Development Community (SADC), the Economic and Monetary Community of
5
Similar pictures appear in TiVA data, though the fact that the intraregional figure relies on only three countries – Morocco,
South Africa and Tunisia – makes it risky to draw strong conclusions for this continent.
131
Central Africa (CEMAC), the West African Economic and Monetary Union (WAEMU), the East Africa
Community (EAC) and the Southern African Customs Union (SACU).
While TiVA data cover only few African economies, some research indicates the regional value chain
integration of African economies is much lower than in Mercosur and ASEAN (de Melo and Twum,
2021). African regional economic communities (RECs) have participated mostly in non-regional value
chains, and they pursue forward rather than backward activities (Black et al., 2019). The main reason
for this pattern is that most of Africa’s exports comprise raw and unprocessed goods, and this also
explains the very limited value added created on the continent. Beyond commodity concentration, high
transport costs and high non-tariff barriers (Cadot et al., 2015) have contributed to low intraregional
trade. Moving ahead, Africa’s limited production capabilities and its limited interconnectivity across
countries, including poor (road) and missing (rail) infrastructure, represent main challenges for the
continent, as Africa’s trade infrastructure is mostly geared to serve trade with the rest of the world, not
intraregional trade. The development of regional infrastructure and, to a lesser extent, the elimination
of non-tariff barriers (NTBs) would be key to stimulating intraregional trade along regional value chains
(RVCs).
CIS economies exhibit similar patterns to those in Africa, albeit in a less extreme way. First, CIS
intraregional trade appears to be more conducive to development, given its broader share of
manufactures (reaching almost 60 per cent in recent years when considering gross exports). This
number contrasts with the structure of exports to the rest of the developing countries, where
manufactures account for about 25 per cent, or to the developed countries, where they represent less
than 20 per cent. Second, intraregional trade has remained relatively low and constant, except for the
last decade when its share grew by a few percentage points. Third, the most dynamic segment of
CIS exports, in terms of trading partners, has been the rest of the developing world, especially during
the last decade. Fourth, since the early 2000s, energy-related products have often represented about
half (if not more) of CIS extra-regional export revenues. Notably, the export structure of this group to
the rest of the developing world changed dramatically after the collapse of the Soviet Union. While
manufactures amounted to 60 per cent of the region’s total exports to these trading partners in 1995,
it oscillated around 30 per cent after the global financial crisis (GFC).
There is a certain asymmetry, however, within the group. The bulk of Russian Federation exports go
outside this group, but for several economies of Central Asia, the Russian Federation remains the
largest export destination. For instance, more than 40 per cent of Belarus exports go to the Russian
Federation. This highlights the ongoing close economic ties with the Russian Federation. Meanwhile,
China has become the largest export recipient of some Central Asian countries, especially those that
are geographically close. Outside these two large trading partners, trade in the other countries of this
group, either intraregional or extra-regional, is more subdued. This partly reflects the generally remote
geographical location of Central Asian economies, their landlocked nature and the development of
trade-related infrastructure, all of which imply high transport costs compared to other regions. In this
context, exports of goods and services, as share of gross domestic product (GDP), decreased in many
Central Asian countries in the decade after the GFC (Karymshakov and Sulaimanova, 2020).
In the years ahead, the disruptions created by the war in Ukraine and the subsequent sanctions
applied to the Russian Federation are expected to affect the trade prospects of this group, even
though, for the moment, the uncertainty is too high to propose any detailed prospects for the medium
term or long term.
In Latin America and the Caribbean, the share of manufactures is much larger in intraregional trade than
in extra-regional exports. The two sets of data confirm this finding, even though there is a significant
difference between the levels of the share of each of the three main product groups depending on
whether we consider gross exports or domestic value-added content of exports. This difference is
partly because the Latin American countries considered in TiVA have a larger share of manufacturing
exports than many less developed economies of the region.
132
More precisely, according to TiVA data, manufactures represent more than 80 per cent of the domestic
value-added content of intraregional exports. Turning to extra-regional exports to developed countries,
still accounting for approximately 60 per cent of the region’s total exports, TiVA data show manufactures
accounted for about 70 per cent in 2018, the last year of the sample. This is almost the same level as in
1995, at the beginning of the sample. In between, the share of manufactures fluctuated strongly. In the
late 1990s, it reached almost 80 per cent, before decreasing gradually in the following decade to reach
a trough of about 60 per cent in 2011. As the first commodity supercycle of the twenty-first century
faded, along with Mexico’s energy exports to the United States, the share of manufactures rebounded
almost 20 percentage points between 2012 and 2016. For the Latin American extra-regional exports
to developing countries, manufactures lost significant market shares during the observed period. From
more than 80 per cent in 1995, it gradually decreased to less than 60 per cent in 2018. This reflects
the strong appetite for primary commodities of all kinds in fast-growing economies, especially China.
Overall, the relative decline of manufactures, especially in exports with developing countries outside
the region, is not a positive sign, as this trading relationship has grown markedly during the considered
period. More generally, a large body of empirical evidence points to the premature deindustrialization
of several large economies of Latin America since the beginning of the millennium, as these countries
further specialized in commodities and low productivity services (e.g., Rodrik, 2016; Castillo and Neto,
2016).
Promoting regional trade integration could plausibly counteract this tendency. Yet data show that
the share of intraregional trade has been either constant (TiVA) or even declined (gross exports). In
parallel, the lack of trade interdependence between Brazil and Mexico, the two largest economies of
this group, is worth mentioning. In short, while Brazil looks to the East, Mexico looks to the North.
More precisely, over recent years, Brazilian exports to China have risen more than 10 times, making
China its biggest trading partner by far and leaving its close neighbour, Mexico, far behind. Meanwhile,
Mexico’s exports to the United States are much more important than those to Brazil – with more than
100 times more exports to the former than the latter. Altogether this highlights some of the persistent
limitations to fostering regional trade.
We should note that the broad classifications used in figure 5.1 have some drawbacks, because the
designations “Primary commodities, excl. energy” and “Energy” include products with the potential to
lift labour productivity and promote structural change. These include, inter alia, some of the processed
V
goods derived from primary commodities or high-value agricultural goods such as horticultural
products.6
Several scholars have devised development strategies based on (natural) resource-based
industrialization (RBI) (e.g., Kjöllerström and Dallto, 2007; Morris and Fessehaie, 2014; Neilson et
al., 2020; also UNCTAD, 2021a, and references cited therein). Thus, the primacy of manufacture
over natural resources suggested in the preceding analysis does not necessarily mean a high and/or
increasing share of primary commodities sends a negative signal; in fact, some of these subsectors can
play a positive role in the structural transformation towards productive, higher-value and increasingly
complex activities. This is especially relevant for Africa at time when the continent aims at investing in
modern agriculture under its Agenda 2063.
Figure 5.2 considers two types of resources-based manufactures originally classified under either
Primary commodities, excl. energy or Energy in figure 5.1. These are labelled as “resources-based
manufactures,” further split between “agro-based” and “other” in UNCTADstat. Such products are
arguably more likely to foster development than other primary commodity products, given their greater
potential to improve labour productivity. In this context, figure 5.2 shows that the share of agro-based
manufactured products is larger in intra-African trade than in Africa’s exports to the rest of the world.
This supports the conclusion derived from figure 5.1.
6
Technically speaking, all these products belong to sections 0 to 4 of the Standard International Trade Classification
(SITC) rev. 3, the basis for figure 5.1.
133
Figure 5.2 Composition of African merchandise gross exports, selected components,

A. Intraregional B. To the rest of the world
Resource-based manufactures (other) Resource-based manufactures (agro-based)

Rest of Primary commodities Non-resource-based manufactures
100 100
90 90
80 80
70 70
60 60
50 50
40 40
30 30
20 20
10 10
0 0
1995 1999 2003 2007 2011 2015 2019 1995 1999 2003 2007 2011 2015 2019
Source: UNCTAD secretariat calculations, based on UNCTADstat database.

Note: “Resource-based manufactures (agro-based)” relates to the following codes of the SITC Rev. 3 : 016, 017, 023,
024, 035, 037, 046, 047, 048, 056, 058, 059, 061, 062, 073, 098, 111, 112, 122, 232, 247, 248, 251, 264, 265, 269,
421, 422, and 431. “Resource-based manufactures (other)” refers to codes 281 to 289, 322, 325, 334, 335, and 411.
“Rest of Primary commodities” corresponds to the sum of “Primary commodities, excl. energy” and “Energy” as defined
in figure 5.1 “Gross exports”, to which the two above-defined “Resource-based manufactures” series were subtracted.
“Non resource-based manufactures” corresponds to “Manufactures” of figure 5.1 “Gross exports”.
As a whole, the merchandise trade data suggest intraregional trade is associated with greater
development potential if we look at its structure, but when we take a look at the size of intraregional
trade compared to extra-regional exports, it is clear that intraregional trade is not the silver bullet for
development. With this intermediate conclusion in mind, we can move to trade in services.
2. Trade in services
Looking at the evolution of the domestic value-added content of gross exports of services sheds
additional light on the potential role of intraregional exports. In what follows, we look specifically at
“business sector services” (BSR). To put things in perspective, BSR represents the bulk of exports of
services, although BSR weight in total exports of goods and services accounts for approximately 38
per cent in Organisation for Economic Co-operation and Development (OECD) economies and 27 per
cent in non-OECD economies.
BSR encompasses five sub-aggregates of industries: distributive trade, transport, accommodation
and food services (WTH); information and communication (INF); financial and insurance activities (FIN);
real estate activities (REA); and other business sector services (OBZ). Of these, WTH includes the
less-skilled activities, although one subcomponent of OBZ – “administrative and support services” –
encompasses call centres and packaging which do not necessarily require highly-qualified workers.
134
In the remainder of this section, we perform decompositions similar to those we did for merchandise
trade to investigate whether intraregional services trade differs from extra-regional exports, and if so,
whether the former is more conducive to development than the latter. More concretely, decomposing
the domestic value added of BSR exports between its five main subcomponents reveals the following
patterns (figure 5.3).
For Africa, intraregional coverage is relatively limited because the underlying data only include bilateral
exports between Morocco, South Africa and Tunisia. In contrast, the two other panels rely on more
country partners. These are therefore less likely to suffer sample bias, even though they still rely only on
these three African countries as the source of exports.7 With this caveat in mind, Africa’s BSR exports
to the (rest of) developing countries show two things. First, this has been the most dynamic segment
for Africa, as its share increased from slightly more than 20 per cent in the late 1990s and early 2000s
to more than 40 per cent a decade later. Digging further into BSR subcategories, data show WTH
industries have seen their share increasing from roughly 70 per cent to 80 per cent, mostly on the back
of a relative decline in INF and FIN. This sends a mixed message in the sense that Africa’s exports to
developing countries outside the region have grown faster than its exports to other parts of the world,
but at the same time, the WTH share of exports to other developing countries has also grown, pointing
to a larger share of services industries requiring, on average, lower-skill workers.
Meanwhile, Africa’s exports to developed countries contrast markedly with those to other developing
countries. Data point to an improvement in the likelihood that exports can promote development in
the sense that shares of two high-skill components of BSR, namely INF and OBZ,8 have grown at the
expense of WTH. Yet the declining black line in the same panel reminds us that the performance of
Africa’s exports to developed countries was weaker than the performance of exports to non-African
developing countries between 1995 and 2020. All this points to an ambivalent conclusion on the
developmental effects of exports of services for this continent because more dynamism comes with
more low-skill activities, while less dynamism in terms of foreign demand comes with a growing share
of industries that rely more on high-skill workers.
We can reach similar conclusions for Latin America and the Caribbean. In terms of the export structure,
the segment referring to developed economies shows a growing share for OBZ.9 Yet the performance of
the exports to this trading partner group between 1995 and 2020 was muted. In addition, irrespective
of the trading partner, the relative size of WTH has remained very high in the region’s exports, especially
V
in intraregional trade and in exports to other developing countries. Overall, this empirical evidence
does not support the view that intraregional trade in services is more developmental in Latin America
and the Caribbean, nor is it possible to infer that extra-regional trade in services is necessarily more
conducive to development.
Our analysis of CIS relies on only two countries: Kazakhstan and the Russian Federation. It is therefore
patchy, although the limited data hint at conclusions similar to those for Latin America and the
Caribbean.
7
Given the structure of the three underlying African economies, compared to the rest of the continent, data presented for
Africa could be seen as a kind of upper bound in the sense that other less-developed African economies are less likely to
have greater share of industry aggregates which require higher levels of education (i.e. INF, FIN, REA and OBZ) than the
ones necessary, on average, for the services exports of WTH.
8
OBZ includes “professional, scientific and technical activities” and “administrative and support services”. Further
investigations not reported in figure 5.3 find these two subcomponents contributed roughly the same to the relative
increase of the OBZ share during the 1995 to 2018 period.
9
Unlike for Africa (see previous footnote), in the case of Latin America, “professional, scientific and technical activities”
contributed much more to the increase of the OBZ share, even though the share relating to “administrative and support
services” also registered positive growth.
135
Figure 5.3 Composition of business service exports, selected country groups and industries,
Distributive trade, transport, accommodation and food services Information and communication
Financial and insurance activities Real estate activities Other business sector services
Share in total exports (by destination)
Intraregional 8S VIWXSJ HIZIPSTMRKGSYRXVMIW 8S VIWXSJ HIZIPSTIHGSYRXVMIW
100 100 100
90 90 90
80 80 80
70 70 70
60 60 60
Africa
50 50 50
40 40 40
30 30 30
20 20 20
10 10 10
0 0
0
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
2015
2017
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
2015
2017
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
2015
2017
100 100 100
90 90 90
80 80 80
70 70 70
60 60 60
ASEAN
50 50 50
40 40 40
30 30 30
20 20 20
10 10 10
0 0 0
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
2015
2017
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
2015
2017
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
2015
2017
100 100 100
90 90 90
80 80 80
70 70 70
60 60 60
50 50 50
CIS
40 40 40
30 30 30
20 20 20
10 10 10
0 0 0
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
2015
2017
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
2015
2017
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
2015
2017
100 100
90 90 90
80 80 80
70 70
European Union
70
60 60 60
50 50 50
40 40 40
30 30 30
20 20 20
10 10 10
0 0 0
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
2015
2017
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
2015
2017
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
2015
2017
Latin America and the Caribbean
100 100
90 90 90
80 80 80
70 70 70
60 60 60
50 50 50
40 40 40
30 30 30
20 20 20
10 10 10
0 0 0
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
2015
2017
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
2015
2017
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
2015
2017
136
Figure 5.3 Composition of business service exports, selected country groups and industries,
1995–2018 (percentage) (cont.)
Intraregional To the rest of European Union 8S VIWXSJ HIZIPSTMRKGSYRXVMIW 8S VIWXSJ HIZIPSTIHGSYRXVMIW
100 100 100 100
90 90 90 90
European Union
80 80 80 80
(Eastern part)
70 70 70 70
60 60 60 60
50 50 50 50
40 40 40 40
30 30 30 30
20 20 20 20
10 10 10 10
0 0 0 0
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
2015
2017
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
2015
2017
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
2015
2017
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
2015
2017
100 100 100
90 90 90 90
80 80 80 80
70 70 70
European Union
70
(Western part)
60 60 60 60
50 50 50 50
40 40 40 40
30 30 30 30
20 20 20 20
10 10 10 10
0 0 0 0
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
2015
2017
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
2015
2017
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
2015
2017
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
2015
2017
Source: UNCTAD secretariat calculations, based on OECD TiVA database.
Note: Underlying data correspond to the domestic value-added content of exports. Country coverage can be limited for
some groups. Africa refers to only 3 countries (Morocco, South Africa and Tunisia), CIS to 2 countries (Kazakhstan and
the Russian Federation), and Latin America and the Caribbean 6 countries (Argentina, Brazil, Chile, Colombia, Mexico
and Peru). The country coverage for ASEAN and the European Union is complete. The eastern part of the European
Union includes: Bulgaria, Croatia, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Romania, Slovakia
and Slovenia. The Western part include: Austria, Belgium, Cyprus, Denmark, Finland, France, Germany, Greece, Ireland,
Italy, Luxembourg, Malta, Netherlands, Portugal, Spain and Sweden. Industries correspond to TiVA 2021 classification.
The ASEAN data suggest BSR exports of these two countries are likely to be conducive to development
because their WTH shares are lower than in other developing regions, irrespective of their trading
partners. In that sense, their BSR export structure does not differ much from the European Union in
V
the late 1990s. The four sub-aggregates that require higher skills (INF, FIN, REA and OBZ) make up
at least 30 per cent of ASEAN BSR exports, similar to the eastern part of the European Union, even
in recent years. Another finding already observed for other developing groups is that ASEAN BSR
exports to developed countries are again more conducive to development, though performance over
time has been more subdued than ASEAN exports to other developing countries and to a lesser extent
to intraregional exports.
The remaining panels of figure 5.3 look at the European Union and its subdivision into East and
West. The motivation for splitting the European Union thusly is to see whether differences arise given
the difference in levels of development and the roles these levels play in terms of the organization
of European value chains. The overall evolution of the structure in terms of industries confirms BSR
exports are more concentrated in high-skill industries, and the shares of these industries have grown
over time, especially for OBZ, INF and to a lesser extent FIN. These trends appear across all types of
trading partners, albeit more saliently in high-skill industries, in both intraregional trade and exports to
other developed countries.
In the East European Union, the structure of BSR exports is similar across the four considered trading
partners, though data suggest they are slightly more conducive to development when this subregion
exports to developed countries outside the European Union or to a lesser extent to the West European
Union. Findings are similar when we look at the West European Union.
137
The main observations that emerge from our analysis of BSR exports for all regions can summarized
as follows.
• The structure of BSR exports in terms of industries seems more prone to development when
regions export to (more) developed regions, yet the demand of these trading partners has been
relatively subdued over time, resulting in declining market shares.
• Across developing regions, the structure of BSR exports from ASEAN is more conducive to
development than the structure of BSR exports from Africa, Latin America and the Caribbean
or CIS. We base this conclusion on the fact that ASEAN reports the larger share of high-skill
industries in BSR exports.
• Unlike the merchandise exports described above, the sense that intraregional exports are more
conducive to development is not clear in BSR exports. Having said that, while it has not been
the most dynamic segment in terms of export destinations, intraregional trade, unlike exports to
developed countries, has grown at the same rate as the trade registered by the total BSR exports
in each region. This points to a certain resilience for intraregional trade, given the robust demand
emanating from large fast-growing developing countries, most notably China. In other words,
the relative increase of the share of other developing countries in total BSR exports observed
in all developing regions has come at the expense of the exports to developed countries, not
intraregional trade.
Findings for trade in services are ambivalent. This might partly be because TiVA export data are
less complete, especially for some developing regions. Moreover, the underlying disaggregation in
TiVA relies on a much smaller number of industries, thus precluding a deeper understanding of the
business services sector. More concretely, unlike for merchandise exports, we cannot strongly affirm
that intraregional trade in services is more or less conducive to development.
This leads to two broad take-away messages. First, there is a more similar structure in services
exports than in merchandise trade in terms of trading partners. Second, as goods still represent the
main component of total exports of goods and services, the findings for merchandise trade seem
comparatively more important than those for trade in services. This suggests that, overall, total
intraregional exports are more impactful than total extra-regional exports.
C. DEVELOPMENT-ORIENTED TRADE
INTEGRATION AND REGIONAL VALUE CHAINS
The intensification of cross-border production and market linkages in support of structural transformation
cannot simply rely on tariff reductions and the elimination of other border measures. Having a trade
liberalization agenda does not imply having a structural transformation agenda. This is especially true
for mega-regional trade agreements extending the scope and depth of earlier, geographically more
limited, bilateral and regional North-South trade agreements whose commitments often go far beyond
border measures and tend to reduce policy space (TDR, 2006, 2014). Trade integration must be part
of a broader development strategy that promotes regional specialization, economies of scale and
mutual economic interdependence without preventing linkages among firms and across sectors at the
national level to build a strong nexus between profits, investment and exports and allow each economy
to upgrade and diversify its productive base (TDR, 2016). The establishment of virtuous cycles of rising
productivity, increasing economic sophistication and growing intraregional trade can, in turn, underpin
greater cooperation around a widening range of non-trade issues that emerge with closer economic
interdependence and address emerging imbalances and divergences among participating countries
that may, if they persist, undermine the stability of regional arrangements.
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Such an approach is best described as developmental regionalism (TDR, 2007; UNCTAD, 2013;
Davies, 2019) or open developmental regionalism to underline its close relationship with shallow trade
agreements that do not unduly reduce the policy space available to developing countries to manage the
trade-offs that accompany any move towards closer integration with multiple countries, to implement
the collective actions that come with closer cooperation among those countries and to continue to
support the broad range of development goals of an inclusive and sustainable development strategy.
Developmental regionalism aims first and foremost at boosting productivity growth and creating jobs
through economic diversification and technological upgrading. In this respect, closer trade integration
among neighbouring countries, the development of regional infrastructure projects, cooperation on
industrial policies and shared legal frameworks can unleash virtuous growth cycles and mediate the
interface between global economic forces and domestic needs.
Rather than the derivation of formal trade agreements with deep commitments, the strategy involves the
informal coordination of policies. Open developmental regionalism requires a stable macroeconomic
and financial framework that supports fixed investment and the creation of productive capacity and
employment, including by avoiding real exchange-rate instability and overvaluation and by fostering
the provision of long-term investment finance (see next chapter). Moreover, policies must be
coordinated both across policy areas within an economy and among countries in a region. Institutional
structures such as those associated with a developmental state (TDR, 2016) are critical, as are joint
infrastructure and industrial policies – broadly understood as shaping incentives for structural change
and technological upgrading – that complement exchange-rate based international competitiveness
with a view to avoiding dependence on cheap labour.
The provision of regionally oriented physical infrastructure, particularly in the form of customs, transport,
energy and communication networks, is an indispensable element of developmental regionalism.
Energy and water resource management remains a constraint on crop yields, but the process of
structural transformation in many developing countries and regional cooperation in this particular area
can create supply capacities that expand both trade and growth potential. It has been estimated,
for example, that a well-coordinated addition to the irrigated area of Africa’s drylands could increase
cereal production by 52 per cent (Ward et al., 2016), and an increase in the share of public agricultural
expenditure devoted to research and development could greatly increase the use of high-yielding
varieties and hence yields (Gollin et al., 2021).
V
Regarding transport infrastructure, the orientation towards international trade may have led to the
overloading (and deterioration) of infrastructure on the main export routes and inadequate funding for
the arteries required for enhanced regional trade. Because tackling these challenges will often involve
high sunk costs, long gestation periods and free-rider problems, there is a danger that neither market
forces nor national government projects will provide effective solutions. Combined or common action
by countries at the regional level are more likely to achieve sustainable results.
Similar considerations apply to industrial development and support for RVCs.10 RVCs are characterized
by stronger backward linkages, with many high value-added activities undertaken within a region.
They may allow regional producers to export end products to a country within the region and to gain
experience and build the local capacities needed to compete globally, thus providing a stepping-stone
to global value chains (GVCs). Moreover, by creating income opportunities and domestic demand,
such activities can leverage the links between domestic demand and production for the GVCs or
RVCs that are critically important for inclusive economic growth.
That said, industrial policies to encourage RVCs face difficult trade-offs. For one, achieving a more
efficient regional division of labour will enable economies of scale but also imply that specific countries
specialize in specific activities or products and renounce the option of investing in others. In the short
10
It should be noted that this discussion refers to bottom-up RVCs. These differ from RVCs in the European Union
spurred by the integration of poorer South European countries in the 1980s and the low-wage Central European countries
in the 1990s, combined with a reduction of trade costs through the creation of the Euro area.
139
run, this will imply the location of high value-added activities in some parts of the region, while others
specialize in more basic activities, inevitably leading to diverging economic performance across the
region and complicating the coordination of sectoral support policies. Moreover, entrenched business
interests and established practices in a country’s financial system will work to reproduce established
production and investment structures, while complicating the provision of the investment finance
required to create RVCs.
Addressing such trade-offs will require clear communication of the objectives and directions of regional
integration agendas, as well as their complementarity and comparative benefits. This may prove difficult
in regions without a regional identity. Nevertheless, strong disruptions, such as those wrought by the
Covid-19 pandemic or a potential shift of production activities in GVCs, may be propitious moments
to undertake such changes.
Similar considerations extend to constraints on diversification associated with a lack of interoperable
regional digital payment systems and technological development. Most developing countries access
technology from abroad and absorb it within local production systems, supported by national
policies and institutions. Yet innovation systems may be devised with an explicit regional dimension
involving collaborative research, training schemes and information gathering and may extend to
complex institutional issues, such as those relating to the design of intellectual property rights or data
management regimes. Regional collaboration will also be required to harmonize the business rules and
laws required for RVCs, and resources must be pooled to ensure the effective management RVCs in
light of changing needs and conditions.
The global economic restructuring and trend in international supply chains towards regionalization
will require an adaptation of policy responses to different value chains and local contexts, not only
because of differences in the governance structure of value chains but also because of differences
in local and regional productive capacities. Supply-chain regionalization may be led by advanced
economies and multinational enterprises involved in near-shoring or friend-shoring their sources to
reduce supply-chain disruptions or protect technological advantages. But they may also be backed
by a rise of middle-income consumers in a range of developing countries and expanding South-South
trade and led by regional efforts to support the structural transformation and economic resilience of
regions in the Global South.
Digitalization and intangible assets play a crucial role in international supply chains in high-tech
sectors, such as electronics and the machinery and equipment industry, so the digital platforms,
mostly from advanced economies, that provide the enabling digital infrastructure are likely to capture
increasing shares of value added. The concentration of value added in these advanced economies will
be further enhanced by the extent to which higher-technology activities are reshored in them, not only
for economic but also for geopolitical reasons. The potential of developing countries to capture value
added in such supply chains depends on their digital industrial policy, discussed in the previous section,
and their establishment of a digital and data infrastructure and a related local and regional digital and
data regulatory framework – this is instrumental in ensuring local and regional firms’ confidence in
the confidentiality and security of their data. Both elements will be required to improve the bargaining
power of local and regional firms in determining the location of supply chain related digital activities.11
RVCs may be easier to create when forces within developing regions lead the efforts to do so, the
diversification of suppliers increases opportunities for new entrants and there are important regional
end markets. This is likely to be the case in relatively simple manufacturing activities, for example,
the apparel industry, where labour costs and market access conditions, such as those set in trade
agreements, play an important role. But it may also apply to technologically more sophisticated areas,
such as the automotive sector. It has been prominent in structural transformations because of its
11
ASEAN’s Framework for Data Protection, Digital Framework Agreement, Data Management Framework and the
Model Data Transfer Law (MTT) are examples of attempts to provide regionally consistent rules to make the use of data
compatible at the regional level.
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multiple linkages: sectors with widespread linkages offer more opportunities to create value added,
gain experience and build capacities in design, marketing, branding and distribution at the local and
regional levels particularly to the extent to which regional tastes and consumer demands differ from
those in advanced country markets. One recent study (Mayer, 2021) showed how access to data on
local and regional consumer tastes can create a comparative advantage for developing countries with
manufacturing capacities and allow them to re-bundle production stages by replicating value chains
but directing them at local and regional markets.
Examples of RVCs in the automotive industry in ASEAN indicate the role of industrial policy in managing
foreign direct investment (FDI) inflows and shaping domestic and regional supply chain participation
as a stepping stone to industrialization and diversified regional trade (e.g., Natsuda and Thoburn,
2021). Crucial determinants of the overall success and the success in individual regional economies
were flexibility (including to changing trade regimes such as brought about by the Uruguay Round
agreements) and the timing and sequencing of policymaking, such that trade measures support the
structural transformation at different development stages of both the regional economies and the
local and regional supply networks in their automotive sectors. Moreover, effective industrial policy12 is
supported by regional monetary arrangements, as well as regional legal frameworks, that, in addition
to trade, govern regional investment, capital flows and business practices, with a view to mediating
the interface between regional and global developments in these areas.
D. NEW CHALLENGES TO REGIONAL

INTEGRATION: THE DIGITAL ECONOMY AND
CLIMATE CHANGE
Deep trade agreements, including emergent mega-regional trade agreements, and recent discussions
at the World Trade Organization (WTO) have devoted considerable attention to a wide range of new
issues, most prominently the digital economy and climate change.13 Other issues are gender and
V
human rights, labour standards and the like, especially in mega-regional trade agreements. Our main
argument in this section is that these issues do not lend themselves to trade agreements. Instead, they
require a large enough policy space that emerging challenges can be addressed in a way that fosters
tangible economic, social and environmental benefits. A developmental approach to regionalism would
allow multidimensional progress on these issues and move towards a more inclusive multilateralism.
1. The digital economy: challenges of data governance

There is wide agreement that data are at the heart of the digital economy and, as such, represent
a crucial economic asset. However, although data affect many economic areas – including trade,
finance, production, market structure and taxation – data issues are increasingly systemic, impacting
health, the environment, national security and human rights, such as privacy. To formulate appropriate
policy responses to the evolving digital economy from a developmental perspective, it is important
to understand the multi-dimensional nature of data. Gaining such an understanding is hampered by
the absence of a generally accepted definition of data or a measure of data flows that would allow
12
An important ingredient of industrial policy in the region is “product champion policy”. Earlier industrialization experiences
in East Asia used “national champion policy”, targeting the development of particular national automobile makers, but the
Uruguay Round agreements made these considerably more difficult to apply. Product champion policy aims at steering
demand towards vehicle segments with a potential for economies of scale even in relatively small domestic or regional
markets.
13
The discussion in this section focusses on the relationship between these issues and trade regionalism. For a broader
discussion of the digital economy, see TDR, 2017, 2018; for discussion of climate change, see TDR, 2019, 2020, 2021.
141
the economic and social values of data to be traced and thus ensure an inclusive and fair distribution
of their related benefits. It is also important to understand that raw data have little economic value.
Rather, it is the capacity to access, control, process, analyse and use data that provides economic
benefits, and the size of any such benefit is dependent on the context (TDR, 2018; UNCTAD, 2021b).
To harness the benefits data can provide to economic development, developing countries need to
bridge existing digital and data gaps. Digital industrial policy will be an important instrument to achieve
that end. The aim of such policy should be to identify the development objectives of engaging in the
digital economy and use these objectives as a basis for building a regulatory framework for the digital
economy and data governance, establishing soft and hard digital infrastructure (such as the building
of data centres and the capacity to store, process and analyse data) and most importantly targeting
measures to increase the data-related value-added content in the production and export of goods and
services (TDR, 2018). In manufacturing supply chains, this can be done in the pre-production stage
through data processing and analysis, in the production stage through robot-based automation and
in the post-production stage through e-commerce, while in the services sector, it can be related to
the digitized treatment of health-related issues or to the provision of digitized services as an input to
manufacturing (e.g., Mayer, 2021).
The objective of regulatory frameworks should be to move developing countries away from the
periphery of the digital economy, the financial centres of which are concentrated in the advanced
countries of the North. One key objective of global regulatory frameworks in the digital economy
should be to address global competition and antitrust issues (TDR, 2018; UNCTAD, 2021c). Although
social objectives, consumer protection and data confidentiality are clearly important, a perspective
that puts digital industrialization at its centre is likely to have more developmental impact. Many
developing countries do not yet have national regulatory frameworks that govern who can store,
process and use their data.14 The absence of such national legal frameworks risks providing existing
global digital platforms, most of which are headquartered in the United States and China, first-mover
advantages and monopoly powers. With no legal frameworks in place, these platforms can use the
data of developing countries and appropriate the economic value, leaving little if any benefit to those
providing the data or the local economy. Similarly, jobs created in the digital economy in developing
countries tend to be low productivity and precarious, with millions of people employed in “microwork”.
There may be a presumption that developing countries can only influence how international digital rules
are framed by participating in related debates. However, the developmental outcome of international
regulatory frameworks depends on the perspective from which these debates are approached and the
inclusiveness of the forum in which they are held.
Approaches to data governance in trade agreements have increasingly supported restrictions on
data flows, treating these like any other trade barrier and generally minimizing them. This is the case
for the e-commerce chapters of mega-regionals, with related commitments going much further than
e-commerce and including issues related to data localization, national security and technological
leadership, such as in the Comprehensive and Progressive Agreement for Trans-Pacific Partnership
(CPTPP). Including data issues in mega-regional agreements exposes the digital economy to a race
for leadership in technological developments, given the economic and strategic advantages accrued
from controlling the data and related digital technologies. This risks consolidating oligopolistic market
structures and hampering inclusiveness, thereby amplifying long-standing inequalities between
developed and developing countries in the digital economy.
14
An important exception is China. Other exceptions include Saudi Arabia’s National Strategy for Data and AI (see
https://ai.sa/Brochure_NSDAI_Summit%20version_EN.pdf), India’s Data Protection Bill 2021 (see https://trilegal.com/
knowledge_repository/the-data-protection-bill-2021/) and its Draft National E-Commerce Policy (see https://dpiit.gov.in/
sites/default/files/DraftNational_e-commerce_Policy_23February2019.pdf), as well South Africa’s Draft National Policy on
Data and Cloud (see https://www.gov.za/sites/default/files/gcis_document/202104/44389gon206.pdf). Other countries
(including Indonesia, Malaysia and Sri Lanka) are finalizing their regulations. For broader discussion, see UNCTAD, 2021b,
pp. 136–138; Aaronson, 2022.
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Endeavours to subject the digital economy to trade norms and commitments is apparent also in recent
activities related to the Joint Statement Initiative on e-commerce at the WTO.15 The legal standing of the
Initiative is open to question, however, and some argue its justifications rely on tenuous interpretations
of WTO rules (e.g., Kelsey, 2022). Moreover, the initial texts16 determining the direction and agenda of
these rapidly evolving activities may be seen as reflecting the interests of advanced economies and big
digital platforms, without accommodating the interests of those at the periphery of the digital economy.
In fact, ongoing regulatory activities in the United States and the European Union deviate from the main
thrust of these texts and explicitly address market concentration. For example, the European Union
Digital Market Act sees competition law as an ex-ante instrument that sets out what firms are allowed
to do and what not, although it makes important exceptions for small and medium-sized enterprises,
probably to protect European firms.17 In the United States, in October 2020, the majority staff of the
Congress House Subcommittee on Antitrust, Commercial and Administrative Law published a set
of recommendations to promote competition in technology markets, and in June 2021, the House
Judiciary Committee advanced six bills that paralleled many of these recommendations, focusing on
the anticompetitive impacts of self-preferencing, mergers and acquisitions, data accumulation and
network effects related to digital platforms.18
There are general doubts as to the appropriateness of attempts to govern the digital economy and
data through trade agreements. For one, a large proportion of data is not linked to any trade flow. This
is the case, for example, with the use of foreign online services, such as Internet search engines or
social media platforms, where users generate a cross-border flow of data that the service provider can
process and monetize without engaging in any trade flow. Trade rules are more generally developed
for goods and services that are produced and cease to exist when they are consumed. In contrast,
using data does not imply their consumption and cessation of existence. Rather, data are intangible
and non-rival. Many people can use the same data simultaneously or over time without their depletion.
Data also often involve positive externalities; for example, they can be combined with other data or
show network effects of digital platforms (TDR, 2018).
Two main sources of distortion in the digital economy are high market concentration and the
proliferation of anticompetitive practices. New policies must address the power they give to large
digital enterprises to influence the rules of the game to their favour. These distortions are facilitated by
the dismantling of large parts of regulations designed to curtail market monopolization and corporate
V
rent seeking and the incomplete updating of existing antitrust and anti-monopoly laws to account
for the specific challenges posed by the digital economy. More complete regulation could start with
The Set of Multilaterally Agreed Equitable Principles and Rules for the Control of Restrictive Business
Practices adopted by the United Nations General Assembly in 1980 (UNCTAD, 2000). It could also
take into account the recent efforts of United States and European Union regulators to curb the
dominant positions of global digital platforms.
15
At the 11th WTO Ministerial Conference in December 2017, Ministers declared they would pursue the 1998 Work
Programme on Electronic Commerce on the existing mandate, but on the same occasion, a group of 71 WTO members
agreed to initiate exploratory work towards future WTO negotiations on trade-related aspects of e-commerce. In January
2019, 76 WTO members confirmed in a joint statement their intention to commence these negotiations, agreeing to “seek
to achieve a high standard outcome that builds on existing WTO agreements and frameworks with the participation of as
many WTO members as possible” (see https://www.wto.org/english/tratop_e/ecom_e/joint_statement_e.htm). See also
UNCTAD, 2020.
16
The European Union stated: “Most proposals broadly align with the topics put forward by the EU” (see https://
www.europarl.europa.eu/RegData/etudes/ATAG/2020/659263/EPRS_ATA(2020)659263_EN.pdf). Moreover, “The US
proposal is not public, but a [now publicly available] leaked communication resembles the digital trade provisions of
the US–Mexico–Canada Agreement (USMCA)” (see https://worldtradelaw.typepad.com/ielpblog/2019/05/us-wto-e-
commerce-proposal-reads-like-usmca.html).
17
See https://www.europarl.europa.eu/news/en/press-room/20220315IPR25504/deal-on-digital-markets-act-ensuring-
fair-competition-and-more-choice-for-users.
18
See https://judiciary.house.gov/uploadedfiles/competition_in_digital_markets.pdf; and https://www.nytimes.
com/2021/06/23/technology/big-tech-antitrust-bills.html.
143
Regional collaboration frameworks on e-commerce could be a powerful complement to such global

efforts (UNCTAD, 2018, 2021b). Digital and data gaps make it difficult to reach consensus on how
to harmonize existing rules and standards at the global level, but these gaps tend to be much
narrower at regional levels. Regional cooperation on capacity development and the creation of digital
infrastructure and data-sharing mechanisms could play a crucial role in investment and competition
policies supporting the growth of enterprises in developing countries and maximizing the inclusiveness
and developmental impact of the digital economy.
The ASEAN regional cooperation frameworks may be a good example in this context.19 The ASEAN
Economic Community Blueprint 2025 highlights the importance of e-commerce as a channel for
cross-border trade and investment. This focus was substantiated in the ASEAN Agreement on
E-Commerce, which entered into force in December 2021. In it, ASEAN members recognize the
importance of allowing information to cross borders “provided that such information shall be used
for business purposes, and subject to respective laws and regulations” (para. 4(a)). They agree to
facilitate cross-border e-commerce by working towards eliminating or minimizing barriers to the
flow of information across borders, subject to safeguards that ensure security and confidentiality of
information and when other legitimate public policy objectives so require. The Framework on Personal
Data Protection, a second ASEAN agreement of this nature, “serves to strengthen the protection of
personal data in ASEAN and to facilitate cooperation among the Participants, with a view to contribute
to the promotion and growth of regional and global trade and the flow of information” (para 1), but
this “Framework serves only as a record of the Participants’ intentions and does not constitute or
create, and is not intended to constitute or create, obligations under domestic or international law
and will not give rise to any legal process and will not be deemed to constitute or create any legally
binding or enforceable obligations, express or implied” (para 2).20 One important characteristic of these
agreements is that in line with the ASEAN way, they establish cooperation that is flexible enough to
accommodate countries’ different digital development trajectories, but they do not establish digital
economy governance in the form of legally enforceable commitments. Such flexibility contrasts with
the binding commitments in mega-regional trade agreements, such as CPTPP.
Approaching the digital economy from a development perspective and ensuring inclusiveness of related
governance frameworks would probably be best achieved by the United Nations and its 193 Member
States (TDR, 2018; UNCTAD, 2021b; United Nations, 2019). Contrary to the narrow trade angle, the
United Nations can adopt a systemic approach to reflect the specificities of data flows, taking into
account relationships with competition, taxation, data access and consumer protection. Deliberations
can be based on multistakeholder exchanges that include government representatives from various
ministries, as well as experts and representatives of organizations that deal with competition, taxation,
technology, consumer protection and other issues related to the digital economy.
2. Climate change
Discussions at the WTO, megaregional trade agreements and unilateral trade measures indicate
increased attention to issues related to the environment and climate change. Although formal
negotiations on a plurilateral Environmental Goods Agreements stalled in 2016 (TDR, 2021), some
members of the WTO initiated Trade and Environmental Sustainability Structured Discussions (TESSD)
and The Informal Dialogue on Plastics Pollution and Environmentally Sustainable Plastics Trade (IDP)
in 2020.21 These member-led plurilateral initiatives have gathered steam, giving rise to two ministerial
19
For the Digital Transformation Strategy for Africa (2020 to 2030), see https://au.int/en/documents/20200518/digital-
transformation-strategy-africa-2020-2030.
20
For the respective documents see https://aseandse.org/wp-content/uploads/2021/02/AEC-Blueprint-2025-
FINAL.pdf;https://asean.org/asean-agreement-on-electronic-commerce-officially-enters-into-force/#:~:text=The%20
E%2DCommerce%20Agreement%2C%20which,strengthen%20capacity%20to%20implement%20them; https://asean.
org/wp-content/uploads/2012/05/10-ASEAN-Framework-on-PDP.pdf.
21
For a recent discussion of TESSD, see Bellmann, 2022.
144
statements. One is co-sponsored by 71 members as part of TESSD and includes a commitment to

launch dedicated discussions on how “trade-related climate measures and policies can best contribute
to climate and environmental goals and commitments while being consistent with WTO rules and
principles”. Another on fossil fuel subsidy reform is co-sponsored by 45 WTO members.22
Outside the WTO, sustainability chapters in bilateral and plurilateral trade agreements have been the
main channel through which climate concerns are reflected in the trading system. These chapters
have arguably mainly helped to secure the regulatory advantage of industrialized economies as
global standard-setters (Goldberg, 2019). In 2019, discussions began on an Agreement on Climate
Change, Trade and Sustainability (ACCTS) between Costa Rica, Fiji, Iceland, New Zealand, Norway
and Switzerland, with a focus on liberalizing “environmental goods and services”, eliminating “harmful”
fossil fuel subsidies and encouraging eco-labelling.
Around these ongoing discussions, developed countries have tabled unilateral trade-environmental
proposals, such as the European Union’s Carbon Border Adjustment Mechanism, are establishing new
sectoral deals, such as the European Union-United States Green Steel Deal, and have coordinated
their positions, notably through G7 trade ministers’ meetings. Developing countries, by contrast, have
not yet formulated a coordinated and coherent approach to the trade and climate nexus.
Although better linkage of climate and trade objectives may seem a positive step forward, the majority
of these initiatives lack a strong development dimension. As an example, the OECD has identified a
Combined List of Environmental Goods (CLEG) of 268 products at the harmonized system (HS) six-
digit level, but around 60 per cent of these products fall under the seven industries identified as high
CO2 emitting industries. Any agreement to liberalize the trade specified in CLEG will mostly benefit the
exporters of these products, and these tend to be advanced economies. At the same time, an analysis
of the tariff revenues collected (using applied duties) on the imports of items on the CLEG shows that
in 2019, developing countries collected $15 billion (TDR, 2021). Reducing tariffs on these goods,
many of which are not climate-enhancing, would disproportionately benefit advanced economies and
significantly reduce domestic resource mobilization for developing countries precisely when they are
facing mounting economic pressures.
When assessing the various producer and consumer fossil fuel subsidies deployed around the world,
it is crucial to remember the very different position of developing countries, where around 940 million
V
people continue to lack access to electricity,23 and the objective must be to increase energy access,
not decrease it. For this reason, decreasing fossil fuel subsidies has often led to political unrest, as
it essentially becomes a regressive measure impacting the most economically vulnerable. These
subsidies need to be rechannelled to renewable energy sources, but transition in developing countries
will need to move at a different pace to prevent political and economic instability.
A recent UNCTAD report estimates the European Union proposal of a carbon border adjustment
measure (CBAM) will reduce global carbon emissions by not more than 0.1 per cent while decreasing
global real income by $3.4 billion, with developed countries’ incomes rising by $2.5 billion and
developing countries’ incomes falling by $5.9 billion (TDR, 2021). Put simply, the tariffs imposed will
have adverse implications for the foreign exchange earnings of developing countries while having little
impact on global emissions.
These concerns about a missing developmental dimension in trade commitments combine with
mounting evidence that industrialized economies are outsourcing pollution (Copeland et al., 2021,
p. 6, 15) at the same time as they avail themselves of industrial policy tools to bolster their dominance
within emerging green industries.
Extra-regional trade plays an important role in these trends. Between 1995 and 2018, CO2 emissions
embedded in global trade increased by 90 per cent, from 4132 tonnes to 7464 tonnes, thereby
22
See https://www.wto.org/english/news_e/news21_e/envir_15dec21_e.htm.
23
See https://ourworldindata.org/energy-access.
145
increasing its share in global CO2 emissions from 23.9 per cent to 29 per cent (figure 5.4). Over the
same period, global emissions grew by 57 per cent, and global emissions excluding trade by 46
per cent. Meanwhile, the emissions intensity of trade declined slightly faster than that of territorial
production, partly because of rising trade in services, but the former remained 24 per cent higher in
2018. These figures underline that the existing regulations, including in trade agreements, have not
decoupled GDP (especially trade) from fossil fuel extraction and CO2 emissions, as hopes or claims
of “green growth” are increasingly unsubstantiated by empirical investigations (Haberl et al., 2020).
Figure 5.4 Evolution of global trade-embodied and production emissions of CO2 and their
intensities, 1995–2018 (index numbers, 1995=100)
200
180
160 CO2 emissions embodied in gross exports
CO2 production emissions

140
CO2 production emissions excluding trade
120 Intensity of CO2 emissions embodied
in value added
100
Intensity of CO2 emissions embodied
in value added (excluding trade)
80
Intensity of CO2 emissions embodied
60 in gross exports
40
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
Source: UNCTAD secretariat calculations, based on OECD TiVA and TiVA-TECO2 databases.
Note: All series are aggregated at the global level and depict their own evolution since 1995. CO2 production emissions
represent the sum of territorial emissions. This sum is composed of CO2 emissions embodied in gross exports, and of
a residual defined as CO2 emissions excluding trade. Intensities represent the amount of CO2 emissions (of production,
gross exports or production excluding trade) per monetary unit.
Evidence suggests extra-regional imports account for the lion’s share of trade-embodied CO2
emissions, and most of these originate in developing countries.24 As figure 5.5 shows, emissions
caused by intra-regional trade have expanded most rapidly in East Asia, whereas in Europe and
Oceania, trade-embodied emissions from intra-regional trade declined slightly in absolute terms
between 1995 and 2008.
24
Countries included in TiVA-TECO2 by continent/region: Africa (3): MAR, TUN, ZAF. North America (4): CAN, CRI, MEX,
USA. South America (5): ARG, BRA, CHL, COL, PER. Central, Western and South Asia (6): CYP, IND, ISR, KAZ, SAU,
TUR. East and South-East Asia (15): BRN, CHN, HKG, IDN, JPN, KHM, KOR, LAO, MMR, MYS, PHL, SGP, THA, TWN,
VNM. Europe (32): AUT, BEL, BGR, CHE, CZE, DEU, DNK, ESP, EST, FIN, FRA, GBR, GRC, HRV, HUN, IRL, ISL, ITA,
LTU, LUX, LVA, MLT, NLD, NOR, POL, PRT, ROU, RUS, SVK, SVN, SWE. Oceania (2): AUS, NZA. Rest of the world: all
remaining countries.
146
Figure 5.5 Shares of carbon emissions embodied in final demand by sources, selected country
groups, 1995–2018 (percentage)
Domestic production Intra-regional imports Extra-regional imports from developed countries

Extra-regional imports from developing countries Extra-regional imports from China
Africa America (North and Center) America (South) Asia (Center, South, West)
100 100 100 100
80 80 80 80
60 60 60 60
40 40 40 40
20 20 20 20
0 0 0 0
1995
1999
2003
2007
2011
2015
2018
1995
1999
2003
2007
2011
2015
2018
1995
1999
2003
2007
2011
2015
2018
1995
1999
2003
2007
2011
2015
2018
Asia (East and South-East) Europe Oceania Rest of the world
100 100 100 100
80 80 80 80
60 60 60 60
40 40 40 40
20 20 20 20
0 0 0 0
1995
1999
2003
2007
2011
2015
2018
1995
1999
2003
2007
2011
2015
2018
1995
1999
2003
2007
2011
2015
2018
1995
1999
2003
2007
2011
2015
2018
Source: UNCTAD secretariat calculations, based on OECD TiVA-TECO2 database.
Note: CO2 emissions embodied in final demand are aggregated for each region and decomposed according to their
geographical origin (i. domestic emissions, ii. emissions imported through intra-regional imports or extra-regional
imports from either iii. developed countries, iv. developing countries, or v. China). For East and South-East Asia
emissions imported from China are included in intra-regional imports. Rest of the world being a single entity in the
database, it has no emissions from intra-regional imports.
Given the limited progress in reducing global trade-embodied CO2 emissions, the per capita emissions
V
of poorer and richer regions still have a ratio 10 to 1, respectively (figure 5.6). While final demand
emissions amounted to 1.6 tonnes of CO2 emissions per person in smaller developing countries (rest
of the world (RoW)) in 2018, with 0.36 tonnes imported, they represented 15.4 tonnes in Oceania, 13.6
tonnes in North America and 8.1 tonnes in Europe, with extra-continental imports amounting to 4.8
tonnes, 2.4 tonnes and 1.6 tonnes in those regions, respectively.
These numbers support recent more detailed empirical findings (Dorninger et al., 2021) showing trade
enables a structural and massive South to North material drain representing an “ecologically unequal
exchange”. For 2015, Dorninger and colleagues estimated that South to North trade flows embodied
a net transfer (i.e. net appropriation by high-income countries) of 10.1 billion tonnes of raw materials,
379 billion hours of human labour, 22.7 EJ of energy and 800 million hectares of land.
Because trade liberalization creates larger markets and opens possibilities for economies of scale,
it also strengthens global material extraction, production, consumption and waste. In conventional
accounting, this improves consumer welfare, but offsetting trends include growing employment
vulnerability and inequality induced by trade, particularly in the Global North (TDR, 2018), and growing
material extraction and pollution offshoring affecting populations in the Global South. Multilateral
initiatives and regional trade agreements are designed to eliminate tariffs and boost trade flows, and
the evidence suggests they also lead to a significant increase in carbon emissions (Tian et al., 2022).
147
Figure 5.6 Per capita carbon emissions embodied in final demand by sources, selected country
groups, 1995–2018 (tons)
Domestic production Intra-regional imports Extra-regional imports
Africa America (North and Center) America (South) Asia (Center, South, West)
4.5 18 3 2.5
4 16
2.5 2
3.5 14
2 1.5
3 12
2.5 10 1.5 1
2007
2011
2015
2018
1995
1999
2003
2007
2011
2015
2018
1995
1999
2003
2007
2011
2015
2018
1995
1999
2003
1995
1999
2003
2007
2011
2015
2018
Asia (East and South-East) Europe Oceania Rest of the world
6 10 18 1.8
5 9 16
1.6
8 14
4 1.4
7 13
3 1.2
6 12
2 5 10 1
1995
1999
2003
2007
2011
2015
2018
1995
1999
2003
2007
2011
2015
2018
1995
1999
2003
2007
2011
2015
2018
1995
1999
2003
2007
2011
2015
2018
Source: UNCTAD secretariat calculations, based on OECD TiVA-TECO2 database.

Note: Per capita CO2 emissions are aggregated for each region and decomposed according to their geographical origin
(i. domestic emissions, ii. emissions imported through intra-regional imports, or iii. extra-regional imports). Rest of the
world being a single entity in the database, it has no emissions from intra-regional imports.
Rather than building a trade and environment agenda on trade liberalization related to commitments in
trade agreements, making the most of the coherence between special and differential treatment and
the United Nations Framework Convention on Climate Change (UNFCCC) principle of common but
differentiated responsibilities may offer a better point of departure for a development-oriented approach
to the trade-climate nexus (TDR, 2021). A related positive Trade and Environment Agenda would focus
on the following: (i) facilitating patent-free green technology transfer; (ii) providing additional finance to
promote trade of environmentally sustainable products, such as through the Trade and Environment
Fund; (iii) building technical capacities, especially of least developed countries (LDCs) and small island
developing states (SIDS), in setting up climate-smart infrastructure and broader adaptive measures; (iv)
providing incentives like preferential market access based on progress towards nationally committed
goals or incentives for promoting trade of renewables and substitutes; and (v) ensuring adequate policy
and fiscal space for developing countries to design their trade policies around environmental goals.
This more multidimensional approach could translate into deeper economic cooperation and planning
at the regional level on a series of climate-critical sectors, such as energy, waste, food and infrastructure.
By pooling resources, capacities and expertise, regionally devised development plans could build-in
resource efficiency from the beginning. As climate impacts rarely stay within borders, such regional
developmentalism would become an adaptation measure, strengthening regional resilience to systemic
shocks. A central aim should be to tackle ecologically unequal exchange, retaining materials, labour
and land to promote developmental ambitions. At the same time, advanced economies will need to
regulate for rapid mitigation within their jurisdictions, tackling their dependency on over-consumption.
148
E. TOWARDS A COMPLEMENTARY
RELATIONSHIP BETWEEN REGIONALISM AND
MULTILATERALISM
That international trade can contribute to structural transformation and help establish sustained
and inclusive growth is firmly grounded in economic theory (e.g., Colantone et al., 2022; von Arnim,
2017). Successful developers, particularly in East Asia, have used trade to complement the traditional
drivers of sustained growth and development. However, the many factors considered critical for the
prosperity-enhancing effects of international trade to materialize do not emerge spontaneously and are
often absent in today’s highly interdependent world. If aggregate demand and global growth are weak,
financial instability is endemic and international trade in goods and services is dominated by a relatively
small number of large firms, trade runs the risk of creating more losers than winners (Gallagher and
Kozul-Wright, 2022).
While the external economic environment has a major effect, the commitments embodied in trade
agreements also shape the extent and nature of a country’s integration and economic development
prospects. It is therefore vital that these commitments respond to development priorities rather than
the narrow interests of a few large corporations, whether multinational or domestic (TDR, 2014, 2018).
Unfortunately, trade rules have increasingly come to foster incentives skewed to boosting cost
competitiveness through labour market flexibility and wage restraint and to crushing or buying out
competitors, rather than boosting profitability through investment and increased productivity. The
many rules and regulations in the WTO agreements, especially in the many bilateral and regional FTAs
between developed and developing countries, constrain the use of industrial policy and are unlikely
to support aspirations to enhance the structural transformation and diversification of developing
countries. Without special and differential treatment and policy space, it will be difficult for developing
countries to transit towards diversified and higher value-added activities in a world facing widening
inequality and impending disruptive technological change (TDR, 2006, 2014; Davies, 2019).
The increasing attention to geopolitics in the design of trade policy reflects growing tensions at the
V
global level that are challenging the rationale for multilateralism. Greater fragmentation also leads to
diverging interests which are hard to reconcile, weakening the appetite for, and effectiveness of, the
global coordination needed to respond to current global challenges. As a result, regional identities and
historically embedded norms and values may come to play a more relevant role and shape distinct
regional policy orders. Managing economic interdependence in such a polycentric world will require
achieving a more synergetic relationship between global institutions and regional arrangements.
A constructive and cooperative approach to multilateralism remains paramount. An inclusive multilateral
trading system must accommodate the diverging interests of the largest trading nations but must also
broaden the space for development policy. This implies seeing the multilateral trading regime as a
mechanism by which trade globalization and the nation state are not competitors but are mutually
reinforcing.
Multilateralism is beneficial for developing countries because individually they have weak bargaining
power vis-à-vis the rich countries. Moreover, multilateralism as a central pillar of global trade governance
provides transparency, security and predictability in global trade relations. Trade regionalism can risk
marginalizing the rulemaking function of the WTO and the multilateral trading system. But recognizing
the virtues of the multilateral system does not mean defending the status quo. If the multilateral system
is not made more inclusive, multilateralism may be eclipsed by mega-regional trade agreements driven
by the most powerful nations.
149
This implies that developing countries will need to be engaged in multilateral trade governance while
recognizing the possible advantages of open developmental regionalism in areas that do not lend
themselves to trade rules and/or where these countries do not yet have the capacity to engage in
binding multilateral commitments. In those areas, open developmental regionalism can offer a bulwark
against an increasingly challenging world order. When combined with the rolling back of elements of
the multilateral trade agenda that have encroached too far into the responsibilities of the state and the
adoption of a more integrated approach to the different components of the multilateral architecture
(TDR, 2016), open developmental regionalism may also help to remedy the insufficient developmental
focus of existing multilateral regimes, as demonstrated by the inadequate attention to the “in-built”
agenda of the Uruguay Round agreements, especially on agriculture and implementation issues in the
operationalization of special and differential treatment, the inability to conclude the Doha Round, the
envisaged changes in special and differential treatment and the challenges to consensus decision-
making.
For regionalism to support multilateralism, the connections between regional and global governance
must be properly managed. FTAs cannot mandate lower standards than WTO rules because doing
so would risk WTO members suing parties to the regional agreement for failing to comply with WTO
rules. Yet experience tells us it is difficult and takes a long time to amend and add flexibilities to the
implementation of WTO commitments. For example, such added flexibilities could have been obtained
(i) by creating an expeditious solution to deal with TRIPS restrictions on exporting medicines made
under a compulsory licence that was mandated in 2001, but it took 15 years before the amendment to
the Trade-Related Aspects of Intellectual Property Rights (TRIPS) agreement came into force, and the
amendment has been widely criticized by several observers as unworkable;25 (ii) by agreeing to longer
transition periods, such as in Trade-Related Investment Measures (TRIMs) agreements proposed
by developing countries as an implementation issue, but despite a 2001 mandate (including that
they could be an early harvest of the Doha Round), they still have not been agreed upon; or (iii) by
allowing countries which graduate from LDC status to continue enjoying LDC status for 12 years after
graduation, but this has not yet been agreed to either.
Contrary to the deep FTAs of the 1990s and early 2000s or the recent mega-regionals inspired
by the Trans-Pacific Partnership (TPP) which aim at extending the era of hyper-globalization, open
developmental regionalism could help developing countries’ voices be heard and reinforce South-
South cooperation towards achieving a more development-oriented international trade governance.
Pursuing regionalism in a form that remains open and developmental may yield fresh insights into
the dynamics of trade governance that would support sustainable development in the Global South.
An open and pro-active regional trade governance could shield developing economies from adverse
global effects and not simply make them wait for such effects to occur and then adopt national
policy to contain their economic and social impacts. In terms of rulemaking, open developmental
regionalism would limit binding commitments to border measures, while relying on cooperation and
creating flexible policies that aim at regional harmonization of behind-the-border trade measures as,
for example, in the ASEAN model. Supported by institutional structures such as the developmental
state and augmented by cooperation in non-trade areas and regional regulatory frameworks that
manage the interface between the global and regional economies, open developmental regionalism
may thus also facilitate the management of the diverging interests and sensitivities of developing and
developed countries for a more inclusive and developmental international trade governance.
25
See https://www.citizen.org/wp-content/uploads/TRIPS-waiver_Existing-TRIPS-Flexibilities-Unworkable-for-Scale-
Up-of-Covid-19-Medicines-Production-.pdf.
150
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Chapter VI VI
Regional Development Finance:
Progress and Challenges
A. INTRODUCTION
With less than a decade left to implement Agenda 2030 and agree on more ambitious emissions targets
to prevent a climate meltdown, neither multilateral financial institutions nor private capital markets are
providing the scale of financial support needed by developing countries to meet these goals. Scaling
up on both fronts will be key to building sustainable development pathways, but many governments
and industries will, in the meantime, rely on “their” regional institutions to finance transformative
investments and deliver public goods that are beyond national capacities alone.
There are now more choices for this than there used to be, thanks to the creation of new regional
financial institutions and arrangements and the expansion of existing ones. Over the last two decades,
through regional development banks, regional foreign exchange reserve funds, regional currencies and
new regional financial mechanisms and instruments, trillions of dollars have been added to the global
pool of finance. Some of these institutions are lending more than the Bretton Woods institutions, and
some of the most innovative are owned and led by countries in the South (Grabel, 2018; TDR, 2018,
2015; Gallagher and Kring, 2017; Barrowclough et al., 2020, 2022; UNCTAD, 2018a, b).
There are other benefits of regional arrangements, including the advantage of pooling scarce
resources, tapping into local knowledge of capacities and needs, increasing the size of local markets
and strengthening “voice” in multilateral forums. For smaller economies, these benefits can be huge,
but even the larger developing countries in a regional arrangement can derive advantages. At the
same time, the definition of “regional” is becoming more amorphous. Either due to the fact that easier
communications have broadened horizons or simply because development financial institutions (DFIs)
which focus tightly on their own region are more vulnerable to external shocks and financial constraints,
many seek members and operations outside their region.
This chapter surveys some of the most important trends in regional DFIs and their evolving role in the
global financial architecture, and explains how they meet the needs of their members. It finds that
no single approach offers the best formula of success: differing structures may be more appropriate
in some regions than others. In Asia, the Chiang Mai Initiative Multilateralization (CMIM), the New
Development Bank (NDB) and the Asian Bond Markets Initiative (ABMI) emerged without a formal
political framework; whereas in other regions, the regional financial institutions can be nested in
broader political arrangements. Whichever structures are chosen, the common challenge is one of
scaling these efforts up to meet the multiple challenges facing developing countries over the coming
decade and beyond.
Section B of this chapter summarizes what is available at the regional level to developing countries in
terms of short-term foreign exchange and balance of payments liquidity, using the lens of the recent
Covid-19 experience to show that different countries have very different arrangements and ways to
cover liquidity needs in times of crises.
Section C delves into the long-term, patient and counter-cyclical finance available in regional
development banks and funds, showing their different experiences during Covid-19 in terms of lending
and points to new roles being played in terms of research and development innovations. It builds
on the evolving views and understandings of regional institutions and the benefits of regionalism, as
described earlier in Chapter IV. Specifically, the latest phase in the evolution of regional development
banks is marked by the changing and more prominent role of the South-led institutional initiatives.
Section C details the consequences of these trends.
156
Regional Development Finance: Progress and Challenges
Section D discusses some important ways of scaling up these regional institutions and arrangements
so they are better equipped to meet their members’ needs, including the use of Special Drawing
Rights (SDRs) from countries that do not use or need them, as well as regulatory reforms that can
remove current constraints. Part E draws key policy recommendations.
B. REGIONAL PROVIDERS OF FOREIGN

EXCHANGE LIQUIDITY IN TIMES OF CRISIS
In the three decades after the Bretton Woods Conference (1944), the International Monetary Fund
(IMF) was the only available source of financing to cover balance of payments difficulties for the majority
of the world’s countries. From the 1970s onward, regional financial arrangements (RFAs) created by
emerging and developing economies, the Arab Monetary Fund (AMF) and the Latin America Reserve
Fund (FLAR) emerged as alternative lending sources, anticipating a wider role for regional arrangements
alongside multilateral and bilateral arrangements, in what is today called the global financial safety net
(GFSN).
In part, their emergence represented reactions to oil price volatility and debt crises in Africa and Latin
America. A second wave of RFAs gathered momentum following the Asian financial crisis of the late
1990s and the global financial crisis (GFC) of 2007–2008, which prompted the creation of a number
of diverse institutions that could provide emergency liquidity at various levels and reinforced a sense
that South-South solutions could offer special features for their members as a “first resort” to which
they could turn in times of crisis, complementary to the “last resort” of the Bretton Woods institutions.
Rather large regional funds were created or previous funds were enlarged in Europe and Eurasia, such
as the Eurasian Fund for Stabilization and Development (EFSD), alongside developing region initiatives,
such as the CMIM and South Asian Association for Regional Cooperation Swap Arrangement
(SAARC), or transregionally between emerging markets, such as the BRICS countries (Brazil, Russian
Federation, India, China, South Africa), who created a Contingent Reserve Arrangement of their NDB
(TDR, 2015; Gallagher and Kring, 2017; Grabel, 2018; Mühlich and Fritz, 2021; Barrowclough et al.,
2022).
By 2020, the GFSN had expanded to ten times its size at the time of the GFC, offering unprecedented
capacity for crisis prevention through a variety of sources (table 6.1). RFAs offered as much as the
equivalent of $1 trillion to their members on preferential terms and without the austerity and pro-
cyclical conditionalities typically imposed by the IMF. They also offered an economic “voice” that was
VI
absent in the Bretton Woods institutions who have still not altered voting rights to reflect the new
economic weight of developing country members. Nonetheless, they remain small in comparison to a
new, third source of finance in the form of bilateral swaps, as shown in figure 6.1.
157
Table 6.1 Major regional financial arrangements within the global financial safety net
Regional financial
arrangements (RFA) Year of inception Members
Arab Monetary Fund Founded in 1976 by the Algeria, Bahrain, Comoros, Djibouti, Egypt, Iraq, Jordan, Kuwait, Lebanon, Libya,
(AMF) Economic Council of the Mauritania, Morocco, Oman, State of Palestine, Qatar, Saudi Arabia, Somalia, Sudan,
League of Arab States Syrian Arab Republic, Tunisia, Yemen
BRICS Contingency Founded in 2015 by the Brazil, Russian Federation, India, China and South Africa
Reserve Arrangement country grouping known as
(CRA) BRICS
Latin American Established in 1978 as Plurinational State of Bolivia (1988), Colombia (1988), Costa Rica (1999), Ecuador
Reserve Fund/Fondo Andean Reserve Fund (FAR), (1988), Paraguay (2015), Peru (1988), Uruguay (2008), Bolivarian Republic of Venezuela
Latinoamericano de transformed into FLAR in (1988)
Reservas (FLAR) 1991
Chiang Mai Initiative CMIM was signed in Members of the Association of Southeast Asian Nations (ASEAN) plus three partner
Multilateralization (CMIM) December 2009 as countries: China, Republic of Korea and Japan
successor to the Chiang Mai
Initiative (CMI) founded in
2001
Eurasian Fund for 2009 Armenia, Belarus, Kazakhstan, Kyrgyzstan, Russian Federation and Tajikistan
Stabilization and
Development (EFSD)
European Stability 2012, successor to European Austria, Belgium, Cyprus, Estonia, Germany, Finland, France, Greece, Ireland,
Mechanism (ESM) Financial Stability Facility Luxembourg, Malta, Portugal, Slovakia, Slovenia, Spain, Netherlands
established in 2010
South Asian Association 1985 Afghanistan, Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan and Sri Lanka
for Regional Cooperation
(SAARC)
Source: UNCTAD secretariat based on Mühlich and Fritz (2021, 2022); RFA websites and reports.
158
Figure 6.1 Evolution of the global financial safety net, 1994–2018 (current dollars)
Swaps 2018
IMF 2018 1.5tr **
1tr*
RFA 2007
40.5bn
FLAR IMF quota
IMF 1947
1989
500m 2007 Bilateral Loans, Multilateral
Repo Agreements,
7.7m AMF
1976 321.6bn Hedging
Development
Banks***
264m Instruments
CMI 2004
34.5bn
RFA 2018
1tr
ESM
EU BOP 540bn
CMIM 54bn
240bn
AMF EU MFA
1.8bn 2.2bn EFSM
SAARC 65bn
2bn
EFSD
CRA 8.5bn NAFA
100bn 14bn
FLAR
3.9bn
1944–1976 1976–2007 2008–2018
Source: Mühlich et al. (2020).

Note: AMF – Arab Monetary Fund; CMI(M) – Chiang Mai Initiative (Multilateralization); CRA – Contingent Reserve
Arrangement of the New Development Bank; EFSM – European Financial Stabilization Mechanism; EFSD – Eurasian
Fund for Stabilization and Development; ESM – European Stability Mechanism; EU BOP – EU Balance of Payments
Assistance; EU MFA – EU Macro Financial Assistance; FLAR: Latin American Reserve Fund (according to its Spanish
acronym); SAARC – South Asian Association for Regional Cooperation Swap Arrangement; NAFA – North American
Framework Agreement.
1. Counter-cyclical and counter-intuitive? Covid-19 and the untapped liquidity of RFAs

Despite the expanded capacity of the RFAs, they remained largely untapped during the recent
Covid-19 period, with IMF facilities and bilateral swaps used more extensively. This is a change from
VI
previous crises, when many developing countries turned in the first instance to their regional financial
institutions. This time around, the RFAs lent out more than $5 billion to their members; however, this
was much less than their capacity. Further, it was dwarfed by bilateral currency swaps between central
banks, standing at more than $1.5 trillion and IMF lending of $119 billion (figures 6.2 and 6.3). The
RFAs between emerging and developing economies have been used very unevenly and at a relatively
small scale (AMF: 10 programs with a total volume of about $1358 million; EFSD: three programs,
$650 million; SAARC: 5 programs, $1200 million; FLAR: one program, $308 million) or have not been
used at all (CMIM and CRA). The total loan amount approved for RFAs requested by such countries
amounted to $3.5 billion.
This pattern is evident for both the lower-income countries and the higher-income ones (Hawkins and
Prates, 2021; Mühlich and Fritz, 2021, 2022; Mühlich et al., 2020, 2022). This trend of heavy reliance
on bilateral swaps was already observed in the year before the Covid-19 crisis and was causing
concerns (Mühlich and Fritz, 2022; Barrowclough et al., 2022). The experience of the last three years
has only magnified those concerns.
159
Figure 6.2 Active central bank currency swaps and lending from IMF and regional financial
arrangements, selected income groups, March 2020–December 2021 (billions of dollars)
Regional financial arrangements IMF (conditional) IMF (unconditional) Swap
Low income countries
Lower middle income countries
Upper middle income countries
High income emerging market economies
Advanced economies
0 100 200 300 400 500 600 700 800

Source: UNCTAD secretariat calculations based on Mühlich et al. (2022) and UNCTAD/Boston University Global Financial
Safety Net tracker.
Note: Data refer to accumulated amounts by country groups. Country group classification follows IMF (2021, October)
World Economic Outlook and World Bank criteria. In particular, “high income emerging market economies” relate to
high-income countries that are not considered advanced economies by the IMF. Because of the primary reserve currency
status of the dollar in the global economy, data for the United States were not considered in this figure. Based on an
assumption of reciprocity, swaps between advanced economies are counted twice, while those between advanced
economies and emerging market and developing economies (EMDEs), only appear on the EMDE side. Also, swaps
between the People’s Bank of China (PBOC) and other EMDEs are only reported for PBOC partners. The volume of
unlimited swap agreements is based on the maximum amount activated during the analysed period while limited swaps
correspond to the total amount made available per country between March 2020 and December 2021. IMF conditional
instruments include stand-by arrangements (SBA), catastrophe containment and relief (CCR), extended fund facility (EFF),
while non-conditional instruments include rapid credit facility (RCF), rapid financing instrument (RFI), flexible credit line
(FCL), precautionary and liquidity line (PLL), short-term liquidity (SLL). IMF lending corresponds to the sum of IMF loans
agreed between March 2020 and October 2021. Lending relating to regional financial arrangements (RFAs) corresponds
to the sum of loans by all RFAs agreed between March 2020 and December 2021.
Figure 6.3 Active central bank currency swaps and lending from IMF and regional financial
arrangements, selected geographic areas, March 2020–December 2021 (billions of dollars)
Regional financial arrangements IMF (conditional) IMF (unconditional) Swap
North America
Sub-Saharan Africa
Middle East and North Africa
South Asia
Latin America and the Caribbeans
Europe and Central Asia
East Asia and Pacific
0 100 200 300 400 500 600 700 800 900 1000
Source: See figure 6.2.
Note: See figure 6.2.
160
An obvious question is why countries who are members of RFAs would not turn more to their use, given
their apparent benefits. Another paradox is that while the RFAs with the largest lending capacity were
not used at all, RFAs with the smallest and mid-sized lending capacity were the most used. Analysis
of members of a variety of RFAs comparing their pre-Covid-19 borrowing patterns with Covid-19
borrowing found RFAs tended to be used more when the funds had an autonomous institutional setup
(i.e. with lending not contingent on an IMF package) and a balanced decision making and governance
structure, whereby member country voting rights and borrowing were not solely dependent on their
capacity to contribute capital. Whereas the small, autonomous and relatively egalitarian regional funds,
such as the AMF and the FLAR, were repeatedly in demand from their member countries, even if
at lower intensity than during the prepandemic period, the more unevenly organized but relatively
voluminous regional funds, such as the EFSD or the SAARC swap agreement, were less used as
standalone crisis finance providers. Furthermore, nonautonomous voluminous regional funds, such as
the CMIM or the CRA, were not in use at all (Mühlich and Fritz, 2022).
Another factor contributing to the trend is that the IMF offered more lending without conditionalities.
From the beginning of the spread of the Covid-19 related economic fallout until the end of December
2021, the IMF disbursed about $137 billion (80 per cent) of overall lending as unconditional lending.
Nonetheless, in total, the IMF provided less than a fifth of its available lending capacity of $1 trillion, and
the bulk of financing went through a very small number of countries that had previously prequalified for
unconditional IMF lending.
At the same time, however, swap arrangements were offered by a wide range of central banks,
including some from developing countries, such as the central banks of India, Maldives, Sri Lanka,
Bhutan, Qatar and Indonesia, to name a few. They are, of course, dwarfed by swaps arranged by the
United States Federal Reserve (Fed) and the People’s Bank of China (PBOC) and to a smaller degree
by other advanced economies’ central banks, such as Japan, the United Kingdom, Australia, Sweden
and Switzerland. These may be smaller but they represent an important source of finance to their
users.
This new formation of the GFSN is raising concerns, however, because while these seem to be
a voluminous source of finance, in practice, such bilateral swaps lack many of the advantages of
multilateral global or regional lending – including its predictability and transparency. This aspect of
the GFSN is discretionary and not driven by standard practices or protocols; it is therefore not a level
playing field, given that not all countries have the ability to negotiate such bilateral agreements and the
relationship between lender and borrower is not necessarily equal, depending on the interests of the
creditor country, especially with respect to trade and financial ties, but also with respect to political and
geostrategic issues. In practice, this form of liquidity provision during Covid-19 was strongly skewed
towards higher income countries (figure 6.2) and to certain regions (figure 6.3) in East and Central Asia
VI
and Europe.
2. Implications for the RFAs

There have long been concerns about the inequities and inefficiencies of the GFSN, with so-called knots
and gaps persisting even as the emergence of new institutions and mechanisms has given developing
countries wider options. It was not, however, ever a real concern that the regional multilaterals might
become marginalized in favour of bilateral arrangements. Now, there are at least five major concerns:
I - If demand for liquidity grows – which seems likely given the continued post-Covid-19 environment
of rising interest rates and spiraling food prices – poorer countries and regions less covered by the
GFSN will struggle to find the required crisis financing.
II - The extent to which bilateral swaps have out-paced multilateral liquidity provision throughout the
crisis raises questions about countries’ confidence in these institutions’ crisis resolution capacity.
161
III - Maintaining choice and competition in the system is important to encourage better service
delivery and enhance the bargaining power of governments in programs to return nations to
stability and sustainability and to ensure all countries have the support they can depend upon,
not just a few. Regional financial arrangements provide an important “voice” for member countries
not included in significant multilateral institutions. The G20 (Principle No. 5) urges the prevention
of arbitrage and facility shopping, especially for policy conditions and pricing (G20, 2011); yet this
is what many developing countries want and a partial reason for the establishment of their RFAs
in the first place.
IV - The threat of potential marginalization of RFAs was evident before Covid-19, and some writers
argued they should ensure their member countries had ownership of regional surveillance and
enforcement systems, rather than giving it to outside institutions (Grimes, 2011). The reluctance to
use the CMIM in the last decade, for example, was linked to the fact that lending was concomitant
with agreement on an IMF program (Mühlich et al., 2022, p. 148). Nonetheless, the longstanding
inequalities in access to and availability of short-term financing point to the lack of coordination in
the existing GFSN.
V - Finally, a reduction in the use of regional multilateral institutions raises the spectre of national
interests increasingly influencing the crisis finance regime. Swaps are an option only for a small
minority of countries and maybe not those who most need support. This vast volume of bilateral
liquidity is not the same as a global safety net.
3. Countering dollar hegemony

The persistence of United States dollar hegemony in a context of continued hyper-globalization,
marked by open capital accounts, floating exchange rates and financial deregulation, has played
an essential part in facilitating the emergence of an international monetary system that has favoured
short-term financial and corporate interests over developmental ones in a systematic fashion (box 6.1).
This has come at a high cost to developing countries in terms of the financing of reserve accumulation
and the servicing of dollar denominated debt contracts (TDR, 2019).
This changes the stakes for developing countries in seeking at least a partial escape from dollar
hegemony by strengthening regional monetary cooperation and marshalling their own financial
firepower to ease the constraints imposed on their development prospects in today’s debt-driven
global economy. This, it should be noted, is not about longer-term South-South cooperation to prop
up development finance through large-scale lending programs, much as these are both necessary
and welcome in view of hesitant, limited and often unpredictable development financing initiatives
from developed countries. Rather, regional monetary cooperation among developing countries can
complement and support longer-term South-South financial cooperation, if it substantially increases
the ability of developing regions to refinance and promote intraregional trade and develop intraregional
value chains (see Chapter V).
The scope and effectiveness of regional monetary arrangements depend on agreed-upon objectives.
These range from simple regional reserve swap and pooling agreements to bridge liquidity constraints
when these arise, to the full-scale development of regional payment systems and internal clearing
unions. The latter extend credit to members through the regular offsetting of accumulated (trade-
related) debts and credits between them and thus at least partially replace reliance on external foreign-
denominated financial resource and associated exchange-rate volatility with local financial resources.
This requires the use of a non-tradable regional unit of account, much like the international accounting
currency proposed by Keynes to manage the international monetary system, that promotes intraregional
trade by allowing accumulated credits within the regional clearing mechanism to be offset against
debits only through imports from, or foreign direct investment in, member states at fixed intraregional
exchange rates against the regional unit of account (Kregel, 2018).
162
The scope for deeper monetary integration in the form of payment systems and clearing mechanisms
largely depends on the initial trading patterns and positions of prospective member states, as the
extent to which intraregional credit creation and clearing can be used to substitute for external financial
resources depends on countries’ ability to extend credit. The higher the share of intraregional trade, the
greater the scope for intraregional monetary arrangements to help expand this. But the net commercial
trade balances within country groupings also matter, as the idea of a regional clearing union is precisely
to use the extension of trade credits to participant deficit countries to replace covering trade imbalances
by compensating external capital inflows.
The purpose of such clearing arrangements is, of course, also to increase intraregional relative to
extraregional trade, such that current trade patterns change. This, in turn, requires political will. For
regional clearing unions to function properly in the interest of freeing up the regions’ own financial
resources and policy space to pursue national development strategies, regional interests have to
be prioritized. Sometimes, even over immediate national interests, in the understanding that reverse
priorities will ultimately undermine both collective and national developmental goals. (See Barrowclough
et al., 2022 for a review of different countries’ experiences of these mechanisms and institutions.)
Box 6.1 The Persistence of the US Dollar as an International Currency

The one continuous feature of the international economic system that emerged from the wreckage of the
Second World War has been the central role of the dollar as the premier vehicle currency in the private
sector and the premier reserve currency in the official sector.
Over the past few decades, however, financialization has evolved at an accelerated pace; the financial
sector now dominates the real productive economic sector on which it rests. In 1980, the combined
nominal value of the world’s equity and bond stocks stood at about $11 trillion, a figure on a par with
that for nominal world GDP in that year. By 2020, the combined value of those securities stocks had
grown over 20-fold to $234 trillion, while world GDP only registered an eight-fold increase to $84 trillion
(SIFMA, 2021). This divergence between financial and productive assets is fuelling a narrative, if not of an
impending collapse of the dollar-based international financial system, then of its growing fragmentation
(for an in-depth debate, see Lysandrou and Nesvetailova, 2022; Galbraith, 2022).
Between 1986 and 2019, daily forex turnover rose from about $0.4 trillion to $6.6 trillion (BIS, 2019).
VI
During this period, the dollar’s share of this turnover averaged about 44 per cent. In today’s terms, this
percentage is roughly on a par with the United States respective percentage contributions to the world’s
equity stocks (40 per cent of the $95 trillion outstanding in 2019) and the world’s bond stocks (39 per
cent of the $106 trillion outstanding in 2019; SIFMA, 2020). However, it is also far above the United States
percentage share of nominal world output (23 per cent of the 2019 world gross domestic product (GDP)
figure of $88 trillion). These numbers, taken in combination with the trend increase in the United States
trade deficits, underpin the widely held view that there will soon come a time when foreign investors will
lose confidence in the dollar and thus abandon it in the face of mounting concerns about the ability of the
United States to meet its financial obligations in the face of its deteriorating macroeconomic fundamentals
and recurrent financial shocks.
But financializaton is not a one-dimensional force. Its depth is just as important an indicator of its historical
significance as its speed of development, because it reflects the structural role of finance in economic
163
transformation. To be specific, the recent scale of growth of the world’s equity and debt securities markets
is an outcome of fundamental changes in both their supply and demand sides.
From the supply side, there has been a growing dependence of both corporate entities and governments
on security issuance, in tandem with the increasing size and complexity of modern economies. In this
respect at least, what the United States offers, beyond possible alternatives, is a huge and varied
abundance of securities (not only equities but also bonds, including corporate, financial, Treasury, agency
and municipal bonds) in which foreign investors can store large amounts of funds. Given the need for
dollars as a means of accessing the United States securities markets, it follows that while the sheer depth
and liquidity of these markets attract foreign institutional investors in droves, this attraction serves, in turn,
to further amplify the depth and liquidity of the market for dollars. This development helps to explain why
the dollar remains the most widely used currency in the execution of various cross-currency transactions.
Moreover, the depth and liquidity of the dollar market mean that even when those institutional investors
holding globally diversified portfolios transfer funds from one set of non-dollar securities to another non-
dollar set of securities, they usually do so indirectly, via the dollar, to contain the costs of these fund
transfers.
The same persistence holds for predictions about the dollar’s primacy as a reserve currency. The share
of dollars in globally identified foreign exchange reserves has dropped over the last two decades by
around ten percentage points from around 70 per cent in 2000. However, the drop occurred in the first
few years following the introduction of the euro and has remained stable since then (TDR, 2019). The
fundamental reason why the dollar has maintained this 60 per cent share of foreign exchange reserves
even as these continue to grow exponentially in absolute terms comes down to the large mass of United
States Treasuries. In today’s era, when the world’s capital markets are deep and highly integrated and
cross-currency capital movements accordingly combine huge scale with high mobility, central banks who
want to minimize the impact of these movements on their domestic currencies need to have in reserve
financial securities that: (i) have a large and safe value storage capacity, (ii) are available in abundance, and
thus (iii) are highly liquid. No other financial securities and no other financial instruments, including crypto
and digital currencies, can match United States Treasuries in these criteria.
Thus, as with institutionally managed asset portfolios, foreign exchange reserve portfolios are organized
according to a hierarchical structure, with the core segment typically comprising United States Treasuries
and satellite segments comprising higher-yielding securities of other governments.
If any EME-based central banks needed any reminder of this crucial fact, the events of early March 2020
provided it. By that time, the Covid-19 pandemic’s negative impact on the global economy was clear to
the world’s institutional investors, and they quickly withdrew funds amounting to over $100 billion from
the EMEs in the space of days. That withdrawal was catastrophic for many countries, but the impact
would have been even more devastating had their central banks not quickly intervened in their domestic
currency markets with huge sales of the United States Treasuries kept in their reserves.
On 1 April 2022, the Bank for International Settlements (BIS) launched its Thirteenth Triennial Central
Bank Survey of Foreign Exchange Transactions and Over-the-Counter (OTC) Derivatives Markets, the
full results of which are due to be published in November 2022. In the two full years between the 2019
survey and the current one, the world economy suffered its biggest shock since the Great Depression of
164
the 1930s with the outbreak of the Covid-19 pandemic. In 2020, nominal world GDP fell from
its 2019 figure of $87.4 trillion to $84.9 trillion, while the world’s combined bond and equity
stocks increased by more than 15 per cent from $200.9 trillion in 2019 to $234.3 trillion, an
increase principally driven by the steep increase in government bond issuance on the one hand,
and the increase in security prices fuelled by monetary policy easing, on the other. In 2021,
economic recovery saw nominal world GDP rise above its prepandemic level to $94.9 trillion,
but the world’s combined equity and bond stocks also rose substantially, to reach over $241
trillion (SIFMA, 2022).
In both these Covid-19-impacted years, the United States share of the world’s supplies of
equities and bonds remained stable at around 40 per cent. Thus, going by the observation
that forex turnover volume is overwhelmingly driven by financial sector interests as distinct from
those of the real sector, the dollar’s share of the new 2022 figure for daily forex turnover will
remain largely unchanged.
Source: Derived from Lysandrou P and A Nesvetailova (2022) “Why the Ukraine crisis will make little difference
to dollar supremacy”, Institute for New Economic Thinking, 24 June 2022, https://www.ineteconomics.org/
perspectives/blog/why-the-ukraine-crisis-will-make-little-difference-to-dollar-supremacy.
C. LONG-TERM FINANCE: NEW ROLES

FOR REGIONAL AND MULTILATERAL
DEVELOPMENT BANKS
More than 90 per cent of development banks across the world are either national or subnational (Xu
et al., 2019). While few in number, however, the multilateral and especially regional multilateral DFIs
have a particularly important role to play. Regional banks – meaning banks with multiple owners,
usually governments from the same region – are an integral part of the global financial infrastructure
and the development system. They play the important role of linking national development banks with
the international financial system and in some cases they help by coordinating multiple governments
VI
and multiple banks across projects greater than any can do alone. For some countries and projects,
they may be the most important source of long-term and reliable finance, whether it be for financing
and promoting trade (the main priority for many higher-income countries) or for financing infrastructure,
agriculture and development in general (the goal of middle-income and lower-income countries’
banks) (Xu et al., 2019, p. xi). They are needed now, more than ever, given the rise of challenges
that go beyond national borders – like responding to climate change or to global shocks such as
the recent experience of Covid-19. Table 6.2 shows how these important regional, inter-regional and
global multilateral banks have emerged in a series of waves over the decades since the establishment
of the World Bank in 1944.
165
Table 6.2 Evolution of the multilateral development bank landscape, 1944–present
Total Assets in 2020

Establishment year Bank Name Geographical scope (billions of dollars)
WWII-1960s – Bretton Woods and the global view
1944 World Bank Global 536.6
1956 International Finance Corporation Global 105.3
First regional development banks – regional integration and development
1956 Council of Europe Development bank Europe 34.2
1958 European Investment Bank Europe 766.8
1959 Inter-American Development Bank LAC 147.5
1960 Banco Centroamericano de Integración Económica LAC 13.3
1963 International Bank for Economic Cooperation Asia Pacific 1.0
1964 African Development Bank Africa 50.9
1966 Asia Development Bank Asia Pacific 271.7
1967 East African Development Bank Africa 0.4
1970 International Investment Bank Inter-Regional 2.0
1970 Banco de Desarrollo de América Latina LAC 46.8
1970 Caribbean Development Bank LAC 2.1
1973 Banque de Developpement des Etats de l’Afrique de l’Ouest Africa 6.0
1973 Arab Bank for the Economic Development of Africa MENA 5.5
1974 Fondo Financiero para el Desarrollo de la Cuenca del Plata LAC 1.7
1974 Arab Fund for Social and Economic Development MENA 12.9
1975 Nordic Investment Bank Europe 43.3
1975 Banque de Développement des Etats d’Afrique Centrale Africa 1.2
1975 Ecowas bank for Investment and Development Africa 1.0
1976 OPEC Fund for International Development MENA 5.9
1977 International fund for Agricultural Development Inter-regional 9.6
1985 Trade and Development Bank Africa 7.2
1989 Arab Trade Financing Programme MENA 1.2
1989 Pacific Islands Development Bank Asia Pacific 0.0
1989 Nordic Development Fund Europe 0.9
1990s–2000s – Regionalism and market-led development, global vertical funds, trust funds hosted by multilateral development banks
1991 European Bank for Reconstruction and Development Inter-regional 85.3
1993 African Export and Import Bank Africa 19.3
1993 Interstate Bank Asia Pacific 0.2
1993 North American Development bank LAC 2.2
1999 Islamic Co-op for the Development of the Private Sector Inter-regional 3.3
1999 Black Sea Trade and Development bank Europe 3.4
2005 Economic Coop. Organization Trade and Development Asia Pacific 0.7
2006 Eurasian Development bank Asia Pacific 5.6
2010 onwards – Regionalism and the rise of the South, the return of industrial policy
2014 New Development Bank Inter-regional 18.8
2015 Banque Maghrébine d’investissement et de Commerce Extérieur MENA n.a.
2016 Asian Infrastructure Investment Bank Asia Pacific 32.1
Source: Update of Ocampo and Ortega (2020) using the July 2022 version of the Public Development Banks and Development
Financing Institutions database provided by Xu et al. (2021).
166
1. The new landscape of long-term regional finance

Regional sources of development finance have been increasing significantly in the last decade – from
the creation of new regional DFIs to the scaling up of existing ones and new trends where some
national banks lend to their region or even beyond. Some of these changes have been particularly
marked in the South.
This matters because regional banks are an important source of long-term finance – and for some
regions, one of the most important. As shown below, loans committed by regional banks have increased
steadily over decades, sometimes growing faster than Bretton Woods lenders and exceeding total
disbursements as well (figure 6.4). According to OECD Development Assistance Committee (DAC)
statistics, they provided at least $180 billion in aggregate in 2018, more than double the funds the
banks initially received from their owner governments, reflecting that banks leverage their capital by
borrowing on international financial markets in addition to receiving revenues from loans and profits
from investments. When other banks that are not officially defined as regional multilateral development
banks (MDBs) are included, such as the European Investment Bank (EIB) or Asian Infrastructure
Investment Bank (AIIB), this rises to over $300 billion (Ocampo and Ortega, 2020).
Figure 6.4 Multilateral disbursements to developing countries by institution, 2018–2020

(billions of constant 2020 dollars)
2018 2019 2020
70
60
50
40
30
20
10
0
International Regional United Nations World Bank Other multilateral
VI
Monetary Fund development banks institutions
Source: UNCTAD secretariat calculations based on OECD Creditor Reporting System.

Note: Disbursements consider official development assistance (ODA) and other official flows (OOF), both following OECD
definitions. Regional development banks include: AfDB, ADB, IADB, AIIB, CABEI, CarDB, CEDB, EBRD, and IsDB. Other
multilateral institutions include: Adaptation Fund, Arab Bank for Economic Development in Africa (BADEA), Arab Fund
(AFESD), Black Sea Trade and Development Bank (BSTDB), Center of Excellence in Finance (CEF), Central Emergency
Response Fund (CERD), Climate Investment Funds (CIF), Eurasian Fund for Stabilization and Development (EFSD),
Global Alliance for Vaccines and Immunization (GAVI), Global Enviromental Facility (GEF), Global Fund, Global Green
Growth Institute (GGGI), Green Climate Fund (GCF), Montreal Protocol, Nordic Development Fund (NDF), OPEC Fund for
International Development (OPEC Fund), OSCE, UNCTAD, and the WTO International Trade Center.
Most importantly, slightly more than half the official lending was concessional (OECD, 2020b, p. 23)
with respect to the interest rate charged to borrowers, maturity or other characteristics compared to
commercial lenders or grant-based lending (figure 6.5). This feature is important because the kind
of lending that is typically the province of public development banks, namely infrastructure or social
investments with high capital costs upfront and very long-term revenue prospects, is eschewed or
under-provided by commercial lenders.
167
Not all regions are equally well served, and as shown in figure 6.6, there can be a big variation between
individual banks, countries and regions. In Sub-Saharan Africa, lending by the MDBs is estimated to
account for as much as 10 per cent of GDP, divided roughly half and half between the World Bank
Group and regional banks. For South Asia, Latin America, the Caribbean and Europe, lending from
MDBs is just over 4 per cent of GDP, indicating the availability of other sources of finance from national
banks and commercial sources (Ocampo and Ortega, 2020). North Africa and Oceania are particularly
poorly served. The evidence shows that both the World Bank and regional development banks
disburse less to lower income countries than they do to middle income countries overall, presenting
the challenge to scale up development finance to the poorest countries across the globe.
Figure 6.5 Commitments and disbursements of international financial institutions to developing

countries by lending type, 2016–2020 (billions of constant 2020 dollars)
Official development assistance Other official flows

140
120
100
80
60
40
20
0
2016 2017 2018 2019 2020 2016 2017 2018 2019 2020
Commitments Gross disbursements
Source: See figure 6.4.

Note: See figure 6.4. International financial institutions include the regional development banks of figure 6.4, together with
IIB, IMF and World Bank.
Figure 6.6 Disbursements by regional development banks and World Bank to developing countries
by income group, 2018–2020 (billions of constant 2020 dollars)
Regional development Banks World Bank

80
70
60
50
40
30
20
10
0
Low income Lower-middle income Upper-middle income High income
Source: See figure 6.4
Note: See figure 6.4. Income groups follow the World Bank classification.
168
A third reason the regional MDBs are important is that some of their new firepower is coming from
the South, with Southern-owned and led banks offering an alternative to the traditional sources of
finance and a fresh “voice” in international debate more commensurate with their economic weight.
The national development banks lending outside their national borders and into the region and
beyond are also often Southern-owned (TDR, 2015; UNCTAD, 2018a, b; Gottschalk and Poon, 2020;
Barrowclough et al., 2020; UNCTAD, 2018b). This is not captured in the official DAC statistics but is
changing the landscape significantly, enabling choices that did not exist before (Grabel, 2018).
These trends notwithstanding, it is remarkable to see the rise of non-multilateral, ad hoc bilateral flows
and “ear-marked” donor funding. As the richer countries of the North have mostly not significantly
increased financing for the regional development banks (RDBs) in which they have a stake, new
sources of finance are filling the void. As shown in figure 6.7 and echoing the story of liquidity finance
told in Section B, the regional multilateral sources represent less than half of the value of bilateral flows
in the latest year for which data are available – even though this includes one of the biggest years for
RDBs in a long time.
Figure 6.7 Bilateral and multilateral disbursements to developing countries, 2016–2020

(billions of constant 2020 dollars)
....
....
Bilateral ....
.... Regional development banks Multilateral
140
120
100
80
60 ..........
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20 ..........
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0
2016 2017 2018 2019 2020
Source: See figure 6.4

Note: See figures 6.4 and 6.5. Bilateral disbursements consider only DAC countries. The dotted area represents the
contribution of regional development banks in multilateral disbursements.
VI
2. The role of RDBs during crisis: counter-cyclical responses during Covid-19.
Many regional development banks played a strong counter-cyclical role during Covid-19, either
increasing their lending significantly compared to other years or redirecting lending to other uses for
their members or yet again, being the main sources of lending in the absence of other finance from
national lenders (in the case of the lower-income countries) or from global financial providers (in the
case of the middle-income developing ones) (Griffith-Jones et al., 2022 forthcoming). Many geared up
quickly, as shown in table 6.3. Some also lent outside their immediate regions, in the search for new
clients, as few governments were able to begin new infrastructure projects during this difficult time
(box 6.2).
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Table 6.3 Loan commitments and disbursements by selected regional development banks,
2019–2020 (billions of dollars)
Loan commitments Loan disbursements
Percentage Percentage
Regional Development Bank 2019 2020 change 2019 2020 change
European Investment Bank 65.8 108.8 65 53.8 66.4 23
Asian Development Bank 24.0 31.6 32 16.5 23.6 43
Development Bank of Latin America (CAF) 13.0 14.1 9 10.0 10.4 3
Inter-American Development Bank 11.3 12.6 10 10.9 14.9 38
New Development Bank 7.2 10.3 43 0.9 5.4 488
Asian Infrastructure Investment Bank 4.5 10.0 120 1.5 6.2 321
Islamic Development Bank 7.8 6.8 -13 8.2 7.0 -15
African Development Bank 10.0 5.8 -42 5.3 7.2 36
Trade and Development Bank (formerly the PTA Bank) 5.1 5.5 7 n.a. n.a. n.a.
Banque Ouest Africaine de Développement (BOAD) 0.9 1.2 36 0.7 0.9 32
Source: Griffith-Jones et al. (2022 forthcoming).
Box 6.2 What does regionalism mean to the new Southern-led banks?
The membership of the new Southern-led banks may be as much about shared and common development
goals, challenges and capacities as about close proximity in terms of geography. Physical location is still
important for many of the institutions established in earlier decades but less so for the most recent ones,
born in an age when communications and travel are easy. Even the AIIB – which by name is rooted in
Asia – has both borrowers and lenders that are far from Asian borders.
Similarly, the NDB was never meant to be just concentrated on the original BRICS founding members
(Brazil, Russian Federation, India, China, South Africa) and has always had a global vision, albeit focused
on developing and emerging economies. From the outset, it was interregional rather than narrowly
regional, as its founding members in 2015 came from countries in all corners of the world. With an initial
capitalization of $50 billion in paid in and callable capital and subscribed capital of $100 billion, the bank
aims to be a powerful resource for its Southern borrowers around the globe. New members were added
last year, again broadening the interregional flavour – Bangladesh, Egypt, the United Arab Emirates (UAE)
and Uruguay – and another five to ten members will be added next year.
Taking on new members will inevitably dilute the ownership of the original founders and potentially change
the direction of lending, an issue for any bank considering increasing its capitalization by taking on new
170
members. However, in the NDB’s case the founders’ share is retained at 55 per cent of the total, with
another 25 per cent to be owned by other emerging countries and the final 20 per cent to be held by
governments from advanced economies. The fact the founders managed to attract new funds and yet
retain the dominant vote is seen as reflecting the rise in influence commensurate with economic weight
of some of the larger members. It suggests the NDB can increase capitalization significantly, thereby
raising the bank’s firepower for lending, without changing its intrinsic nature because the initial founders
will retain voting predominance. Similarly, in the AIIB, with its very large number of shareholders drawn
from the entire world, China retains the veto right on voting.
Both new banks have the ambition to focus on green lending, which could be relatively easier for them
than for older banks with long histories of supporting activities that are now considered problematic, but
which were not decades ago. The NDB, for example, has no lending to coal. Moreover, despite having
advanced country members, both banks aim to lend to emerging markets, being quick and agile with
lending and following the environmental standards of borrower countries, not those of more advanced
countries. At the same time, these banks have many partnerships with other banks, including the World
Bank, and this is needed for technical capacity and expertise. NDB officials say the bank learned a
great deal from its partnerships with the legacy and other multilateral banks, with whom it did many co-
financings during Covid-19 relief and recovery programs. While the NDB aimed to be different from, and
complementary to, the World Bank, it is still one of its key partners. Hence, regionalism does not bring
competition but distinctiveness.
From the borrowers’ perspective, the benefits of membership in specialized Southern-oriented DFIs were
evident during the Covid-19 crisis. The NBD moved extremely quickly and was the first institution to lend
to members South Africa and India when their economies were struck by Covid-19. Perhaps because
the pandemic was first noted in a member country, when the pandemic ravaged the BRICS members,
it was seen by the bank as the “central and most critical development challenge facing our countries.”
“When the building is on fire,” said one senior official, “we don’t discuss medium-term investment such
as infrastructure.”
The AIIB is also interregional and Southern-focused in its lending, although it has global owners, including
many from the North. Before Covid-19, it limited its lending to the Asian region, and any lending outside
Asia had to be somehow related to Asian investments, Asian markets or Asian development needs.
This requirement was lifted only when the impact of lockdowns meant the bank had to seek alternative
investments further afield. Much of this lending is still at the national level as cross-national projects
are difficult to initiate, in part because they need to be supported by complementary regulations and
other policies, and interests need to be balanced between the different countries involved. The AIIB has
VI
a goal for 25 per cent of its lending to be “cross border” by 2030, inspired by regional trade treaties,
including the Regional Comprehensive Economic Partnership (RCEP), Trans-Pacific Partnership (TPP)
and the Comprehensive and Progressive Agreement for a Trans-Pacific Partnership (CTTP), which are
expected to have a transformative impact on the region and should make it easier for the bank to arrange
interregional lending associated with trade, such as transforming transport, power grids and connectivity
or trying to access the giant supply chains running across Asia.
Source: Derived from Griffith-Jones et al. (2022, forthcoming); UNCTAD interviews with senior bank officials, May and
June 2022.
171
Box 6.3 Regional banks and projects: how a Multilateral Development Bank financed
the anti-Covid-19 vaccine
Public development banks, it is often argued, provide more than just finance – they can also provide
expertise and technical advice on how to design and manage difficult or complex projects. Both attributes
are needed for the kinds of projects characterized by uncertainty, risk, the prospect of low or zero profits
and the need for coordination among many parties – all of which are deterrents to attracting finance from
commercial or private banks. This may be particularly so when benefits and costs are spread across
multiple countries, as was the case with the health impacts of Covid-19. The following describes how the
EIB helped to finance the research and development of an anti-Covid-19 vaccine.
On 11 June 2020, EIB and BioNTech, a German company, signed an agreement for a Venture Debt (VD)
operation of €100 million debt financing for the development of a Covid-19 vaccine in partnership with
the pharmaceutical company, Pfizer. The German company, which had already signed a VD agreement at
the European level in December 2019 for cancer research, also agreed to increase its own manufacturing
capacity for a faster distribution of the vaccine at its own risk. The loan was guaranteed by the European
Commission and the EIB, and they equally shared the guarantee. Resources, distributed in two equal
instalments, came from the European Fund for Strategic Investments (EFSI) and from the InnovFin
Corporate Research Equity fund, part of the Horizon 2020 program, specifically from the Infection
Diseases Finance Facility (IDFF), which had already invested more than €500 million in the Covid-19
vaccine. In December 2020, the Covid-19 vaccine developed by BioNTech and Pfizer was approved
by the United Kingdom medicines regulatory authority, and a few days later, the vaccine began to be
administrated in the country. A few weeks later, Canada, Mexico and the United States approved the
vaccine, and the European Union followed suit, though slightly later. The vaccine was ultimately approved
and used worldwide, including in developing and emerging economies.
Thus, the European regional development bank EIB contributed to the creation of an important global
public good, as a response to the Covid-19 pandemic. The example is also important because of its
central idea that development banks can be deployed in ways that maximize their development impact,
and the use of the VD mechanism enables the bank to pursue sustainable and inclusive impacts while
maintaining some financial profits or at least avoiding losses. It is a way of appropriate risk sharing as
opposed to the so-called “de-risking” that usually means transferring risks from the private sector to the
EIB and ultimately to its member governments and tax payers (see also Mazzucato and Mikheeva, 2020).
Source: More details available in Griffith-Jones S and Carreras M (2021) and European Investment Bank (2021).
172
D. SCALING UP CAPITALIZATION AND

CAPACITIES: NEW SOURCES OF FINANCE
FOR RDBs.
One way to redress the striking and growing disparity between multilateral lending versus ad hoc
and bilateral capital flows would be to direct more funds to RDBs. One of the most obvious lessons
to emerge from the Covid-19 experience of RDBs is the importance of having sufficient and reliable
sources of capital. Unsurprisingly, those banks that were well capitalized were better able to provide
assistance when needed (Griffith-Jones et al., 2022, forthcoming). Many national banks – often already
under pressure before the shock of Covid-19 – relied on their regional DBs, so it makes an important
difference when the RDB has some spare capacity to cope with the unexpected. These lessons are
important given that future shocks are likely – whether climate related or financial – on top of the fact that
RDBs face a far bigger role in the future in helping fund the investment needed to carry out the transition
to low-carbon and more inclusive economies. Moreover, some policies now under consideration to
address these challenges – such as carbon border taxes or other heightened environmental standards
– will likely require additional financial investments in developing countries. If development banks are
to be in a position to respond to such demand, they will need to be backed by higher levels of capital.
This is especially important given the concern that CBAM and other mechanisms will likely hit revenue
streams of developing countries much harder than those of more advanced or higher-income ones (for
a discussion of this, see TDR, 2021, pp. 141–142). Recent research for UNCTAD’s Least Developed
Countries Report shows that trade imbalances and hence revenues would be worsened for LDCs,
because they tend to be both import-dependent in “dirty” sectors and significant exporters of raw
materials to those sectors (UNCTAD, 2022, chap. 2).
In advanced economies and in some (but certainly not all) middle-income countries (MICs), governments
have the fiscal space to capitalize further their national development banks. Some did during the
pandemic, such as the Uganda Development Bank, but, in fact, recapitalization was rare compared
to the responses during the GFC. Moreover, it is often more difficult for the national governments of
most low-income countries (LICs), many low-middle-income countries (LMICs) and even some MICs,
which have limited fiscal space to respond to financial shocks or crises such as Covid-19 or to meet
the challenges of the green and inclusive transition, to significantly capitalize their PDBs. In that case,
it becomes desirable for the international community to step in and provide additional resources. As
will be shown below, for many, this has taken the form of bilateral flows. There is a strong case that
argues it is better – more transparent, more democratic and more equitable – to use the funds to help
VI
governments capitalize these national PDBs. Thus, providing them with additional credits, guarantees
or help capitalize and provide additional finance to their RDBs so they can do the on-lending.
There are different ways this can be done, many of which have been discussed in previous Reports,
such as taking on additional members, including from higher-income countries, as this both increases
the pool of capital available and makes it easier for the banks to raise additional capital on international
markets. Another would be to revisit the triple-A requirements imposed on most banks by their
government owners, as this would enable them to hold smaller cash reserves. Still another is not
to take on new members but rather to increase the capital contribution from existing government
members. These are all important measures. The focus in the following section is on the most topical
and current debate about the potential transfer of IMF special drawing rights (SDRs), including from
those originating from a potential redistribution of the $650 billion SDRs already issued in 2021. This
redistribution from advanced countries that do not need SDRs to poorer economies that need them
was discussed as a principle supported by the G20. A tentative figure of $100 billion was approved
for such a redistribution. The significance of this would be huge, as it is already more than the entire
concessional lending by MDBs in 2018.
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1. Recycling unused SDRs through RDBs

As Plant (2022) has pointed out, sharing access to global reserves could be an important component
of the response to any crisis, especially as the only truly global financial response to the Covid-19 crisis
was precisely the issuance of SDRs discussed above. This is different from the GFC, when there were
important increases in the capital of MDBs and RDBs, facilitating strong increases of their lending
commitments (see, for example, Griffith-Jones and Gottschalk, 2012).
The reallocation of these SDRs, to be channelled via RDBs and MDBs, so they can increase their
capital and use it to harness their advantage of having knowledge of local borrowers’ capacities
and needs, is already technically possible. Some financial institutions possess the prescribed “holder
status” for SDRs, and this includes the main RDBs and MDBs. Holder status could be broadened
in future to other institutions, if the international community so wished, but for the moment, these
institutions seem the best suited for this role.
MDBs and RDBs are natural candidates for SDR rechannelling because they match the policy
objectives underlying the SDR general allocation with the existing public bank mandates, tools and
experience. Their mission is to support development and to supply global public goods and they can
do so because of their long-term financing and their ability to achieve maturity transformations across
a wide range of schedules. They can also take the long view when it comes to financing the goods
and services countries need in a way that other sources of finance cannot or will not do. MDBs and
RDBs can create and guide capital, borrowing on capital markets and lending resources at affordable
or concessional rates to their borrowing members, and these functions are closely compatible with the
SDR mechanism. Most of the main RDBs and MDBs, in fact, are already prescribed holders of SDRs
and can therefore use or borrow SDRs. In addition, the RDBs are often requested to increase their
financial support in crisis times. And there has been somewhat of a signal to do so: in a virtual meeting
on 15 April 2020, G20 Finance Ministers and Central Bank Governors called on the World Bank and
RDBs to swiftly implement the response package previously adopted by their respective Boards but
without increasing their capitalization, hence raising the question of how to do it.
In recent years, RDBs and MDBs have been increasingly active in the fight against climate change,
on top of other important policy priorities; thus, they have no shortage of uses for which to direct the
additional lending. Indeed, these MDBs and RDBs are a key but underused pillar of the international
development finance architecture aiming at financing both mitigation and adaption to climate change
projects, so they have a major role to play in contributing to reaching global goals such as the ones
enshrined in the 2015 Paris Agreement.1
As banks, they already have the ability to leverage their capital and experience, whether through co-
financing ventures with the private sector or with other public co-financiers. According to the African
Development Bank (AfDB), MDBs can leverage SDRs by a factor of 3 to 4 by co-financing with private
and public actors; this would multiply the positive effect on borrowing countries considerably2 and
help them meet the financing needs of national development banks in their member countries. The
Joint MDB Report on Climate Finance (2020) further reported that for every dollar MDBs invested,
an additional $0.29 came as co-financing from private sources, while some banks (AfDB and AIIB)
reported another $3 from public sources, again indicating the potential advantages of augmenting the
finance available to these banks (AfDB et al., 2020).
They also have the technical expertise to guide and manage the funds once created, benefitting from
their close relationships with governments and experts in Ministries around the world. During the
Covid-19 period, many RDBs were in regular contact with representatives of their government owners,
helping to chart the path to relief and recovery. In this context, they can act as intermediaries between
1
Reflecting this, most MDBs and RDBs announced that they would align all operations on the Paris Agreement, but there
is a need for continued clarity on and evaluation of how to do this (TDR, 2021, pp. 151–154).
2
AfDB presentation at a French Treasury/CGD event, Exploiting the Full Power of SDRs, Paris, 2 February 2022.
174
the global financial system and countries in need, especially countries with difficult and particularly
expensive access to private capital markets. This includes both LICs and many MICs urgently requiring
increased long-term funding to finance investment essential for recovery as well as for health – for
example, vaccine production – not to mention urgent investment in climate mitigation and adaptation.
Another benefit of channelling the SDRs to MDBs is their “preferred creditor” status. Some development
banks in the low-income regions where it is already difficult to raise finance from other sources (for
example, the Development Bank of Rwanda) have signalled a desire to access increased resources via
use of SDRs through their regional banks (the AfDB), as have the RDBs themselves. They are hopeful
for progress on the issue and are making proposals on how to implement them. African governments
have also thrown their support behind such initiatives.3
For all these reasons, there have long been important calls for such a use of SDRs (TDR, 2019), but
to date, we have seen little progress. There may be some technical challenges to reallocating SDRs to
RDBs and MDBs stemming from the requirement to retain their reserve asset characteristic (see Plant,
2022, forthcoming; Lazard, 2022). Research is currently underway on how this could potentially be
addressed, to examine ways of structuring any SDRs given to MDBs to both count as their capital and
to maintain their reserve asset characteristic.
Given the need for increased scaling up of RDBs, the arguments above suggest it is both important
and feasible to rechannel SDRs from countries that do not need them to those countries that urgently
require them. This can be done efficiently by rechannelling excess SDRs held by advanced economies
that do not need them via RDBs and MDBs, given that (a) RDBs and MDBs are prescribed holders of
SDRs; (b) they can leverage their balance-sheet, multiplying their effect; and (c) they can undertake
maturity transformation to finance long-term projects around the climate transition and other key
development aims. There is, therefore, a strong case economically and technically for such a path to
be taken and to do so on a significant scale. Indeed, the main obstacles seem political.
2. Where next?
Other long-standing issues addressed in previous Trade and Development Reports include the
important role of deepening and widening regional capital markets. While the potential of public regional
financial institutions such as development banks has been the focus of this chapter, private capital
markets can play an important complementary role. The Asian region has been particularly active in
exploring this possibility, with the creation of the ABMI in 2002 by the ASEAN+3 group of countries (10
original ASEAN states, Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Republic of the
Philippines, Singapore, Thailand and Vietnam, plus China, Japan and the Republic of Korea). Its aims
were to promote regional financial integration through local currency bond markets and to help Asian
countries reduce their reliance on international finance, having suffered in previous economic crises
VI
when foreign capital fled abruptly (see Chapter IV; Park and Bae, 2002).
Measured by some yardsticks, such initiatives have been very successful – the Asian region, for
example, saw a boom in local currency bonds that are now measured in the tens of trillions of dollars.
However, this does not mean the bonds are necessarily “regional” in the sense of raising the resources
regionally, nor of investing them in cross-border as opposed to national projects. First, most bond
issuers are national (governments or corporations) with the exception of a small number of bonds
issued by regional development banks. In Asia, green bonds issued by the Asian Development Bank
(ADB) raised some $766 billion over seven years since 2015 (EMEAP, 2022); while in Latin America,
bonds issued by the supraregional banks Corporación Andina de Fomento (CAF) and Central American
Bank for Economic Integration (CABEI) represented some 5 per cent of the total for the region (Nunez
3
If recapitalizing them right away with SDRs is a bridge too far, solutions involving hybrid subordinated debt are being
actively contemplated. Lazard (2022) suggests allowing SDRs to be invested in a junior fixed income product issued by
an RDB, whose equity features would allow some leveraging. The investment risk would be relatively limited, given that
such banks are generally significantly less leveraged than Basel-regulated commercial banks.
175
et al., 2022). Second, the purchasers of these bonds are not necessarily regional. Despite taking the
precaution of issuing bonds in local currency, in the Asian region, only Japan has succeeded in largely
eschewing foreign obligations (Lim, 2021). In comparison, for Indonesia and Malaysia, some 38 per
cent and 31 per cent respectively of local currency bonds are held by non-residents, suggesting these
markets are vulnerable to foreign flight in times of difficulty.
This was borne out – to some extent – during the recent Covid-19 crisis. Research by the Executives'
Meeting of East Asia-Pacific Central Banks (EMEAP), a cooperative organization of central banks
and monetary authorities from 11 economies in East Asia and the Pacific, found that having bonds
in local currencies was no guarantee of protection from global financial volatility, as the emerging
markets in the region with significant foreign investor participation in their local currency bond markets
experienced a brief self-reinforcing cycle of currency depreciation, bond fund outflows and rising bond
yields. This was especially evident in the sharp unwinding of market positions by foreign investors,
who may not have hedged their currency risk (EMEAP, 2022). Although flows eventually returned,
this magnitude was extreme – comparable to the outflows in the first few weeks after the collapse
of Lehman Brothers in September 2008 during the GFC and more severe than during the taper
tantrum in 2013 (EMEAP, 2022, p. 12). The authorities in the region responded to the heavy sell-off
of government and corporate bonds by shoring up demand for bonds and supplying liquidity to the
financial system, with central banks using a wide range of innovative policies (EMEAP, 2022, p. 16), but
the point for current purposes is that they were national responses, not regional.
Finally, there is the question of how the funds are invested, and again, it seems this is usually national
in orientation and less often involves cross-border projects. Despite the ABMI, intraregional investment
has not picked up significantly in Asia, and the region continues to rely on external capital despite high
domestic saving rates (Lim and Lim, 2012). The ADB’s green bonds, for example, were raised in a
multiplicity of currencies ranging from Australian dollars to euros, Honk Kong dollars, Indian rupees,
Norwegian kroners, British pounds, Swedish kroner and Turkish lira and the funds allocated to a
special subportfolio linked to ADB lending for eligible projects. While the bank may be a regional one,
its lending is not particularly so, potentially reflecting the fact it is very difficult to design and implement
large investments that cross national borders. Out of 58 projects listed on renewable energy and
energy efficiency, only two were described as “regional” and neither has succeeded in allocating
finances anywhere near the approved amounts (ADB, 2022, pp. 11–52). Similarly, out of 41 project
loans for sustainable transport, none was regional, and there were no regional projects in the 8 water
and urban infrastructure categories.
This matters because the investment demands for climate change and green or sustainable transition
need to address challenges that go beyond national borders. It is not easy to link or compare the
precise nature of the underlying investments for which bonds are issued, in part because there is no
clear framework for reporting or measuring impacts. This is a problem, given the fast growth of these
instruments.
For many reasons, the rather limited intraregional aspect of corporate bond issuances and investments
may remain so. For one, spending the money across the region requires a degree of harmonization of
development plans and objectives, rules and regulations, along with agreement on how to divide the
respective costs and benefits. For another, promoting regionally integrated markets requires complete
capital account liberalization among the participating countries, and for well-known reasons, this is
seen as a risky strategy with uncertain benefits (see TDR, 2015). Finally, credit rating agencies (CRAs)
are not only constraining many banks’ lending operations but are also provoking instability as much
as warning of it (see box 6.4).
176
Box 6.4 Giving banks more policy space: reducing the role of credit rating agencies
CRAs have long held a powerful yet ambiguous position in international finance as both player and
umpire, with profound effects on economic policymaking and investor decisions. Their track record in
meeting their objective to dampen pro-cyclicality is disappointing, often contributing to macroeconomic
instability by amplifying cycles and contagion, with asymmetrical impacts on vulnerable populations.
This was evident already in the Asian financial crisis and again during the late 2000s and 2010s; to an
extent, the unintended but self-reinforcing impacts of their “spectacular and disastrous power” appear
inevitable given the reflexive role played, especially by the “Big Three” CRAs, identified by Barta (2022)
as Fitch, Moody’s and Standard and Poor’s. The irony and costs of this were further evident during the
pandemic, when countries availing themselves of G20 debt relief initiatives were faced with downgrades
despite attempting to achieve a more sustainable fiscal position (Li, 2021; Griffith-Jones et al., 2022,
forthcoming).
Triple-A credit ratings from all the major CRAs are the explicit goal of most MDB capital adequacy
frameworks and one of the reasons provided for not participating in recent debt relief initiatives. According
to MDBs, these ratings allow them to access markets safely and at low cost, even during times of stress,
allowing a much larger contribution to liquidity provision and enhanced fiscal space through continued
and extended provision of concessional financing (World Bank, 2020). Consequently, CRA assessments
exert considerable influence in determining MDB risk tolerance, de facto embedding rating agency
methodologies into internal policies, leading to a highly conservative approach to financing. Evidence
gathered by one of the leading CRA agencies (S&P Global) suggests major public banks could increase
lending by at least $1 trillion without losing ratings (see TDR, 2019).
A recent independent review of MDBs’ capital adequacy frameworks commissioned by the G20 argues
MDBs can relax their strict aversion to risk, ease capital requirements and increase financing by hundreds
of billions of dollars without losing their high credit ratings. The review provides a range of proposals
for MDBs, shareholders and CRAs to allow a more realistic and evidence-based assessment of risk.
According to the review, the full series of reforms would allow MDBs to start increasing their lending
capacity over the next 12 to 24 months by hundreds of billions of dollars but would protect their triple-A
rating.
In addition to adjusting their approach to risk tolerance, MDBs and other public and development banks
need more support. They require a boost to their capital base, made possible through transfers from the
banks’ shareholders and augmented by borrowing on international capital markets, with a measured
relaxing of their triple-A credit rating where appropriate. Government owners should send clear signals of
their support for the banks they own; their developmental mandate should support increased lending to
enable more socially beneficial projects to begin.
UNCTAD has long argued that a different kind of CRA is required, one that would support countercyclical
policy responses, avoid conflicts of interest in operations, challenge the monopoly of the three major
VI
CRAs and refocus priorities on sustainability and financial stability.
A public multilateral credit rating agency (MCRA) could improve and stabilize credit rating assessment of
sovereign and public banks with explicit priority to achieve the Sustainable Development Goals (SDGs).
An MCRA would provide a distinctive and more effective assessment for developing countries, as it
177
would integrate both long- and short-term horizons. Moreover, it would develop an alternative model to
better align with the realities of developing countries and mainstream climate considerations, including
double materiality wherein considerations of both climate’s impacts on finance and finance’s impacts on
climate are recognized. An MCRA would ultimately prioritize the assessment of economic development
trajectories, rather than credit-worthiness, while reorienting financing towards productive investment.
Without this kind of innovation, the world is stuck with a system where firms, institutions and even
governments are caught in a predictable yet inevitable vicious cycle, where the logic of credit ratings
overpowers any stabilizing effects. At the sovereign level, this can have the effect whereby democratically
elected governments follow policies imposed by non-elected technicians, which could be the opposite of
what their citizens voted for (Barta, 2022).
Another core and related issue is the banks’ mandate, including the expectations of their government
owners – whether expressed in a vision statement, in the legislation that enacted them or in the
reporting requirements and indicators of performance. Nearly all of the public banks established since
2010 have “green” in their title or high up in their mandate (TDR, 2021, p. 150), and while much
will depend on the actual impact of lending decisions, it is surely significant that the MDBs have
made climate pledges with targets for their lending (TDR, 2021, pp. 151–153). This matters because,
as shown in the recent experience of Covid-19 lending, it makes a very big difference if banks are
unambiguous about their role and purpose. Public banks – regional as much as national – with clear
and unambiguous mandates in addition to sufficient capital were the ones most able to respond quickly
and in line with their members’ needs (McDonald et al., 2020; Barrowclough and Marois, 2022).
The regulatory environment is also extremely important in determining the policy space afforded
to regional public banks as to all banks; there are concerns that the current rulings which do not
recognize the special role of these public banks are causing a negative constraint that needs to be
addressed (box 6.5).
Box 6.5 Is financial regulation constraining lending capacity by development banks?

Against a backdrop of limited finance available to support regional integration, the question is whether
financial regulation further constrains the ability of development banks to lend at the required scale to
finance large cross-border infrastructure projects. Research shows the Basel Capital Accords – financial
standards internationally designed to create a level playing field for internationally active banks – constrain
both multilateral development banks (MDBs) and national development banks (NDBs) playing regional
and international roles in their ability to provide development finance.
A first critical problem arising from the Basel framework is its risk-based approach to capital determination.
It is in the nature of banks to evaluate risk in credit allocation decisions. And this is definitely a reason
why in the end banks normally do not lend over the long term to the extent required. Basel, however,
in adopting a risk-based approach for capital determination, only reinforces a pattern of lending biased
against the long term, because it attaches higher risk-weights to long-term exposures (Gottschalk, 2019).
178
Notably, MDBs (and NDBs with an international role) do finance long-term and riskier projects, as well
as large projects. This implies these banks have a portfolio concentration on assets at the higher end of
risk buckets. This, in turn, means for the same amount of assets, development banks hold more capital
relative to other banks, while the latter have a more diversified portfolio. So from the start, development
banks under the Basel framework are penalized, because their ability to lend to larger and riskier projects
is constrained. Yet, the Basel framework affects the various categories of development banks differently.
MDBs and RDBs are not under the purview of national regulators, but Basel affects these banks by
assigning them fixed risk weights, thereby affecting their funding costs.
Under Basel III, 11 MDBs are assigned zero risk weight. These banks are: World Bank Group (WBG);
ADB; AfDB; EBRD; Abu Dhabi Islamic Bank (AIDB); EIB; National International Bank (NIB); Commercial
Bank of Dubai (CDB); IsDB; CEDB; AIIB. This implies banks who lend to those MDBs do not need to
allocate capital for such credits. All the other MDBs face risk weights varying from 20 to 150 per cent,
while unrated banks are assigned 50 per cent risk weight. The BRICS founded New Development Bank
(NDB), for instance, does not have zero risk weight despite having strong shareholders, and even though,
unlike other MDBs, it raises funds in national financial markets, which helps it avoid currency mismatches.
According to Basel, MDBs need to meet strict requirements to be granted zero risk weight, which means
following “conservative financial policies,” in Basel’s own words. Basel standards, therefore, affect MDB
funding costs and, as a consequence, the way these banks manage their balance sheets on the assets
side (Gottschalk, 2019).
On the assets side, the biggest constraints for MDBs are the ratings from CRAs. The latter follow Basel
standards closely in the models they use to assess risks facing banks. The consequence is that the ratings
which these agencies assign to these banks follow the same conservative approach as recognized by
Basel. The result is that MDBs and RDBs maintain low gearing ratios (loans to equity ratio) to obtain high
ratings, but this limits their leveraging.
National development banks with regional and international roles, in turn, which are under the purview
of national regulators, are affected by Basel through Basel’s large exposure framework. The framework
restrains banks’ ability to finance large infrastructural and industrial projects. For these banks, international
loans also imply currency risks, which are also affected by Basel standards. These risks can be quite
significant, to the extent that these banks issue loans in currencies other than those in which they are
funded.
Finally, NDBs lending abroad often support innovation using a range of instruments and practices. In
this regard, the Basel standards that matter here are those relating to equity finance, an instrument
NDBs use to support innovation, and those relating to climate finance, which may involve yet untested
clean technologies. Equity exposures from the banking book are assigned risk weights between 100
VI
and 1250 per cent, thereby penalizing NDBs with large exposures. In the area of climate finance, NDBs
are becoming increasingly engaged in support for a just energy transition. Supervisors, however, are
incorporating climate-related risks in their supervisory work, because of concerns with banks’ vulnerability
to such sectors and with weather events that can cause losses to the banks (Gottschalk et al., 2022).
179
E. CONCLUSIONS AND POLICY

RECOMMENDATIONS
This chapter has shown that while regional development banks and funds are needed as much as
ever, if not more, they are frequently not adequately supported by their government owners. A massive
scaling up and redirection of development finance is needed to face the challenges and opportunities
of today’s post-Covid-19 and climate-aware world.
• Membership in regional banks and funds can be extremely useful, offering funds, expertise and
other benefits, including a voice more commensurate with economic weight and more choices
of sources of finance.
• However, regional arrangements cannot solve the limitations of the international financial
architecture; they may be a useful stepping-stone, but some countries will never receive the kind
of support needed from the region, especially during systemic crises when all countries in a region
may be hit at the same time.
• Regional liquidity arrangements were not used much during Covid-19, and bilateral currency
swaps were the main source of liquidity in the GFSN. While RFAs provided vital support to those
countries that tapped them; the trend of bilateral swaps is a concern because many countries
lack the capacity to negotiate them.
• In comparison, regional development banks were a major provider of counter-cyclical funds during
Covid-19, especially those banks that were well capitalized and had a clear public purpose.
Some banks increased lending by more than 100 per cent to provide relief and recovery; others
supported regional research and development to find a Covid-19 vaccine.
• Looking forward, regional banks and funds need more reliable and sufficient capitalization (i.e.
much more than they get now), more representative governance and economic performance
measures and indicators that reflect their catalytic developmental role and allow them to fulfil it,
rather than narrow financial measures.
• RDBs and RFAs can usefully receive new or unused allocations of special drawing rights, as
currently under debate. One benefit DBs offer for the effective use of SDRs (versus national
budget transfers) is that they can be leveraged; another is that they are potentially seen as
politically more independent.
• G7 or other high-income owners in RDBs should increase their capitalization and policy space
to allow the banks they co-own to support more experimental, developmental, green technology
and enterprises. Regional banks could also seek new members to beef up their capital bases.
• Regional credit ratings or regional regulatory agencies are needed to overcome the stranglehold
of the “Big Three” CRAs. Some banks have it in their mandates that they must achieve AAA status
from at least two of these ambiguous – private sector – institutions.
• Finance can be found at times of urgency, as during the Covid-19 years, but this does not mean
it goes where it is most needed. Some countries missed out in the pandemic. RDBs can help
by providing public leadership in coordinating and delivering reliable long-term finance. In their
special role as a bank with a public purpose, they can tap both public and private channels, and
as they have technical expertise and management skills, they can ensure these are directed to
developmental purposes.
180
• Regional capital markets are seen by some as an important complement to national markets
and a potential counterpart to public bank lending; for these reasons, some regions have keenly
promoted them. However, simply issuing bonds in local currency does not offer protection from
exchange rate volatility and cross-border capital flight.4
• Other forms of financial arrangements, such as regional bonds (social, blue and green), are seen
by many as offering hope for the financing of regional public goods. But the evidence does not
yet support this, and it is likely that regional market-based financial institutions will suffer the same
obstacles as regional projects everywhere – including tension about real or perceived allocation
of the benefits and costs between the individual members of any regional grouping. For such
reasons, it is hoped that public regional institutions, with their intergovernmental processes and
negotiation fora, coupled with their potential for taking a longer-term view than the market, can
address some of these. For such reasons, South—South sharing of experiences and solution-
seeking, in addition to North—South, North—North, triangular and indeed global arrangements,
will continue to be important for the future.
• While regional arrangements have been able to offer a lot in short-term and liquidity financing,
these are still really only regional on one side of the equation – the supply side – by pooling finance
to make a reserve fund larger than what individual countries could create. Demand for lending is
still mostly national, and this limits the provision of urgently needed public goods and the removal
of public bads. Most of the regional multilateral banks lend quite a small proportion of their total
to projects that are cross-boundary or multicountry, certainly less than one quarter. It seems
regional projects require more harmonization between countries in terms of regulations, physical
infrastructure, regional procurement policies and the ability to perceive benefit and share it among
regional members fairly. This is most evident in the issue of oceans or blue-based lending.5 Many
banks have the ambition to lend more regionally, but this will require significant negotiations and
soft-capital investments first.
VI
4
Some of the new regional arrangements are an unusual form of quasi-public and quasi-private structure, as yet untested.
For example, a new regional repurchasing agreement (“repos”) to help participating countries reduce their cost has been
created by United Nations Economic Commission for Africa (UNECA) and Pimco USA Liquidity and Sustainability Facility.
However, this would perhaps not appear as attractive had banks in Africa not been so capital-constrained in the first
place.
5
For example, only a very small proportion of total loans from the Green Climate Fund appear to be targeted to oceans or
blue economy activities. Many of these are regional or multi-country project loans, reflecting the fact that ocean resources
(such as fish) and ocean-related problems (such as pollution) cross national borders and thus need multilateral responses.
Co-ordinating these is typically more complex and time consuming than more simple single country loans for obvious
reasons (Vivas et al., 2021, pp. 7-9).
181
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Chapter VII
VII
Multinationals, Development and

Corporate Arbitrage
A. INTRODUCTION
Between 1945 and the early 1980s, an increasing volume of foreign direct investment (FDI) flows
occurred among advanced countries. It was closely connected to their rapid post-war rates of industrial
expansion, particularly in more capital and technology intensive sectors, and their rapidly growing and
converging levels of income. These tended to be two-way flows, often in the same sector, undertaken
by large firms operating in the already well-established export markets.
Given these structural determinants of FDI, developing countries offered only marginal attractions to
international investors. Incoming foreign capital was directed towards primary resource extraction,
although technological changes in the consuming countries and rising political tensions in some host
countries increased the economic risks for foreign investors in that sector. Expanding local markets
could also attract multinational enterprises (MNEs) to some selective sectors requiring medium levels
of skill and technology, such as chemicals and transportation, primarily in larger developing countries
with an emerging middle class, where tariff barriers offered assured rents that could offset the perceived
economic and political risks.
Since the early 1980s, FDI has grown considerably faster than both output and international trade
in goods and services, with a marked increase beginning in the early 1990s in the share going to
developing countries, including through the spread of global value chains (GVCs). Policymakers in the
developing world have not only placed much greater emphasis on attracting FDI as a trigger for catch-
up growth, but as carefully documented in UNCTAD’s World Investment Reports (WIRs), have done
so by allowing much greater freedom to MNEs to choose how they operate in their countries: of the
thousands of country-level reforms in FDI identified since 1990, the vast majority have been liberalizing
(WIR, various years).
Bilateral and regional treaties and agreements have been a particularly important force behind this
“liberalizing” trend. In most cases, these have been linked to a wider package of measures aimed at
extending the influence of market forces. Indeed, because affiliates are generally more dependent on
imported inputs than domestic firms, and as they rely on close financial relations with their respective
parent companies, other affiliates and foreign financial institutions, competition to attract and retain
inward FDI has been associated with broader efforts to accelerate the liberalization of trade and finance.
Liberalization is often presented as a simple policy choice of scaling back politically inspired
infringements on an otherwise pristine world of economic decision-making based on relative prices
and perfect competition. In reality, liberalization – whether of trade, the movement of capital or labour
markets – is itself an act of state (and regulatory) intervention that requires political decisions and a
change in the legal framework, usually paralleled by the creation of new norms and rules, as well
as adjudication and enforcement mechanisms which also require political construction. All these
have profound consequences for how businesses operate and who benefits (and loses) from their
implementation and operation. Moreover, as liberalization can be pursued through domestic, regional
and global processes, harmonization across the different constituencies is an additional political
challenge on the liberalization agenda.
Whether conceived as a move away from previously agreed-upon multilateral norms or as the
establishment of complementary regulations, regionalism – be it in trade, production, finance or the
digital sphere – rests on negotiated agreements among a select group of (predominantly national)
decision-makers who alter the rules and norms governing the economic activities in a particular space.
Therefore, regional integration typically involves multiple layers of new regulations, with varying degrees
of influence in national territories.
Whether the changes in rules and regulations have a positive effect on development is determined not
only by the details of negotiated treaties, but also by the behaviour of large private actors – particularly
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Multinationals, Development and Corporate Arbitrage
the MNEs – navigating the global treaty space. This chapter sets forth some of the key aspects of this
corporate maneuvering between jurisdictional niches – a phenomenon known as corporate arbitrage.
The behaviour of MNEs is partly affected by the sets of rules and regulations of the jurisdictions in which
they operate and partly by the capacities of the corporations themselves to anticipate, shape and
accommodate regulatory shifts in the political and economic context. In recent decades, the power
of these actors to influence outcomes and shape regulatory contexts has grown in relation to other
economic agents; it has also been transformed and amplified, as mechanisms of corporate control
have been reengineered by the wider forces of legal and financial innovations, or financialization.
The focus of this chapter is on two dimensions of the financialization of the corporate realm pertinent
for the developmental outcomes at both national and regional levels. The analysis reveals the way
the core group of actors in the global economy – leading MNEs – interacts with the global system
of multiple regulations and does so by making an incision into the way MNEs navigate the global
regulatory system when planning their investment strategies generally and particularly when investing
in the developing countries. The latter are vulnerable to the two-fold problem of global financial and
corporate governance.
First, at the level of global political economy, regulatory complexity has been conducive to the rise
of the “fragmented firm.” Second, the inner transformation of the corporation itself, or the “code of
capital” (Pistor, 2019), paralleling the technological, financial and regulatory shifts in the global economy,
has meant that notwithstanding the macro-financial data on FDI flows, the economic substance of
international investment, including in developing countries, is often structured much like a variant of
asset management.
In the context of developing economies, when investing in these places, top multinationals tend to
structure their FDI flows indirectly, taking ownership and control over the nature of investment (i.e. the
type of economic activity, if any, associated with the investment), away from the host country and the
purview of its regulatory institutions. Moreover, around a quarter of the subsidiaries of the top MNEs
in the Global South present only balance sheets as evidence of their presence in a country, with no
(or few) income statements reflecting real economic engagement. This has multiple implications for
policymakers at national and regional levels and more crucially at the multilateral level.
The chapter is organized as follows. Section B features an explanation of the evolution of the linkages
between the organization of production activities and the internationalization of MNEs and notes the
role of financialization mechanisms in augmenting those links. Section C contains an analysis of the
regulatory structure of the global economy that facilitates and determines the nature of international
financial flows and investment. Importantly, notwithstanding recurring financial crises and reform
attempts, including at the level of regional integration, the analysis indicates the system of global
finance and investment is anchored in long-established regulatory niches and specific jurisdictions
favouring financial capital, to the disadvantage of the developing countries seeking to attract long-
term, productive investment.
Section D presents an empirical study of the investment activity of the top-100 non-financial MNEs
globally. It is revelatory of a stark contrast between indirect ownership of subsidiaries of top MNEs
and the type of their economic presence in the advanced vis-à-vis the developing countries. Section
VII
E contains a conclusion drawing lessons for the macro-financial regime governing global corporate
behaviour, for the efforts of national governments seeking to attract foreign capital into their economies
and for the efficacy of regional integration efforts, which are imperilled in the global regulatory topography
exploited by the interests of global corporations and amplified by the structure of global finance.
189
B. CORPORATE CONTROL, INVESTMENT

AND THE EXPANSION OF MNES
1. Corporate strategy, international production and regional development
The spread of cross-border supply chains is not an altogether new feature of the global economy,
but the emergence of GVCs, particularly in manufacturing sectors, has brought fundamental changes
to the way international production is organized. Whereas firms previously expanded abroad by
essentially cloning themselves in another location, today, separate activities are performed in different
locations and valued according to how they contribute to the objectives of the firm as a whole,
not simply based on their profitability in the host country. Moreover, as the universe of MNEs has
expanded, inter-firm agreements, networks and alliances of various kinds have emerged alongside
FDI, to coordinate dispersed activities and deal more effectively with the growing complexity and
contestability of international markets (WIR, 2011, 2013).
There is broad agreement that the adoption of market-driven reforms, along with technological
developments and greatly reduced transport, communication and coordination costs, has stimulated
the expansion of FDI over the past two decades. There is no consensus, however, particularly given
the uneven distribution of investment flows across developing countries, on why some countries have
proven more attractive to international business than others, and what the developmental impact of
a global corporate presence in a country is. Outside the macro discussions, there is considerable
analytical confusion surrounding the decision of firms to expand their activities abroad.
International trade theory provides little guidance. Its assumptions of identical production functions
and competitive markets are far removed from the world of international big business and cannot
explain why significant cross-border flows of investment occur between countries with similar factor
endowments. Instead, conventional explanations of why firms invest abroad focus on efficiency
considerations, with the commitment to invest seen as reflecting the comparative costs of hierarchy
and markets in managing intangible assets. Given the mix of factor endowments in the host and home
countries, the presence of scale economies in production and the transaction costs arising from trade
and setting up production abroad, cost efficiency will dictate whether investment abroad emerges
as the optimal market outcome in industries where firm-specific assets are important. This argument
downplays and may even ignore the significance of firm size and corporate control in maintaining and
expanding profitability; simply stated, it fails to recognize the potential economic distortions that can
accompany very large firms’ rent-seeking behaviour (Hymer, 1979, p. 65; TDR, 2018).
Big firms can and do shape market outcomes. These firms tend to be the first to move into
production abroad. Recognizing this means abandoning the fiction of price-taking firms in perfectly
competitive markets and contemplating instead a global economy structured by hierarchical power
relations, inherently imperfect markets and (private) rent-seeking behaviour. Including these features
in the argument adds an historical dimension to the FDI story, both by recognizing the evolutionary
progression of international production and by acknowledging first-mover advantages.
The creation of MNEs is, from this perspective, best understood as an extension of the processes
which originally gave rise to national corporations (Hymer, 1960). In essence, national firms become
internationalized because they possess specific assets – such as a superior production technology,
a distinct product design, superior managerial and marketing skills and other intangible capital – and
have sufficient economic size to undertake profitable investments and manage costs internationally,
despite the higher risk and additional costs deriving from coordinating production activities over large
geographical distances and across political borders.
190
The transfer of production abroad is, however, rarely an all-or-nothing affair, and certain functions often
continue to be performed in the country of origin or to be registered in jurisdictions offering favourable
conditions for this specific type of business activity. These include higher-level strategic functions, such
as research and development (R&D) and financial and service operations, with only the more routine
types of production located in the jurisdiction where the actual production takes place. There can
be strong neighbourhood effects to the organization of FDI: within Western Europe, for example, the
consolidation and expansion of the European Union via the internal market program has been a steady
influence on the growth of intraregional FDI which, as a result of both mergers and acquisitions (M&As)
and greenfield investment, has facilitated the formation of pan-European firms (Dicken, 2003), with a
Europe-wide corporate bond market developing in the same direction (Plender, 2003).
This process is also quite advanced in North America, where the historically close relations between
Canada and the United States were extended under the North American Free Trade Agreement
(NAFTA), particularly in some key industries, such as automobiles, where regional production structures
played a central role. In the 1980s, Japan also started to invest heavily in some of its neighbouring
economies, with much of the investment going into manufacturing (UNCTAD, 1996). But because the
development gap between Japan and its neighbours was still considerably wider than that within other
advanced regions, this left an opening for firms from the first-tier newly industrialized countries (NIEs)
to become an important source of FDI in the regional economy of East Asia.
Within these regional blocs, direct investment and trade are often complementary, reflecting the
development of an internal division of labour within a firm, whereby plants in different countries of the
bloc either collaborate in the creation of a single product or specialize in the production of different
finished goods for export to the entire bloc or beyond.
An additional set of barriers to the developmental gains from corporate expansion comes from the
financialization of the corporation itself. As the next section shows, financialization, understood as the
workings of financial and legal innovation driving corporate arbitrage globally, is closely linked to the
decreasing ability of national and regional host authorities to control the behaviour of global corporate
groups investing into their regions. At the same time, the reorganization of GVCs is paralleled by finance-
driven patterns of rent extraction, wherein developing countries remain at a structural disadvantage.
2. The financialization of the inner corporation

From the 1980s onwards, there has been growing evidence that MNEs are responding proactively
to the changing regulatory regimes underpinning globalization and regionalization. During the 1980s,
the global presence of MNEs in developing countries started to evolve from relatively simple and
specialized cross-border structures, predominantly motivated by the search for natural resources and
international markets, to more complex and integrated GVCs, built to exploit differences in labour costs
and productivity (Zhang, 2021, p. 206). In the 1990s and into the 2000s, this process accelerated, and
the two decades witnessed rapid growth in GVCs, a tenfold increase in the global stock of FDI and a
fivefold increase in global trade.
More recently, the unbundling and geographical dispersion of MNEs’ operational activities has come
to affect those functions traditionally agglomerated in the global corporate headquarters of MNEs
VII
(Desai and Moel, 2008; McIvor, 2010). The offshoring of business support services has affected back-
office and support operations, such as human resource management, legal services and accounting
(Wilson, 1995), as well as front-office operations, such as customer support (Breathnach, 2000) and
R&D activities (Dachs et al., 2014).
Together, these tasks are grouped in the category of corporate treasury and financing functions. Today,
many of these functions tend to be separated from other headquarter functions and are performed by a
separate subsidiary or set of subsidiaries. Furthermore, the groups of subsidiaries performing treasury
functions tend to be located in specific jurisdictions providing an optimal institutional environment for
191
the performance of that specific function. Similarly, strategic management might be “offshored” to
jurisdictions providing large pools of managerial talent and conveniently located in the proximity of
major markets.
An important aspect of the way MNEs are investing is the legal framework underpinning every type
of transaction they undertake. Economic and financial operations must be booked through the firm’s
subsidiaries and located in a jurisdiction – a sovereign country – for accounting purposes; they also
have to be registered somewhere for legal reasons. Along with contracts that reflect the interests of
business parties, economic transactions are subject to the laws of a particular jurisdiction where they
are nominally located (or registered). The majority of modern multinationals deal with legal structures
by decentring into separate legal persons, each of which is regulated by the rules and laws in the
country where it is located (Blumberg, 1993; Ferran, 1999; Robé, 2011).1
Today’s MNEs are organized, in effect, as a network of entities held directly or indirectly by the parent
through equity ownership. The corollary of this separation is that legally the different subsidiaries must
trade with one another “as if” they were separate companies involved in typical market transactions.
This is called the “arms’ length” principle, as mandated by the Organization for Economic Cooperation
and Development (OECD). Estimations by UNCTAD (e.g., WIR 2015, 2016) and other organizations
suggest between one-third and roughly two-thirds of global trade today is intrafirm – that is, trade
between subsidiaries and affiliates of the same MNE that are located in different countries (Zhang,
2021, p. 207).
The implication of this chain of legal ownership is that when multinationals invest abroad, they tend to
set up a subsidiary or a joint-venture company in the host country. The subsidiary will be controlled
directly by a parent company or indirectly by one or more subsidiaries held by the parent, but for all
intents and purposes is considered an independent legal person (Palan et al., 2021; Robé, 2011; WIR,
2015, 2016).
A multinational firm can opt for different arrangements of chains of ownership. A multinational whose
parent holding company and headquarters are located in the United States can invest directly in
Argentina by setting up an Argentinian subsidiary held directly by the United States parent. Alternatively,
the firm may opt to invest indirectly in Argentina by routing the investment through subsidiaries in a
third country – a transit country. While the multinational firm in the United States remains the ultimate
owner of the investment in Argentina, the subsidiary in the transit country becomes the immediate
owner (Bertz et al., 2021, p. 759; WIR, 2016).
Figure 7.1 visualizes the corporate structure of a major United States non-financial corporation. As it
shows, nearly all interactions between the parent company in the United States and its subsidiaries in
the developing countries are mediated through the group’s United Kingdom subsidiaries. According
to Phillips and colleagues (2021), among the largest 100 non-financial MNEs in the world, direct
ownership of subsidiaries in developing countries is a rare event. In this figure, there is practically no
direct relationship between the United States and the developing country where the corporate entity
invests. A comparison of global corporate presence of major MNEs by home countries is presented
later in this chapter in figure 7.8.
1
Many legal scholars argue the independence of corporate subsidiaries is a fiction (Greenfield, 2008), but courts treat
each corporate subsidiary as an independent corporate entity. On rare occasions, courts accept that the subsidiary is
acting on behalf of the parent company or on behalf of another subsidiary and thus is not acting as an independent
corporate entity. This is often referred to as “lifting the corporate veil.”
192
Figure 7.1 Global structure of a United States non-financial corporation
Source: UNCTAD Secretariat visualization on the basis of Orbis corporate filings.

Note: All interactions between the parent company in the United States and its subsidiaries in the developing countries go
through the United Kingdom. There is no direct relationship between the United States and the developing country where
the corporation invests. This pattern is similar for all major corporations (not just those in the United States).
Until recently, the central assumption of economic theory and policymaking has been that these
corporate layers are merely functional elements of efficiency: they establish an allocation of ownership
stakes across countries but need not affect or reflect the firm’s productive operations. However,
academic research increasingly recognizes that the form and nature of corporate ownership entail
macroeconomic and macro-financial consequences.
First, indirect forms of investment create a distinction between the ultimate and the immediate owners
of assets and, as a result, can present a major challenge to governments attempting to reassert
control over the investment regime (Bertz et al., 2021, pp. 760-768; Robé, 2020; WIR, 2016).
Second, while for a company run as a single entity, the separation between form and function is less
obvious, the corporate form is increasingly used to partition assets of the same firm into select pools;
as a result, one firm may be comprised of hundreds of legal shells used for entity shielding, loss shifting
and possible immortality (Pistor, 2019, pp. 52-55).
VII
Third, in terms of the relationship between the nature of corporate holdings and control over investment,
UNCTAD’s earlier work on corporate complexity and investor nationality shows that while in the internal
ownership structure of MNEs, control generally coincides with (direct or indirect) majority ownership,
MNEs can exercise control over affiliates, even when they have a minority stake (WIR, 2016, ch. 4).
Fourth, the use of intermediary subsidiaries creates statistical anomalies in FDI accounts, because
flow of investment through intermediary subsidiaries located in third countries inevitably creates data
anomalies and double counting in FDI statistics (Zucman, 2013). Because data on aggregate FDI
positions are typically based on immediate asset ownership, they provide a potentially biased measure
193
of international financial ties, the distribution of asset ownership and risks associated with investment
– for home and host countries alike. For example, beginning in 2019, Bahamas and Bermuda both
overtook the Republic of Cyprus as a lead FDI investor in the Russian Federation,2 while Hong Kong,
Cayman Island and the British Virgin Islands (BVI) are the top three FDI investors in the People’s
Republic of China.3
Last but not least, by using intermediary subsidiaries in the third country, the owners and managers of
an entity or parties to a contract can, if they so choose, register these in the same jurisdiction where
they reside or work or where the underlying assets held by an entity are located. This is particularly
important for a number of reasons.
3. Intermediary subsidiaries
One known purpose of such intermediaries is the tax-efficient channelling of the value created by
operating subsidiaries to the parent company (Eicke, 2009; Lewellen and Robinson, 2013; Palan et al.,
2021; Phillips et al., 2021). To achieve this, the debt or equity investments of the parent company are
not made directly into a foreign subsidiary but indirectly through an intermediate holding company.
Returns on those investments are then channelled back to the parent company through the conduit
entity in the form of interest or dividend payments. Intermediate holdings or other entities in the group
may also be used to channel royalty payments. Such “royalty conduits” may receive royalty payments
because they are the legal owners of an intellectual property (IP) asset itself or because they own the
economic rights to the royalty income generated by the asset because of a licensing agreement with
the group entity who legally owns the asset (Maine and Nguyen, 2017).
The payments they receive are usually deductible expenses for the operating company and are generally
taxed at a favourable rate in the country where the holder of the IP is located. The above-described
dividend, interest and royalty conduit functions may also be combined in a single intermediate holding
company (Garcia-Bernardo and Reurink, 2019). These techniques involve intermediary subsidiaries
who serve as mere “conduit” entities (Garcia-Bernardo et al., 2017; Mintz, 2004). A recent International
Monetary Fund (IMF) study called them “phantom investments” and suggested they are conducted
purely for tax purposes (Damgaard et al., 2019; Garcia-Bernardo et al., 2017).
As most large multinational corporations are located in OECD countries, the phenomenon of phantom
investment is often seen to affect tax receipt from corporate taxation in those home countries (Clausing,
2016; Hines, 1988; Zucman, 2013; WIR, 2016). Yet Cobham and Janský (2018, 2019) demonstrated
a deleterious effect on developing countries as well, and others have suggested those corporate
structures also accelerate capital flight from developing countries. As a recent OECD study argued,
rerouting investments through less-regulated environments may raise risks of illicit financial flows
(IFFs) (Nesvetailova et al., 2020). This argument, in turn, sparked debate on whether those conduits
which are typically located in offshore financial centres (OFCs) are used for tax avoidance or serve as
corporate treasury centres
According to Goldman Sachs, corporate treasury plays a central role in the firm’s overall strategy, with
the specific task of providing appropriate funding to support all firmwide activity while maximizing net
interest income. The division allocates financial resources, raises funding and capital to support firm
activity and dynamically manages the firm’s asset liability risk and liquidity portfolio.4 Corporate treasury
actively engages in public markets and with businesses across the firm, investors, ratings agencies
and regulators. At times, corporate treasury functions as an in-house bank (KPMG, 2016).
2
See Inward Direct Investment in Newly Issued Shares of Banks and Other Sectors by Geographical Allocation. Data
from Central Bank of Russia.
3
Data from Republic of China Ministry of Commerce (MOFCOM).
4
https://www.goldmansachs.com/careers/divisions/corporate-treasury/
194
Importantly, the use of corporate treasuries is not confined to companies in the financial sector but is
standard across non-financial corporations (see box 7.1). In reality, they can function in both. According
to Bertz and colleagues, the use of such intermediaries goes beyond accounting: it has implications
for multilateral dialogue and reform because of the effects of shared investor nationality on economic
diplomacy, the consequences of existing investment ties and regulations for military conflict and risks
of illicit financial flows (Bertz et al., 2021, p. 786).
Box 7.1 The rise of corporate treasury operations

Before the advent of financial innovation, treasury operations in a corporate organization tended to centre
on cash and very specific hedging operations serving investments. For a number of reasons – mainly
but not only associated with financialization – these treasury tasks have, on the one hand, expanded in
scope internally (within the corporate structure), but on the other, become dependent on being located in
specialized intermediary subsidiaries typically registered in OFCs (Polak, 2010; Polak and Roslan, 2009).
Today, these types of subsidiaries perform many tasks, including hedging, investment, use of derivatives
and compliance techniques, as well as capital market, accounting and tax arbitrage and, in some cases,
in-house banking. With the expansion of these corporate treasury centres, many of the most value-added
tasks of the organization have been shifted to corporate treasury units. The phenomenon is noted as the
extraction of value in the literature on GVCs, where it is apparent that primary production of raw materials
or basic agriculture goods constitutes only a fraction of the price paid by the consumer. This means much
of the value added is absorbed within the corporate groups themselves or through transactions between
groups along those value chains. The use of intermediary subsidiaries in third countries may be used,
therefore, not simply for tax avoidance functions, also for treasury operations, along with the absorption
of value, or earnings stripping (Robé, 2020, ch. 8).
As Haberly and Wojcik (2022) recently explained, the financialization of the inner corporation takes the
form of larger portions of tasks and revenue assigned to these treasury operations and is intimately
linked to broader trends in the global financial topography. Top companies in banking, insurance, real
estate, investment management and other financial services, as well as in law, accounting and business
consulting, drive the process of financial innovation at the macroeconomic level, with new financial
products and services arising from the interactions between the sector and its consumers in both private
and public realms.
In the emergent financial business services complex, the activities of many “non-financial” firms are just
as impactful as those of the financial institutions. Law firms, for example, in addition to their key role in the
economy of contracts, play an indispensable role in the structuring of assets and liabilities into investable
funds and securities. Meanwhile, the concept of “value” in finance is often vague and thus frequently
manipulated by accounting firms (Haberly and Wojcik, 2022).
Schwartz (2021) recently gave an empirical illustration of the social construction of value by pure
VII
financial vis-à-vis intellectual property rights (IPR) companies in the United States. He found a notable
convergence in the business models of high-profit finance and IPR-based firms, particularly tech firms, as
the latter become increasingly co-dependent at the level of business models and production processes.
This concerns the way firms capture profit and what they do with that profit. The four homologies noted
in his study involve: splitting standardized goods into an IP component firms control and a generic good
or service, with low barriers to entry spun off to someone else; the salience of patenting (and state-
sanctioned monopoly more generally) in creating a tollbooth around that IP; the nature of production
processes; and reliance on proprietary data collection and manipulation (Schwartz, 2021, p. 10).
195
From the perspective of developing countries, these changes in the inner structure of MNEs mean the
use of intermediaries can be very significant and entail serious macroeconomic consequences.
First, their use highlights the limitations of traditional FDI data for macroeconomic strategy, illustrating
that a country’s ability to attract large FDI flows into the economy does not necessary translate into
national fiscal revenue. Second, corporate conduits are used for tax avoidance purposes and raise
risks of illicit finance (Nesvetailova et al., 2020). Third, if used as corporate treasury centres, the
jurisdictional location of these entities is important, especially for developing countries, because the
operations they perform are very lucrative. If investments are mediated through foreign intermediaries,
and these intermediaries serve as corporate treasury centres, a considerable portion of the high-value
activities is clearly taking place elsewhere.
C. REGULATORY COMPLEXITY AND THE

FRAGMENTATION OF THE FIRM
The lack of harmonious regulation governing international trade and investment is widely cited as a
by-product of the regional integration initiatives that have increased during the last three decades. At
a broad level, this is the result of the historical layering of regional integration initiatives that originated
in the creation of trading blocks in the post-war years. More specifically, it is also an outcome of
the changes in the very nature of regional agreements – in scope, depth, type of participation and
coverage. Finally, the regulatory governance of regional integration is affected by the global politico-
economic context.
1. Regulatory complexity as a by-product of regulatory layering

As a result of regulatory layering, most regional and bilateral initiatives across trade and investment
have tended to expand in a manner not controlled by the multilateral regulatory framework. From
the perspective of large MNEs, the global economy has become a complex and uneven set of what
Douglass North called “the rules of the game of society.” These are national rules shaped by particular
states, their own macro-financial regimes and competition priorities, combined with a multilateral or
regional layer of rules and regulations superimposed on the national rules.
Figure 7.2 visualizes the complexity of the global regulatory landscape governing international
investment flows – known as the international investments agreement (IIA) regime. It shows all currently
active IIAs, pointing to the centrality of Europe as a global hub for international investment structures
and the key connecting role of OFCs, as well as the comparatively weaker presence of “attractor
states” in the developing South.
The multilateral investment regime is known to have many problems related to complexity and lack
of coherence, with treaties often exposing gaps and overlaps. In this respect, as noted by UNCTAD,
regionalization initiatives represent a rare opportunity to rationalize the regime and create a more
coherent, manageable and development-oriented set of investment policies. In reality, however,
regionalism has moved in the opposite direction, leading to a multiplication of treaty layers over time
(figure 7.3), making the network of international investment obligations even more complex and
prone to overlap and inconsistency (WIR, 2013). In effect, more than half a century after the first
bilateral investment treaty was concluded (between Germany and the Islamic Republic of Pakistan
in 1959), the multilateral investment regime has evolved from a system originally developed to foster
legal predictability in investment relations between countries to become a source of legal uncertainty,
debate and controversy (UNCTAD, 2020, p. 117).
196
Figure 7.2 International investment agreements, 2022
Source: UNCTAD Secretariat visualization based on UNCTAD investment agreements data.

Note: Only agreements that entered into force are represented.
Attracting FDI is now a key reason for developing countries to seek regional trade agreements (RTAs),
especially with the developed countries, as a way to join GVCs.5 Theoretically, one would expect
continued support for a multilateral regime governing investment – that is, a set of rules to protect the
rights of the corporation – among leading MNEs. However, because of the layering and multiplication
of treaties, the largest MNEs tend to already have access to investment treaties for most of their target
markets or can get such access with relative ease.
As illustrated by figures 7.2 and 7.3, Europe and OFC states serve as key hubs or conduit spaces
in providing such access. This might explain both the lack of corporate support for a multilateral
investment regime after its failure in the 1990s and the slow-down in the creation of new investment
treaties, as illustrated by figures 7.3 and 7.4 (Jandhyala et al., 2011). Unsurprisingly given the market
reach endowed in bilateral investment treaties, large MNEs tend to be less supportive of (and may
even oppose) a multilateral regime than they would have been without an existing bilateral investment
regime. This echoes arguments about preferential trade agreements, which similarly create opposition
to multilateral liberalization among beneficiaries (Mansfield and Milner, 1999; Bertz et al., 2021, p. 786).
VII
5
Balassa conceived his typology in the 1960s when the roles of FDI and cross-border production networks were less
important. The motives for reginal integration have been extended from the traditional area of trade into new areas, such
as investment and regional trade, both of which relate to deep integration (Kang, 2016).
197
Figure 7.3 The evolution of international investment agreements, 1957–2022
Pre–1995
1995–2008
Post–2008
Source: UNCTAD Secretariat visualization based on UNCTAD investment agreements data.

Note: The figure periodizes all active IIAs based on when the agreements came into force. The three periods captures
agreements in force pre 1995; agreements that entered into force between 1995 and 2008; agreements that entered into
force post 2008.
198
Figure 7.4 International investment agreements by type, 1957–2022
BITs in force BITs signed, not in force TIPs in force TIPs signed, not in force
4000
3500
3000
2500
2000
1500
1000
500
0
1957
1959
1961
1963
1965
1967
1969
1971
1973
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
2015
2017
2019
2021
Source: UNCTAD secretariat calculations, based on UNCTAD, Investment Policy Hub, International Investment
Agreements Navigator.
Note: International investment agreements (IIAs) are divided into two types: bilateral investment treaties (BIT) and treaties
with investment provisions (TIP). BIT is an agreement between two countries regarding promotion and protection of
investments made by investors from respective countries in each other’s territory. TIP brings together various types of
investment treaties that are not BITs.
By default, the visualizations presented in figures 7.2, 7.3 and 7.5 offer only a snapshot of the scope
of regional agreements and do not reflect the specifics of each deal and type of partnership. Yet they
do give a clue about the political geography of international trade and investment governance. While
RTAs (figure 7.5) broadly correspond to major zones of market integration and trade, as reflected by
the established regional blocs and wider participation of the developing countries, the network of IIAs
points to the central role of the European hub and OFCs as central nodes in the regulatory landscape
governing the corporate intermediation of FDI flows.
The outcome of this layering is the increasing regulatory complexity of the global economy; this
tends to disadvantage the developing countries seeking to establish new regional integration projects
and governance institutions (Kang, 2016, p. 243). For instance, bilateral investment treaties include
a dispute settlement clause that allows investors to sue host states, typically bypassing domestic
courts and allowing investors to bring international arbitration proceedings directly, most often at the
International Centre for Settlement of Investment Disputes or under the United Nations Commission
on International Trade Law arbitration rules. Originally based on a system of ad hoc confidential
VII
commercial arbitration between private parties, the legitimacy of the investor–state dispute settlement
system is now challenged (TDR, 2018). By mid-2019, investors had brought more than 1190 investor-
state dispute settlement cases against 130 countries, including 117 cases against at least 30 African
countries (EDA, 2020, p. 117; WIR, 2022, p. 73). The interplay between the legal infrastructure of asset
creation at the level of the corporations and the international financial system poses a set of challenges
not only to national and regional regulators, but also to the strategies of developmental regionalism
more generally (see box 7.2).
199
Figure 7.5 Regional trade agreements, 2022
Source: UNCTAD Secretariat visualization based on World Trade Organization data.

Note: Only agreements that entered into force are represented.
The introduction of IP laws in international trade and investment agreements has added further
complexity to such agreements in recent decades, largely to the detriment of the needs and interests
of the developing countries. The adoption of the Agreement on Trade-Related Aspects of Intellectual
Property Rights (TRIPS) by the World Trade Organization (WTO) in 1995 established binding multilateral
minimum standards on all WTO member states for granting and protecting the use of IP (i.e. patents,
copyrights and trademarks) in foreign markets.
The negative impact of these IP protection measures on the developing countries, particularly with
respect to the healthcare and pharmaceutical industries, resulted in the Doha Declaration in 2001; the
developing countries’ rights to use flexibilities and safeguards were reaffirmed in the Declaration and
clarified at the WTO Ministerial Meeting. However, despite these supposed safeguards, in practice,
the bilateral, regional and plurilateral agreements signed in recent years have included IP protection
provisions that are far more stringent than those envisaged in TRIPS. Such provisions, often referred
to as TRIPS-PLUS, include the expansion of existing obligations under the TRIPS Agreement (e.g.,
patent term extensions6), restrictions on the use of safeguards or flexibilities (e.g., compulsory licenses,7
parallel imports8), and the introduction of new provisions not even addressed by TRIPS (e.g., data
exclusivity9) (Correa, 2017). These provisions are often imposed on the developing countries as a
necessary component of international trade and investment agreements.
6
These are provisions to extend the duration of a patent beyond the 20 years required by TRIPS.
7
This provision gives the government the authority to grant permission to another party to produce a patented product
or process without the consent of the patent owner.
8
This provision refers to the purchasing of patented goods in a foreign market for their resale in the domestic market.
9
This provision means that for a specified period of time the regulatory authorities cannot rely on the originator’s safety
and efficacy data for the registration of generic versions of a drug.
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Box 7.2 Investment protection and climate change

One aspect of investment treaties subject to intensified scrutiny in recent years is the legal protection
of investments.10 The investor-state dispute settlement (ISDS) mechanism included in thousands of
investment treaties allows investors to sue governments for any action they claim violates their legitimate
expectations of profits. These cases can run into billions of dollars, often involving claims against future
profits: in July 2019, the Australian subsidiary of Tethyan Copper Company was awarded $5.8 billion
against the government of the Islamic Republic of Pakistan, more than 25 times the $220 million the
company invested in the project and 16 per cent of the entire Pakistan budget for 2018-2019 (Bonnitcha
and Brewin, 2020).
Cases are often initiated in response to public interest policies, such as financial regulation, public health,
land use, environment and social protection policies (Thrasher, 2021). Risk of exorbitant penalties curtails
governments’ right to regulate, causing a regulatory chill. Climate and environmental regulations are the
most common, most lucrative and fastest-growing trigger for claims (Salvatore, 2021). The fossil fuel
sector has been the most litigious, initiating 20 per cent of total investor-state disputes so far and winning
almost three-quarters of them (Salvatore, 2021).11
A recent study estimated the costs of possible legal claims from oil and gas investors in response to
government-led transitions in line with International Energy Agency’s 1.5°C scenario (IEA, 2021). It found
claims could reach $340 billion (Tienhaara et al., 2022). As a consequence of treaty shopping, this is an
underestimate of the true extent of protection of 1.5°C – incompatible oil and gas assets, with law firms
already advising investors to adjust corporate structures to avail themselves of ISDS benefits from climate
claims (Jones Day, 2022). Considering the total public climate finance in 2020 was less than this at $321
billion, these protections pose a significant financial risk, draining resources from necessary mitigation
and adaptation efforts.
The Energy Charter Treaty (ECT) which protects energy investments is the most commonly used
ISDS mechanism in the world. There is increasing awareness of the threat the ECT poses to a just
energy transition, with governments facing liability for a range of net zero actions, such as cancelling
pipeline developments and denying drilling permits. As a consequence, ECT members recently agreed
to a process of “modernization” to “align the ECT with the Paris Agreement and our environmental
objectives.” However, the “agreement in principle” did not go so far as to remove fossil fuels and other
carbon-intensive energy sources from protection and did not alter the basic mechanics of the Treaty to
shield corporate power from public policy decisions (European Commission, 2022).
As many more countries in Africa and the Middle East, Asia and Latin America are in the process of joining
the Treaty, litigation will drive up the bill for global transition, posing a barrier to sustainable and climate-
resilient development. Given the obvious threat to public interest and the failure of such investment
protections to deliver promised levels of productive FDI, governments should terminate their existing
Treaty (Moehlecke and Wellhausen, 2021).
VII
10
For UNCTAD’s work on this, please see: https://investmentpolicy.unctad.org/publications/1269/the-international-
investment-treaty-regime-and-climate-action and https://investmentpolicy.unctad.org/publications/1270/treaty-based-
investor-state-dispute-settlement-cases-and-climate-action
11
For breakdown see: https://investmentpolicy.unctad.org/investment-dispute-settlement
201
Although a central argument justifying the adoption of these IP protections is that they promote the
transfer and dissemination of technology, recent evidence suggests IP protections do not have a
positive impact on technology transfer to the developing countries (Kirchherr and Urban, 2018).
Rather, the inclusion of so-called TRIPS-PLUS provisions in international agreements is largely a result
of intense lobbying by large corporations seeking to leverage technological leadership to enhance
market power, set a barrier to market entry and create a source of super-profits (TDR, 2020).
Consequently, the IP provisions and frameworks in international agreements have shown an increasing
bias towards the excessive protection of private investor interests, often at the expense of wider public
interests (TDR, 2017). This is particularly the case when international agreements are signed between
developed and developing countries, evidenced by the fact that North-South agreements contain a
larger number of TRIPS-PLUS provisions than either North-North or South-South agreements (TDR,
2014; WTO, 2011).
The next section focuses on the fragmented corporation in the political economy of development to
reveal the role of control in global corporate groups. The analysis of the configuration of corporate
ownership structures offers important lessons for development, including through regional
arrangements, because when analysed in a systemic framework, they point to where value and
earnings stripping occur.
2. Legal implications of the use of subsidiaries

Section B included a description of the potential uses of intermediary subsidiaries of MNEs. The
importance of diverging functions of such intermediaries within corporate groups becomes clearer
in the context of the rules of incorporation and transaction. As mentioned above, each subsidiary is
subject to the rules of its country of registration.
Figure 7.6 presents a scheme of direct and indirect holding. In a direct holding, AC, the investment
is subject to the rules and regulation of country A and country C, to the bilateral trade and investment
treaties between the two countries and to multilateral treaties in which they participate. In an indirect
investment, A  B  C, the investment is subject to a much more complicated set of rules. The
investment takes the form of AB and is subject to the rules and regulations of country A and country
B and the bilateral and multilateral agreements between them, and between country B and country C
and the bilateral and multilateral agreements between them.
Indirect investment through intermediaries is more complicated, but it may have the advantage of
redirecting the rules under which the investment takes place. An MNC may react to a more favourable
environment presented by a regional trading agreement by locating an intermediary in the most
favourable jurisdiction in that agreement and direct most activities to that intermediary, thus denying
much of the coveted advantage of FDI to other countries in the region.
Figure 7.6 Direct and indirect ownership patterns
A B C
Source: Phillips et al. (2021).
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In a more sophisticated scenario, an MNC can use two intermediaries. One is located in a country
that is not part of a regional agreement but shares a bilateral agreement with one of the countries in
a regional agreement. The upper intermediary is then accessing the regional trading or investment
agreement through the lower subsidiary, whereas much of the actual activity is moving to the upper
subsidiary located in a country that is not part of the regional agreement. An even more sophisticated
scenario can involve three intermediaries in three different countries. These techniques of setting up
an intermediary can ensure that every regional agreement is “arbitraged.”
In a yet more sophisticated scheme known as a “put out” option, the corporation may move business
out of an entity via an apparently innocuous contract:
1. Company A in Country B has a business of producing widgets sold to distributors. It has a
turnover of 100 and makes a margin.
2. Company A is indirectly controlled by Company Z in the Global North.
3. Company Z prefers Company A’s business to be located in Country B.
4. Subsidiary B signs a contract with Company A. It will supply components to A; A will produce
the same widgets with these components and will deliver the finished widgets to B for the price
of manufacturing the widgets.
5. Company B sells the widgets to distributors.
6. End result: Company A gets enough to pay local production costs (mainly employees’ salaries
but nothing more); Company B now owns the business (it has the clients) and earns the margin.
In sum, the corporate world, particularly large MNEs, often manoeuvres the changing regulatory
environment at two main levels. First, while regional trade and investment agreements may well
encourage investment into the region, the way the investment is structured through subsidiaries is
crucial for the economic nature of the investment. The default assumption in FDI research is that
all investment is structured as a set of directly held subsidiaries, and those subsidiaries perform
operational activities (as above).
Second, MNEs can and, as shown below, do structure those investments indirectly through
intermediaries and ensure a considerable portion of operational activities takes place elsewhere. They
may do so because certain countries offer a better regulatory environment, lower taxation and other
advantages – as reflected in the phenomenon of the competition state. As detailed in box 7.3, there is
strong evidence to suggest countries have chosen to participate in the global economy by competing
over lucrative segments of corporate “parts.” Due to statistical anomalies discussed above, none of
these outcomes is picked up in FDI statistics.
The internal organization of corporate groups and the way subsidiaries relate to parent companies
and to each other are now recognized to play major roles in enabling corporate access to international
arbitration. The techniques can also come into conflict with national governments, especially in the
context of developing countries, where corporate groups arbitrage national rules through access
to investment treaties. Consequently, analysing the specific role of corporate subsidiaries in host
economies and mapping their linkages to their parent may point to a central way in which value and
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earnings are being created (and stripped) in the process of international business.
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Box 7.3 The competition State and OFCs

The neoliberal reforms of the 1980s gave rise to a development that remains at the centre of globalization,
including regionalization processes. With the hollowing out of post-war models of welfare states and the
rise of global markets, states became increasingly engaged in a peculiar competitive game, wherein “they
are competing for world market shares as the surest means to greater wealth and greater economic
security” (Strange, 1987, p. 564).
The phenomenon is known as the rise of a competition state – a process where key institutions and
policies of the state are adapted to the new conditions of the global market, and where the very concept
of the national interest is expanding to embrace the transnational dimension: the so-called competition
state is itself obliged by the imperatives of global competition to expand transnationalization (Cerny, 1994,
p. 225). One major implication of the transformation, as maintained in the Washington Consensus, is that
rather than directly controlling the economy, in order to compete for a share in the global marketplace, the
state is better off providing the conditions for generating growth (Palan and Abbot, 1996, p. 4).
The transformation has unfolded globally in the era of what Philip Cerny has referred to as “embedded
financial orthodoxy” – an extended phase of crisis marked by unstable cycles of boom and slump. In the
context of heightened fragility, the policy instruments available to the state have changed from tools of
fine-tuning to more blunt options, such as interest rates, while the central concern of financial stability is
to ensure a contagion-free environment conducive to further and deeper financialization (Cerny, 1993, p.
158). In parallel, economic policymaking has shifted from predominantly demand-side measures of the
Fordist era and the immediate post-Second World War decades to supply-side measures.
The broad principle of deploying state rules and regulations as a developmental strategy has achieved its
extreme form in some of the very small states in the world, particularly island economies in the Caribbean
and small states of Europe, who historically found it difficult to develop a strategy of competition based on
diversification of economic sectors. They learned to commercialize their sovereignty by offering a free and
liberal regulatory environment of low or zero taxation, secrecy and light regulation. By the early 1990s,
with over 40 states offering a variety of facilities for tax havens and offshore banking, the tax haven model
was, at least numerically, one of the most popular state strategies.
In effect, the strategy drew a new political and economic map, with each of the major and minor trading
blocs now surrounded by an archipelago of small tax havens (Palan and Abbott, 1996, p. 167). While
many of these states were initially accused of becoming tax havens, over time, their models of the
competition state became more sophisticated and targeted, and many established themselves as more
diverse OFCs (Haberly and Wojcik, 2022).
In Europe, with the creation of the European market and the concept of subsidiarity, states were given free
hand to determine their fiscal structure. Some began to compete to become the gateway for investment
into Europe (early 1990s). Some states targeted real investments, while others became conduits for
financial presence of chiefly United States companies, accommodating, in part, the hosting of corporate
treasury centres (Garcia-Bernardo and Reurik, 2019). Over time, these European attractor states drew
not only United States capital, but also European and Asian corporations. The effect of this structure
is that the services aspects of the investment value – the highest value-added of the value-creating
components – are being located in very specific jurisdictions, led by the Netherlands, Ireland, Luxemburg,
the United Kingdom and Switzerland. As a result, FDI into developing countries is rerouted through these
territories (Garcia-Bernardo and Reurik, 2019).
204
As Haberly and Wojcik (2022) recently noted, the institutional and historic legacy of European legal
frameworks looms large over the global web of not only offshore financial havens but also the global
financial system. Laws and institutions that once served the extraction of wealth now prove useful for
jurisdictional arbitrage (Haberly and Wojcik, 2022; Palan et al., 2010; Eden and Kudrle, 2005; Shaxson,
2011). The role of these tailored jurisdictional niches is key to the global pathways of FDI and the flows
of international finance as mediated by MNEs. These historical jurisdictional niches constrain the national
policy space available to governments when regulating the economy and pose a challenge to multilateral
attempts at economic governance (Robé, 2020).
As a result, the structural impact of the global architecture built by early regionalization initiatives is the
creation of regulatory layering: the regionalization initiatives are being layered onto each other, amplifying
complexity in the process. In this increasingly complex global economy, where the very process of
value creation and extraction proceeds in many stages across several economic and legal spheres,
typically involving multiple agents in many jurisdictions, financialization, including its legal and corporate
underpinnings, is the main channel that not only connects capital and regions, but also sustains the
value-creating operations of MNEs at the transnational level. Both dimensions of financialization pose
a spectrum of challenges for development in general and for the outcomes of regional integration in
particular.
D. CORPORATE ARBITRAGE AND

DEVELOPMENT: MAPPING CORPORATE
EQUITY CHAINS
It is clear that an understanding of whether or not regional arrangements can accommodate a strong
development dimension must address the issue of changing corporate structures, especially the
growing ability of large international firms to circumvent regulations and policies. Doing so requires
a more granular approach to FDI and includes the analysis of corporate organization and intrafirm
trade, of the sort pioneered by UNCTAD (WIR, 2015, 2016). The challenge that has so far impeded the
advancement of the analysis of corporate intermediaries and groups is two-fold.
First, the number of subsidiaries and groups has tended to multiply over the past few decades, making
it difficult to have an overview of the corporate organization at the aggregate level. Second, some
subsidiaries, especially indirectly held subsidiaries, do not acknowledge in their annual report their
relationship to the group or the parent of the group. Phillips et al. (2021) relied on the Orbis database
to chart the visual maps of the groups as whole (these were called equity maps). More specifically, the
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authors innovated an algorithm linking subsidiaries to the overall group, even when this relationship is
not formally declared. As a result, the technology visualizes all subsidiaries and affiliates.
With the authors’ permission and having access to their original database and the algorithm, the
following box combines the spatial mapping technique with the analysis of subsidiary accounting data
to gauge the degree to which investment in developing countries follows the phantom FDI pattern. The
more general goal is to establish to what extent jurisdictional arbitrage-seeking is a key feature of the
foreign investment patterns of multinationals.
205
Box 7.4 The CORPLINK study and its limitations for development research
The Corplink study examined the way the largest 100 publicly traded non-financial MNEs in the world
structure their investment in the Global South and around the world. It should be noted that many of
the largest companies from the developing economies are state-owned or partly state-owned, and the
Orbis database does not record any of the largest Global South MNEs in its top 100. As a result, there
is a bias of composition in the sample of companies: the top 100 largest non-financial MNEs tend to be
companies from the advanced economies. Importantly, however, the present analysis focuses on the
location and organization of subsidiaries, not on the flow of funds.
By definition, not all entities may have or report financial statements (they can be dormant, for instance).
Furthermore, countries’ record collection practices and filing requirements may influence whether records
exist in the Orbis dataset; companies, in turn, may seek out specific jurisdictions for secrecy reasons.
Indeed, the financial management practices of multinationals can mean economic activities are “booked”
in certain entities and not in others. All of this means it is normal for only a fraction of MNE subsidiaries
and affiliates to have visible financial reporting data; consequently, research should be taken as indicative,
not definitive.
1. Mapping corporate equity chains

The approach taken in this Report comprises a two-stage analysis:
Stage 1. Estimate the significance (if any) of indirect investment via third-party jurisdictions, as opposed
to a simpler form of investing directly, in the structure of investment between the parent company and
its subsidiary undertaking in a developing country.
To do this, we first identify all the corporate entities where equity ownership is traceable to the parent
multinational (i.e. the global ultimate owner or GUO). The “group subsidiaries” considered here
represent two types of equity holdings underpinning the foreign investment activities of a multinational:
i) Those entities where the estimated weight across an observed chain of equity holdings is
greater than 50 per cent. These entities are estimated to be “owned” and “controlled” by the
GUO; thus, their financial activities are most likely to be attributed to that GUO entity as part of
its consolidated accounting and financial reporting.
ii) Those entities with a discrete estimated equity value below 50 per cent and either directly owned
by a subsidiary as defined in (i) above or by the parent GUO itself. These entities represent the
“affiliates” of a group. All other sub-holdings of these entities are excluded from analysis, as they
pertain to investments relative to some other GUO outside the present research focus.
With this set of group subsidiaries defined, we focus on foreign incorporated holdings (relative to the
parent company) and differentiate these entities along two dimensions:
i) Foreign holdings incorporated in the Global North versus those incorporated in the Global
South.
ii) Foreign entities identified in terms of their direct versus indirect ownership structure. Direct
holdings are those where the GUO entity is the sole immediate owner and/or where all other
206
entities in a chain of intermediate shareholding to a foreign entity are incorporated in the same
jurisdiction as the parent. In contrast, indirect holdings are situations where a foreign subsidiary
is held via a known entity incorporated in a third-party jurisdiction (or jurisdictions) different from
both the GUO and the jurisdiction of the foreign holding in question. The results of this stage of
the study are presented in figures 7.7 and 7.8.
Stage 2. Differentiating between operational and asset-based subsidiaries.
We differentiate between subsidiaries presenting an income statement and those providing only a
balance sheet.12 We introduce an additional nuance to this classification by acknowledging income
statements can be “thin” presentations of only financial transactions and non-operating expenses. In
addition, some subsidiaries’ income statements may be dwarfed by large balance sheets, signalling a
stronger likelihood of the subsidiary being an investment vehicle.
We resolve this by making an additional quantitative assessment of the proportion of the two types of
activities in a given entity. We then define our categorization of MNE investments as “asset dominant”
when the income statement is less than 1 per cent. We take the mean average of all reported balance
sheet items and compare this to the mean average of all income statement items to determine whether
a subsidiary is likely to serve operational or merely financial purposes.13 The results are displayed in
figure 7.7.
All entities with financial reporting fall into two basic groups: those with income statement information
plus balance sheet reporting and those with only balance sheet data. Entities only reporting balance
sheet information are treated here as pure investment vehicles, because available evidence suggests
their role is primarily to manage some underlying asset.14 The presence of additional income statement
reporting requires further consideration, as this information does necessarily signify the presence of
substantive operations or “real FDI.” For instance, income statement reporting may only be a description
of relatively small administration costs of an enterprise managing a larger pool of financial assets.
To discriminate between operational and asset-based subsidiaries when both forms of financial
reporting are available, we compare a three-year weighed average of two indicative variables taken
from both areas of reporting. From the balance sheet, capital and total fixed assets are used as
comparative measures, with operating revenues and net income evaluated from the income statement
reports. We use a weighted average estimate for the latest three fiscal years. As the data were collected
in mid-2018 and reflect the state of available information in Orbis at that time, the three-year period
covered here is 2015 to 2017. Cases where the weighted average of the balance sheet is greater than
the weighted average of the income statement are classified as “asset dominant” situations, more
likely to be financial investments or phantom FDI cases than substantive operational investments of
the MNC itself. The results of this analysis are summarized in figure 7.9.
12
There are two forms of financial reporting at the level of a private subsidiary in Orbis: (1) balance sheet reporting and
VII
(2) income statement reporting. We identify several key components from both, if available, and compare them. If no
financial reporting is associated with an entity, the case is not part of the equity maps. If there are both balance sheets
and income statements, we use their comparative weight to gauge the type of economic activity associated with the
reporting entity.
13
For an explanation, see box 7.4.
14
Under English law, such companies are defined as dormant: these companies had no “significant” transactions in the
financial year (https://www.gov.uk/dormant-company/dormant-for-companies-house)
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Figure 7.7.A France indirect investment in the Global South
564 no. of observations

1
Direct holdings only
Indirect investment destinations
Mixed indirect destination and intermediary
No investments detected
Non Global South country
Netherlands Germany
United Kingdom
Belgium
Luxembourg
Spain Italy
United States of America South Korea
Japan
Thailand
Note: Number of corporate groups with FR GUO: 9; total holdings of FR GUO: 12,204; total foreign holdings: 7,414;
total holdings in the Global South (GS): 1,858; total GS holdings held by third party country: 809.
Figure 7.7.B Germany indirect investment in the Global South
1
Netherlands
United Kingdom
France
Switzerland
United States of America Spain
Singapore
Note: Number of corporate groups with DE GUO: 16; total holdings of DE GUO: 14,840; total foreign holdings: 10,552;
208
Figure 7.7.C Japan indirect investment in the Global South

1
Netherlands
United Kingdom
France
Spain Italy
United States of America Malta
Virgin Islands (British)
Singapore
Note: Number of corporate groups with JP GUO: 9; total holdings of JP GUO: 11,939; total foreign holdings: 9,240; total
holdings in the Global South (GS): 3,102; total GS holdings held by third party country: 1,285.
Figure 7.7.D Republic of Korea indirect investment in the Global South
1
Netherlands Germany
United Kingdom
Hungary
Hong Kong S.A.R.

VII
Singapore
Note: Number of corporate groups with KR GUO: 6; total holdings of KR GUO: 2,057; total foreign holdings: 1,611; total
holdings in the Global South (GS): 623; total GS holdings held by third party country: 209.
209
Figure 7.7.E United Kingdom indirect investment in the Global South

1

Netherlands
Switzerland
Canada
Virgin Islands (British)
Mauritius
South Africa
Note: Number of corporate groups with GB GUO: 6; total holdings of GB GUO: 6,057; total foreign holdings: 5,004;
Figure 7.7.F United States indirect investment in the Global South
1,200 no. of observations

1
Sweden
Netherlands
United Kingdom
France
Luxemburg Switzerland
Italy
Bermudas
Bahamas Hong Kong S.A.R.
Singapore
Source: UNCTAD calculation and visualization of equity holdings (2018), based on Orbis data as compiled by Corplink
in Phillips et al. (2021).
Note: Number of corporate groups with US GUO: 40; total holdings of US GUO: 34,893; total foreign holdings: 12,249;
total holdings in the Global South (GS): 3,130; total GS holdings held by third party country: 1,269.
210
2. Interpreting the results

Two key patterns emerge from our analysis. First, our examination of the top 100 MNEs shows large
MNEs tend to structure their FDI investments through intermediary subsidiaries, and those are typically
located in a developed country. Within this general pattern, there is a divide in the type of relationship
between the parent company and its subsidiaries in developed and developing countries: between
65 per cent and 80 per cent of subsidiaries in the Global North are held indirectly; the figure rises to
between 70 per cent and 95 per cent for investment in the Global South.
In other words, companies from every developed country that make it into the top 100 MNEs by
revenue hold a larger proportion of their Global South subsidiaries indirectly through intermediaries
compared to their holdings in the Global North.
The second pattern that emerges from the analysis is that those intermediaries tend to be located in
Europe, with very little in the way of investments flowing between the regional blocs. Figure 7.7 shows
the multinationals from all the GUO jurisdictions analyzed in our sample structure, with the majority
of their foreign equity investments using indirect holding structures. Moreover, the general tendency
across our sample (MNEs from Japan and Republic of Korea are exceptions) is that investments into
the Global South have a greater tendency to be structured indirectly than respective investments into
the Global North.
There are some important nuances in the data worth highlighting. Figure 7.7 provides a visual summation
of how the largest multinationals from six major economies structure their indirect investments in the
Global South. With around 35,000 equity investments, United States multinationals dominate the top
100 companies in the world (there are 40 United States multinationals in our sample).
However, United States multinationals have noticeably fewer investments going into the Global South
than corporations from other countries. For instance, less than 9 per cent of United States investments
are entities incorporated in the Global South. In contrast, Germany, France, Japan, Republic of Korea
and United Kingdom multinationals have, on average, 19 per cent of their investments located in the
Global South. As can be observed across the different exhibits in figure 7.7, subtle differences aside,
the largest multinationals share a tendency to structure their investment into developing countries
through intermediary subsidiaries located primarily in those advanced countries that serve as OFCs.
Unlike indirectly structured investments into developed economies, the overwhelming majority of direct
equity investments into the Global North are cases where the value of income statement reporting is
typically greater than balance sheet reporting (figure 7.9). This stark discrepancy is a further illustration
of how the substance and function of intragroup corporate financing are linked to the form of legal
structures managing those foreign investments. This difference is a managed one, likely to reflect the
reality that a differential regulatory pressure is exerted on subsidiaries in the Global North.
In contrast, both directly and indirectly structured equity investments into the Global South exhibit a
nearly equivalent distribution of phantom cases where, in our method of detection, the balance sheet
dominates the income statement (figure 7.8). Not only are these rates of incidence nearly identical
for each GUO country group, but they are also very similar to what MNEs are pursuing by making
indirect investments into the Global North. This consistency suggests that despite differing degrees to
VII
which multinationals use phantom foreign investments (this range typically falls between 20 per cent
and 40 per cent of cases), multinationals all have a “normal” level of demand for constructing foreign
investments in a phantom form.
211
Figure 7.8.A Shares of foreign equity holdings in corporate groups, by region and by jurisdiction
of global ultimate owner, 2018 (percentage of all holdings)
Global North Global South

100
90
80
70
60
50
40
30
20
10
0
CH DE BE ES FR GB IT JP KR LU NL
Source: UNCTAD Secretariat calculations based on Orbis corporate filings using CORPLINK algorithm.
Figure 7.8.B Shares of foreign equity holdings held indirectly through third-party jurisdictions,
by region and by jurisdiction of global ultimate owner, 2018 (percentage of holdings in the region)

100
90
80
70
60
50
40
30
20
10
0
CH DE BE ES FR GB IT JP KR LU NL
212
Figure 7.9 Shares of direct and indirect equity investment amounting to “phantom FDI”
within top 100 MNEs, by region and by jurisdiction of global ultimate owner, 2018 (percentage)
Global South Global North

Indirect equity investments Direct equity investments
US US
NL NL
LU LU
KR KR
JP JP
IT IT
GB GB
FR FR
ES ES
BE BE
DE DE
CH CH
0 20 40 60 80 100 0 20 40 60 80 100
Note: A “phantom FDI” is defined as a foreign investment into an equity holding, where the balance sheet dominates the
income statement.
Table 7.1. presents the summary of the results. Our study of corporate equity chains reveals that 26
per cent of indirect subsidiaries of top MNEs in the Global South present only a balance sheet as
evidence of their presence in a country, with no (or few) income statements that would reflect real
economic engagement with the host economy. The ratio of balance sheet dominant entities in the
Global South that are held directly by the country of the GUO is 22 per cent. In contrast, the proportion
of directly held subsidiaries of top 100 MNEs in the Global North that are balance sheet entities is
less than 1 per cent. Interestingly, in case of indirectly held subsidiaries in the Global North the ratio of
balance sheet only entities is 32 per cent.
These differences may simply reflect the fact that the more stringent regulatory pressures of the
developed economies do not apply to entities located in the Global South. Nonetheless, the empirical
point remains: the Global South has more cases where foreign investments take on a phantom form.
In other words, a considerable portion of large multinational subsidiaries in the developing countries
only maintain assets and perform very few operational tasks.
Table 7.1 Distribution of phantom FDI cases, by region and type of equity invesment
arrangement, 2018 (percentage)
VII
Directly held subsidiaries <1 22
Indirectly held subsidiaries 32 26
Total 23 24
Note: See note of figure 7.9.

213
The pattern is indirectly confirmed by other UNCTAD research. More specifically, UNCTAD found that
in 2021, the profitability of the largest MNEs doubled, reaching 8.2 per cent. The developed economies
saw the biggest rise in FDI inflows, reaching $746 billion – more than double the exceptionally low
level in 2020. In Europe, FDI rose in most countries, although half of the increase was caused by large
fluctuations in major conduit economies (UNCTAD, 2022, p. 10).
Our results suggest there is a North-South divide in the registration of value creation in the global
economy, with corporate players mostly relying on the financial, accounting and regulatory
infrastructure offered to them by competition states (e.g., the Netherlands, Luxemburg, OFC islands).
The majority of the developing economies, despite their efforts, remain structurally disadvantaged
in the global competition for capital, and there is a structural divide across two major spheres of
the global economy: corporate control and international investment. This divide is accentuated by
the regulatory architecture governing finance and the activities of the corporate sector itself. Until
these structural issues are adequately addressed, regionalization projects will not achieve their full
developmental potential.
E. CONCLUSION AND POLICY LESSONS

This chapter has featured an examination of the role of corporate arbitrage broadly and the function of
corporate equity chains specifically, across two dimensions.
First, at the level of global political economy, it appears that the inner financialization of the corporate
structure can serve as a tool for value extraction and earning stripping. In addition to corporate groups
themselves, the beneficiaries of this phenomenon tend to be the advanced countries, especially global
financial and corporate hubs located predominantly in Europe and the OFC islands.
Second, at the level of the multinational corporate investment activity, the transformation of the inner
corporation paralleling technological, financial and regulatory shifts in the global economy (often referred
to as the fragmentation of the firm) has meant that notwithstanding the macro-financial data on FDI
flows, the economic substance of international investment, including in the developing countries, is
often structured much like a variant of asset management.
In other words, a fifth of directly held subsidiaries of top 100 non-financial MNEs in the developing
countries only maintain assets and perform few operational tasks. In the Global Norh, in contrast, the
ratio of such subsidiaries in the corporate structure examined in our sample is less than 1 per cent.
This stark contrast between the type of corporate activity in the Global North and the Global South
warrants further research and policy attention.
Some lessons from the study relate to two aspects of corporate behaviour attracting increasing
attention: tax arbitrage and profit shifting. Success in attracting FDI is not, in and of itself, conducive
to making incoming foreign capital work for the host economy by, for example, helping it to increase
its productive capacity, levels of employment and welfare. Large corporate groups can be structured
in such a way that local subsidiaries exploit the local economic advantages in the form of inexpensive
labour, natural resources and so on, while other subsidiaries in the corporate group located in other
jurisdictions contribute to and benefit from the value extraction via the localization of profits, low taxes
and other types of corporate arbitrage.
the fiscal space of any host economy. Developed countries can potentially offset a significant part of
interest and capital gains, which themselves tend to be boosted by higher rates of global corporate tax
214
this way. These countries face an additional disadvantage in the long term: their cost of borrowing
is higher, usually several times higher, than that of the advanced economies (Garcia-Bernardo et al.,
2022).
Against this global context, the structural asymmetries described above pose challenges to the
developmental impact of regionalization efforts. As shown in the chapter, the global corporate-financial
regulatory architecture favours private corporate and financial interests and is often guarded by the
policies of advanced states. In the absence of a developed set of multilateral regulatory standards
and a systemic framework of regulation, the developing countries need to build the relevant financial,
accounting, legal and data expertise, with a view to enhancing the visibility of corporate behaviour at
the global level. Earlier work by UNCTAD suggested policymakers in some countries have started to
develop a range of mechanisms to safeguard the effectiveness of foreign ownership rules, including
anti-dummy laws, general anti-abuse rules to prevent foreign control and disclosure requirements
aimed at monitoring ownership-based and non-ownership-based control (WIR, 2016).
But these initiatives remain in their early stages and are selective. The central role of legal and financial
infrastructure in corporate arbitrage and value extraction poses a particular challenge to developmental
regionalism and regional institution-building. Therefore, an attempt to consolidate available resources
at the regional regulatory level could be an important first step towards harmonizing regulatory policies
and curbing – at least at the regional level – opportunities for corporate arbitrage.
In this instance, while many recent efforts by international organizations take a major step towards
global tax justice and corporate transparency, these efforts have evolved separately. A more integrated
approach towards a systemic multilateral system of measures of corporate and financial regulation
is needed to address the power and economic asymmetries dividing developed and developing
countries.
The development of such an integrated approach can start on the basis of the initiatives already
undertaken at the international and regional levels. For instance, it is clear from the study discussed
above that reform measures aimed at tracing tax arbitrage by corporations have to be connected
with closer policy attention to advancing FDI statistics. Similarly, corporate accountability measures
implemented in the developed countries need to take a closer look at the role and type of corporate
subsidiaries and the nature of their de facto (as opposed to de jure) economic activity. The availability
of reliable data on corporate financial behaviour, professional expertise and dedicated regulatory
mandates at national levels can play a key role here. In light of the results of the study, the regulatory
solution to corporate rent-seeking needs to start from the Global North.
In this respect, it is encouraging that the European Union is the first regional power to seriously consider
making it mandatory for large companies operating in the region to spell out the details of their group
of subsidiaries in corporate registers. This is an important step towards public control over corporate
behaviour at the regional level (Foroohar, 2022). Although it is being challenged by countries’ concerns
about potential revenue losses from data sharing, if implemented and integrated with similar efforts in
financial regulation, it can represent the first step towards a wider set of multilateral systemic measures.
And while the phenomenon of corporate and financial arbitrage and rent extraction is by definition
multi-faceted, United Nations agencies, especially UNCTAD, are in a unique position to lead a program
VII
of reform, capitalizing on the relevant expertise of the organization. UNCTAD’s earlier work on the
multilateral investment regime focused on treaty shopping and international corporate complexity.
Today, the broader goal would be to formulate a multilateral and multi-layered strategy representing
the interests of the developing countries and addressing the negative consequences of corporate rent-
seeking and financial arbitrage in a systemic manner.
215
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Development prospects in a fractured world :

Global disorder and regional responses

Requests to reproduce excerpts or to photocopy should be addressed to the Copyright Clearance

This publication has been edited externally.

United Nations publication issued by the

Global Trends and Prospects........................................................................................ 1

A. Too close to the edge...................................................................................................... ......... 2

Trends in International Markets.................................................................................... 41

South-Led Integration in a Fragile World...................................................................... 69

A. The long shadow of past and present mistakes............................................................... ......... 70

References........................................................................................................................... ......... 107

Regional Integration: Issues at Stake............................................................................ 113

A. Introduction.................................................................................................................... ......... 114

B. Regionalism: Concept, Evolution, Challenges................................................................... ......... 115

C. Developmental Regionalism: Key Challenges................................................................... ......... 118

References .......................................................................................................................... ......... 124

Trade Regionalism and Development........................................................................... 125

A. Introduction.................................................................................................................... ......... 126

B. Recent patterns in regional trade: developmental impacts of regionalization................... ......... 126

C. Development-oriented trade integration and regional value chains.................................. ......... 138

E. Towards a complementary relationship between regionalism and multilateralism........... ......... 149

References........................................................................................................................... ......... 151

Regional Development Finance: Progress and Challenges............................................ 155

A. Introduction.................................................................................................................... ......... 156

B. Regional providers of foreign exchange liquidity in times of crisis.................................... ......... 157

E. Conclusions and policy recommendations....................................................................... ......... 180

References .......................................................................................................................... ......... 182

Multinationals, Development and Corporate Arbitrage.................................................. 187

A. Introduction.................................................................................................................... ......... 188

B. Corporate control, investment and the expansion of MNEs.............................................. ......... 190

C. Regulatory complexity and the fragmentation of the firm................................................. ......... 196

E. Conclusion and policy lessons......................................................................................... ......... 214

References........................................................................................................................... ......... 216

6.4 Multilateral disbursements to developing countries by institution, 2018–2020..................... ......... 167

1.1. World output growth, 1991–2023............................................................................ ........ 13

List of charts in boxes

1B2.1 Decomposition of United States consumer inflation, measured by personal

Close to the edge

A. The inflation spectre haunting the world

B. Growth prospects through the fog of war and inflation

D. Trends in international markets

E. The challenge of institution building in a divided world

2. Regional development finance

3. Confronting corporate arbitrage

A. TOO CLOSE TO THE EDGE

2. Global stagflation: spinning back down the years

Source: World Bank (2022). 

All energy Oil Gas Developed economies (left axis)

1965 1975 1985 1995 2005 2015

Total Government Private Advanced economies EMDEs

Source: World Bank (2022). Source: World Bank (2022).

3. Global stagflation redux: bad news on the doorstep

B. GROWTH PROSPECTS THROUGH THE FOG

1. Global growth and inflation outlook

Table 1.1. World output growth, 1991–2023 (annual percentage change)

GFC (Year T=2009) COVID (Year T=2020)

GDP Pre-Covid trend

Figure 1.10 Expected output gap in 2023 in G20 countries (percentage)

Source: IMF (2022) World Economic Outlook (July update).

Source: World Bank (2022).

Source: Federal Reserve of San Francisco.

Source: Bureau of Labor Statistics.

Source: UNCTAD secretariat calculations based on OECD data.

Source: UNCTAD secretariat calculations based on Refinitiv.