By IDN World Economy Desk
BERLIN - The South Centre, an intergovernmental organization of developing countries, has good news about developing economies. Contrary to the view promoted by ‘establishment institutions like the IMF’ (International Monetary Fund), recent events show that major developing countries have not “decoupled” their economies from those of advanced ones, avers Yılmaz Akyüz, chief economist of the Geneva-based organization.
In another analysis, Akyüz says: “Workers’ remittances have emerged as a major source of external financing for Developing Countries (DCs) in the new millennium, second only to FDI (foreign direct investment inflows)”.
Akyüz was the Director of the Division on Globalization and Development Strategies at the United Nations Conference on Trade and Development (UNCTAD) when he retired in August 2003 and later joined the South Centre established by an intergovernmental agreement, which came into force on July 31 1995.
In an analysis titled The “Decoupling” Debate, published in the South Bulletin, Akyüz writes: “Developing countries experienced exceptional GDP growth before the outbreak of the crisis, averaging at an unprecedented 7.5 per cent per annum during 2000-08 while growth in advanced economies (AEs) remained relatively weak. This was widely interpreted as decoupling of the South from the North, including by the IMF.”
“Presumably,” he adds, “decoupling in this sense does not imply that the South has become economically independent of the North – something that would be far-fetched given closer global integration of developing countries. Rather, it should mean increased ability of DCs to sustain growth independent of cyclical positions of AEs by pursuing appropriate domestic policies and adjusting them to neutralize any shocks from the North.”
Decoupling was discussed in the paper ‘The Staggering Rise of the South’, Akyüz published in March 2012. Several authors cited in that paper showed that “business cycles understood as deviations from trend or potential output continue to be highly correlated".
On a more fundamental question of whether there was an upward shift in the trend (potential) growth of DCs relative to AEs, the paper concluded that “the pre-crisis acceleration of growth in DCs was due not so much to improvements in their underlying fundamentals as to exceptionally favourable but unsustainable global economic conditions”.
These included a surge in their exports to AEs, booms in capital flows, remittances and commodity prices, largely resulting from property and consumption bubbles in the US and Europe, rapid growth of international liquidity and historically low interest rates.
The South Centre’s chief economist informs: “The IMF has now ‘refined’ its position on the question of decoupling, revisiting the issue in IMF WEO (October 2012: chapter 4) under ‘Resilience in Emerging Market and Developing Economies: Will it last?’
“In a quantitative analysis, lumping together more than 100 emerging market and developing economies (with per capita incomes ranging from $200 to over $20.000) and examining their evolution over the past 60 years, it has concluded that ‘[t]hese economies did so well during the past decade that for the first time, [they] spent more time in expansion and had smaller downturns than advanced economies’.
“Their improved performance is explained by both good policies and a lower incidence of external and domestic shocks: better policies account for about three-fifths of their improved performance, and less-frequent shocks account for the rest.” (IMF WEO, October 2012: 129. Italics in original.)”
Akyüz adds: “’Good policies’ that the IMF has found to have improved performance in DCs include ‘greater policy space (characterized by low inflation, and favourable fiscal and external positions)’ created by ‘improved policy frameworks (countercyclical policy, inflation targeting and flexible exchange rate regimes)’. No robust link could be found between structural factors including trade patterns, financial openness, capital flows and income.”
The other study, also published in the South Bulletin, finds that “worker’s remittances have followed broadly the same pattern as private capital inflows, expanding at a rate of 20 per cent per annum during 2002-08”.
Remittances hit the peak of some 2 per cent of the GDP (gross domestic product) of DCs taken together in the middle of the decade, mostly from migrant workers in the EU, followed by the US. Akyüz finds that for several DCs, remittances served as “an important source of current account financing, at a rate of more than 3 per cent of GDP in India and Mexico and over 10 per cent in Bangladesh and the Philippines”.
Surprisingly the crisis in the US and EU did not have a strong impact on total inflows of remittances to developing countries even though these economies account for a very large proportion of total remittances and they have experienced sharp increases in unemployment after 2008, writes the South Centre chief economist.
He adds: “In nominal terms, remittances registered a small decline in 2009 followed by a moderate recovery afterwards, and are estimated to have reached $400 billion at the end of 2012. However, this has not been sufficient to reverse the decline in percentage of GDP of the recipient countries. At the end of 2012 they are estimated to have amounted to 1.7 per cent of GDP, compared to over 2 per cent during the pre-crisis peak.”
Akyüz explains: “Traditionally, remittances to DCs have generally served to support consumption of families and relatives in the countries of origin of migrant workers and financed mainly from their current earnings. However, existing statistical recording of these flows do not allow a precise determination either of the origin or of the final use of these transfers. They may actually be funded from accumulated savings of workers abroad and/or used in their countries of origin not for consumption but for investment in property or financial assets.”
He continues: “The continued increase in remittances to DCs after sharp rises in unemployment and declines in wages in the crisis-hit Advanced Economies (AEs) suggests that a greater proportion of these may have actually come from accumulated savings rather than current earnings of migrant workers.”
In the same vein, Akyüz adds, these might have been increasingly used for investment rather than consumption. “In other words, they may be like capital flows rather than unrequited transfers. Increased rates of return on real and financial assets in DCs relative to AEs and the change of the risk perceptions against AEs may have encouraged such transfers. This has the implication that in the event of a shift in relative risk-return profiles of investments in AEs and DCs, these flows may well be reversed in the form of increased capital outflows from DCs.” [IDN-InDepthNews – December 20, 2013]
Photo: Remittance advertising in Oxford Street, London with Polish and Russian slogans. Credit: Kaihsu Tai | Wikimedia Commons