Dr Anastasia Nesvetailova, Head of Macroeconomic and Development Policies Branch at UNCTAD, examines the financial challenges facing developing economies today
Q. The latest Trade and Development Report discusses a number of challenges facing developing economies today, such as weak global growth and a slowdown of global trade. It also flags the issue of the finance curse on development while calling for reforms to enable long-term capital for development. Could you elaborate?
A developed financial system and deep capital markets are essential for successful economic integration and development. But finance and banking are prone to speculative bubbles and instability, so the challenge is to get the balance right between the expansion of finance vis-a-vis the economy as a whole.
In an analogy to a resource curse, a ‘finance curse’ describes a situation where an outsized financial sector drains resources from other parts of the economy, without generating a sufficient share of well-paid jobs, while also creating systemic imbalances.
The UK’s experience offers a valuable lesson as it navigates its evolving approach to growth and integration. For decades following the ‘Big Bang’ of 1986, the UK’s competition strategy had been based on deregulated capital markets and expanding banking and financial sectors.
The City of London has risen to be the financial centre not only for Europe but the global economy, too. This rise in finance yielded some benefits, such as highly developed services and creative sectors and a world-leading asset management sector in London.
However, financialisation had progressed against the backdrop of deepening asymmetries – sectoral and regional – in incomes, wealth, employment and even access to public services, with London far ahead of other major cities and regions of the UK.
And while it was the legacy of the 2008-09 crisis and austerity policies that exacerbated much of social discontent in the run-up to the Brexit vote in 2016, its outcome was, in part, the voice against the system that appeared to serve the interests of global asset owners rather than those of the people of the United Kingdom.
Q. Are there lessons that countries and their developing economies can draw from this?
The policy challenges the UK continues to navigate highlight the importance of a balanced policy mix for shared growth and a strategic approach to international economic integration. As the global economy embarks on a new growth wave, driven by new technologies, energy transition and growing demand for commodities, these issues become more pertinent.
We know that in the developing economies, the link between the commodity price cycle and the financial cycle is much more pronounced than in the advanced countries. The rise of the Global South in the first decade of the millennium illustrates the point.
As the emerging and developing economies grew at unprecedented rates between 2003 and 2013, commentators enthused about ‘Lions on the move’, anticipating a decoupling of the buoyant global South from crisis-stricken North.
But once the commodity price boom stalled, it became apparent that in many economies of Africa and South America, commodity-driven growth between 2003 and 2013 was just that: a rise in export revenues driven by external demand. The end of that boom left the economies vulnerable to shocks and the slowdown of the global economy.
Q. Do you see similar risks today?
We do warn against such risks in two main areas. First, the global demand for materials needed for new technologies and the energy transition is projected to expand significantly by 2050. For countries exporting critical minerals and other commodities essential for the transition, it is vital not to repeat past policy mistakes and to design policies that can transform export revenues into long-term, sustainable and shared growth. Lessons from the economies of Asia, such as India, Vietnam, Indonesia and others that have invested in diversification, infrastructure and human capital, are particularly relevant to countries that want to avoid the negative consequences of deindustrialisation and additional costs of financial and commodity bubbles.
Second, asset bubbles are detrimental to societies because of the impact of financial crises. At the time, Andy Haldane called it the costs of banking pollution. With the global economy overdue a financial crisis, we have warned of risks hidden in the financialised commodity sectors. This specifically concerns global food trading, a system dominated by a handful of opaque, poorly regulated but very powerful corporations. Not only were they able to profiteer on market volatility in 2022-23, but during the period of price instability, the largest of them have vastly expanded financial investments. These de facto shadow banking activities go unnoticed, as the sector becomes more concentrated.
It was not that long ago that a similar expansion of unregulated and unnoticed financial operations put the global economy on the brink of collapse and forced governments to intervene with costly bailouts. As the global demand for food is projected to grow by 35-56% in the next two decades, financialisation and concentration of the global food commodity trading system need to come on the regulators’ radars.
