Sunday,22 July, 2018
Current issue | Issue 1165, (19 - 25 September 2013)
Sunday,22 July, 2018
Issue 1165, (19 - 25 September 2013)

Ahram Weekly

Spurring domestic consumption

A minimum wage is not only a prerequisite for social justice but also a means of spurring economic growth, according to a new UNCTAD report, writes Nesma Nowar

Al-Ahram Weekly

Over the past decade, the global economy has been changing in ways that have prompted individual countries, whether developed or developing, to change their economic priorities and policies.

With the global economy slowing down after the financial crisis of 2008, it has also become obvious that economies overly dependent on exports to support growth need to reconsider their strategies.

Developing countries and economies in transition need to move towards more balanced growth and to give a greater role to domestic demand in order to push their economic growth, rather than simply adopting export-oriented strategies.

The United Nations Conference on Trade and Development’s (UNCTAD) Trade and Development Report 2013, entitled “Adjusting to the Changing Dynamics of the World Economy” and released last week, reflects such new priorities.

The report cautions that a prolonged period of slow growth in developed countries will mean continued sluggish growth in their imports, something that should urge policy-makers elsewhere to reconsider development strategies overly dependent on exports.

Instead, the report says, development strategies should place a greater emphasis on encouraging local demand by pushing up wages. 

“In order to encourage domestic demand, this requires increasing the purchasing power of low and middle-income families who spend larger shares of their incomes on consumption,” said Mahmoud Al-Khafif, an UNCTAD representative, in a press conference launching the report last week in Cairo.

“This in turn would require setting a minimum wage and enacting progressive tax policies in a bid to integrate such income groups into the production process,” he added.

The report argues that prior to the financial crisis in 2008, buoyant consumer demand in some developed countries enabled the rapid growth of manufactured exports from industrialising and developing countries, which in turn provided opportunities for primary commodity exports from other developing countries.

This boom seemed to vindicate the idea of developing and transitional economies adopting an export-oriented growth model. However, such a model is no longer viable in the current context of slow growth in the developed economies, the report warns.

To address the prospect of a prolonged period of considerably slower export growth, policy-makers need to give greater weight to domestic demand, it says.

Gouda Abdel-Khalek, a professor of economics at Cairo University and a former Egyptian minister of supply and domestic trade, said that the report showed that the future outlook for exports was not promising, meaning that Egypt should reconsider its export-support programme and export destinations in the light of the current economic slowdown in Europe, Egypt’s largest trading partner.

Egypt allocated LE4 billion in the 2013/2014 budget to supporting export-oriented industries. This allocation, almost the same level as that of the previous year, has stirred a lot of reservations as it has been directed towards a few well-established exporters rather than to small manufacturers.

Abdel-Khalek echoed the UNCTAD view by saying that it was important to spur domestic consumption by setting fair wages, “which emphasises the importance of the social dimension for a healthy transitional period in Egypt.” He added that a large chunk of the government’s stimulus plan should be directed towards revisiting minimum wages.

The government is considering raising the minimum wage from its current level of LE700 to a new level ranging from between LE800 to LE1,000 a month.

The report also argues that in attempting to spur productive investment, developing countries and economies in transition should adopt a cautious and selective approach towards foreign capital flows, which may be needed for financing imports of inputs and capital goods, but have a tendency to create macroeconomic instability, currency appreciation, and recurrent boom-and-bust financial episodes.

It says that a large proportion of foreign capital inflows can be used simply to finance consumption or speculative financial investments that can give rise to asset price bubbles, lead to currency appreciation, and make domestic financial systems more fragile.

The subsequent drying up or reversal of inflows exerts pressure on countries’ balance of payments and on public and private-sector financing. “It’s time for Egypt to impose regulations on foreign capital flows because some are beneficial while others are harmful,” Abdel-Khalek commented.

The report says that what matters for developing countries is not simply access to external financing, but also control over how that financing is used. It calls on developing countries to rely increasingly on domestic sources of finance, the most important of which are profits and bank credits.

Economic policies should aim at encouraging the domestic investment of profits and at influencing the behaviour of the banking system so that it more consistently allocates credit to productive economic activities that will lead to job creation, sustained economic growth, and less vulnerability to global economic shifts.

In order to achieve a healthy economy, better regulation of the financial system is needed, the report says, adding that this requires aiming at both monetary and financial stability and at orienting the financial sector towards serving the real economy through restructuring the financial system, especially banking.

Such restructuring could include a larger and more active role for central banks, development banks, and specialised credit institutions.

“Monetary policy should play an active role in development policies, and it’s high time that the Central Bank of Egypt began to play a development role,” Al-Khafif noted.

The UNCTAD report says that central banks should enlarge their mandates and play a much more engaged role in stimulating investment through credit policy.

“Central banks should support maturity transformation in the banking system and encourage, or oblige, banks to provide more lending for the financing of productive investment,” the report says.

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