UN Trade and Development (UNCTAD) has released its latest Trade and Development Report, projecting global economic growth to hover at a stagnant rate of 2.7% for both 2024 and 2025. This marks a further dip from the average growth rate of 3% witnessed between 2011 and 2019, and is significantly lower than the 4.4% growth that characterized the years leading up to the 2008 global financial crisis. The report underscores the challenges posed by this “new low normal,” highlighting that such minimal growth will struggle to address critical issues like development goals, climate action, and easing the pervasive cost-of-living crisis affecting millions worldwide.

Historical Context and Current Trends

During the early 2000s, growth rates were markedly higher, especially in the global South. Between 2003 and 2013, emerging economies saw robust growth at an average of 6.6% annually. This economic boom facilitated significant progress in poverty reduction, infrastructure development, and expansion of essential social services. However, as the decade progressed, growth in these regions has slowed, averaging just 4.1% over the past ten years. Excluding China—a major economic powerhouse—the global South’s growth further declines to an average of 2.8%, aligning with the global trend of economic slowdown.

For developing nations, the repercussions of this deceleration are profound. Many economies now face increasing hurdles in managing rising debt, covering the costs associated with energy transition, and providing expanding social services. In addition, the global cost-of-living crisis has worsened conditions, with inflation eroding household purchasing power and leaving vulnerable populations in even more precarious positions.

Impact of High Interest Rates and Rising Debt in Developing Economies

High interest rates in advanced economies, coupled with depreciating currencies in developing countries, are creating a pressing debt crisis for many emerging economies. Countries in the global South, for example, are now allocating a growing share of their export earnings to service foreign debt, diverting resources away from essential development goals. UNCTAD’s report notes that debt servicing costs are surging, especially in nations heavily reliant on dollar-denominated loans, such as Ghana, Zambia, and Sri Lanka. These economies are especially vulnerable, as currency depreciation against the dollar compounds the real cost of debt repayment.

This debt strain is also affecting the funding available for crucial infrastructure projects, education, and healthcare services. Many developing countries now face difficult fiscal decisions—either cut back on public investment or seek financial aid. However, financial aid often comes with stringent conditions, as seen in recent International Monetary Fund (IMF) agreements with several African and Latin American countries.

Stagnation in Global Trade Growth and Rise of Services Sector

Global trade growth, once a significant driver of economic expansion, is also witnessing a notable deceleration. Between 1995 and 2007, trade grew at twice the rate of global GDP. However, since the 2008 financial crisis, trade growth has failed to keep pace with overall economic expansion. In 2023, for the first time in history, merchandise trade contracted by 1.2% despite modest global GDP growth. This marks a dramatic shift from the rapid trade expansion of previous decades and signals the growing shift towards services-led growth.

In response to the slowdown in traditional goods trade, the services sector has emerged as a potential growth engine. Services now account for approximately 25% of global trade, expanding at an annual rate of 5%. Areas such as information technology, creative services, finance, and healthcare are witnessing robust demand. However, despite these promising developments, the shift towards a service-based economy introduces risks of its own. Developing countries currently capture less than 30% of global services export revenues, underscoring a stark divide between advanced economies and the global South.

Within the creative services industry, for instance—valued at $1.4 trillion in 2022—advanced economies account for an overwhelming 80% of exports. This uneven playing field is further exacerbated by the rising importance of intangible assets such as brands, software, and patents, which are increasingly pivotal to value creation in global supply chains. Investment in intangible assets reached $6.9 trillion in 2023, growing three times faster than physical assets. For many developing economies, capitalizing on intangible assets requires substantial technological advancement and education investment, which remain out of reach for many.

Global Inequalities and Risks of Rising Social Unrest

The persistent economic disparities between advanced and developing economies contribute to rising global inequalities. The UNCTAD report highlights how this widening gap is not only an economic issue but also a potential driver of social instability. With limited growth opportunities, insufficient investment in public services, and escalating debt burdens, many developing nations face growing discontent among their populations. In regions such as sub-Saharan Africa and parts of Latin America, where high youth unemployment compounds economic grievances, there is an increased risk of social unrest and political instability.

Economic inequality also affects environmental sustainability. Developing nations, already struggling with limited resources, face immense challenges in addressing climate change. These countries need substantial investment to support renewable energy transitions and climate resilience projects, yet their ability to fund such initiatives is hampered by mounting debt and slow economic growth. Without adequate support from wealthier nations, these regions may be forced to continue relying on fossil fuels and other unsustainable practices, further exacerbating the global climate crisis.

Calls for Bold Action and Global Support for Developing Nations

UNCTAD’s report calls for “bold action” to address the pressing issues outlined. The organization stresses that without coordinated global support, the income gap between rich and poor nations will likely continue to widen. There are calls for advanced economies and multilateral institutions, such as the World Bank and IMF, to offer more favorable lending terms and debt relief for struggling economies. Additionally, international cooperation is needed to help developing nations build economic resilience, diversify their economies, and adopt new technologies.

In terms of actionable recommendations, the report advocates for:

1. Debt Relief Initiatives: Debt restructuring, moratoriums, or relief for developing nations could allow governments to reallocate funds toward development goals rather than debt servicing.
2. Increased Investment in Technology Transfer: Facilitating technology sharing could help developing countries modernize industries, build capacity in service sectors, and reduce dependency on primary commodities.
3. Promotion of Domestic Resource Mobilization: Encouraging local investment and reducing tax evasion through stronger financial systems can enable governments in the global South to raise additional revenue domestically.
4. Climate Adaptation Funding: A significant portion of international climate financing should be directed towards helping vulnerable nations adapt to climate change, particularly in areas such as agriculture, infrastructure, and disaster management.

Path Forward: Fostering Sustainable, Inclusive Growth

While the UNCTAD report paints a concerning picture, it also emphasizes the potential for developing countries to harness growth through strategic investment and reform. However, achieving sustainable growth requires a commitment to addressing structural inequalities and facilitating economic transformation. For instance, diversifying exports, investing in green technologies, and enhancing digital infrastructure can drive long-term growth. Countries like Rwanda, which has made strides in digital technology and green energy, demonstrate how targeted investments in education, technology, and governance reforms can foster resilience and sustainable development even amid global economic headwinds.

UNCTAD underscores the urgency of immediate and coordinated action. As the world grapples with climate change, demographic shifts, and technological transformation, addressing these intertwined challenges is paramount to ensuring a more equitable and sustainable global economy. The path forward will demand a commitment to inclusive growth that benefits both advanced economies and the developing world, ultimately building a more resilient and prosperous global future.

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Photo source: Google

By: Montel Kamau

Serrari Financial Analyst

30th October, 2024