Table of Contents

  • According to this year’s Trade and Development Report, if the current momentum in the world economy is sustained, we can expect decisive progress towards the Millennium Development Goals. Moreover, the Report shows that there has been growing demand around the world for developing-country exports – including those that are of crucial importance for their economic fortunes.

  • The classification of countries in this Report has been adopted solely for the purposes of statistical or analytical convenience and does not necessarily imply any judgement concerning the stage of development of a particular country or area.

  • Since 2002, world economic expansion has had a strong positive impact on growth and helped support progress towards the United Nations Millennium Development Goals (MDGs). Most developing countries have benefited from this growth momentum as a result of strong demand for their exports of primary commodities and, to an increasing extent, of manufactures. In addition, a number of other changes in the external environment for development over the past 10 to 15 years have benefited individual developing countries in different ways, depending on their economic structure and state of development. These changes include some improvements in market access, provision of debt relief and commitments by donors to substantial increases in ODA, as well as new opportunities to benefit from FDI and increasing migrants’ remittances. In order for all developing countries to reach the MDGs and to reduce the large gap in living standards with the more advanced economies, the global partnership for development, stipulated in Goal 8 of the MDGs, needs to be strengthened further. Much depends on the ability of developing countries to adopt more proactive policies in support of capital formation, structural change and technological upgrading, and on the latitude available to them in light of international rules and disciplines.

  • Since 2002 the performance of the world economy has had a strong positive impact on growth and poverty reduction in the developing countries, thereby contributing to progress towards the Millennium Development Goals (MDGs). The expansion of world output continued unabated in 2005, with a growth rate of 3.6 per cent. Output is expected to expand in 2006 at a similar pace as in 2005. High prices for oil and industrial raw materials and a tendency towards more restrictive monetary policies as well as turbulence in the financial markets have not yet had a significant negative impact on global growth. Nevertheless, the risks of a slowdown are increasing.

  • Policy reforms undertaken by developing countries in the 1980s and 1990s were strongly influenced by the international financial institutions, which emphasized stabilization and liberalization. Through their lending activities and political support from the major industrialized countries, the International Monetary Fund (IMF) and the World Bank were able to exercise considerable leverage on the design and implementation of developing countries’ macroeconomic and development policies. The new policy agenda, which came to be labelled the “Washington Consensus”, evolved over time, incorporating additional elements in response to the disappointing outcomes of reform programmes and to criticism that emanated from the international policy debate.

  • The external environment for development continues to be determined by the growth performance, cyclical and structural changes as well as economic policy decisions of developed countries. In recent years, fast and sustained growth in the two developing countries with the largest populations, China and India, has added another dimension to this aspect of interdependence. However, although the growth dynamics of these two large Asian economies are increasingly exerting an influence on other developing countries, they themselves depend to a large extent on cyclical and structural changes in the industrialized countries.

  • Globalization is permanently changing the framework of national macroeconomic policy, offering opportunities as well as posing challenges and constraints. Many developing countries and economies in transition that opened their borders to international trade and private capital flows over the last quarter of a century have experienced crises triggered by the vagaries of the international financial markets. The “creative destruction” expected from the new openness has often been much more destructive than creative, leading to deep recessions and political crises.

  • The widening gap in relative income levels between rich and poor countries has been a major trend in the world economy over the past 250 years. On one estimate, the difference in per capita income between the richest and the poorest country in the world was about 5:1 before the Industrial Revolution; today this difference has increased to 400:1 (Landes, 1998). While the exactitude of these numbers is debatable, there can be little doubt that the world economy has been on a long-term path of substantial and growing divergence in relative productivity levels and living standards, both between developed and developing countries and among developing countries themselves.

  • In the preceding chapter it has been argued that economic policies in support of industrialization and technological upgrading need to aim not just at efficiency gains, but also, primarily, at strengthening the creative forces of markets to induce capital accumulation and promote innovation and productivity. The present chapter examines institutional and governance structures at both the national and international levels that are best suited to complement these policies.