Trade and Development Report 2016

Structural Transformation for Inclusive and Sustained Growth

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Development is a transformational process, combining a series of interactive and cumulative linkages to create a virtuous circle of enhanced resource mobilization, higher incomes, expanding markets and investment, leading to more and better jobs. Such a structural transformation requires selective government policies to shift a country's productive structure towards activities and sectors with higher productivity, better paid jobs and greater technological potential ‒ what is commonly called "industrial policies". The Trade and Development Report (TDR) 2016 highlights the central role of industrialization, given the higher productivity of manufactures in relation to other sectors. Manufactures can also generate strong cross-sectoral linkages (e.g. backward, forward, income and knowledge linkages) and complementarities that enhance productivity and employment growth in the primary and tertiary sectors. Countries that have been able to narrow the productivity and income gap with developed countries are those (mostly in Asia) that managed to expand investment, employment and productivity in their manufacturing sector in a sustainable way, which contrasts with other countries and regions affected by "stalled industrialization" or "premature de-industrialization". Successful structural transformation requires a comprehensive policy approach. This includes strategic policies for international trade, pro-growth macroeconomic policies to ensure high levels of aggregate demand and investment and a stable and competitive exchange rate, policies in support of the profits-investment nexus to provide finance for structural transformation, and closing tax loopholes through fiscal and regulatory measures that would bring greater transparency to corporate decision making and finance public expenditure that provides an enabling context for production upgrading and economic diversification.

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Current trends and challenges in the world economy

The world economy in 2016 is in a fragile state, with growth likely to dip below that registered in both 2014 and 2015. The mediocre performance of developed countries since the 2008–2009 economic and financial crisis is set to continue, with the added threat that the loss of momentum in developing countries over the past few years will be greater than previously anticipated. Without a change of course in the former, the external environment facing the latter looks set to worsen with potentially damaging consequences for their prosperity and stability in the short to medium run. More widespread contagion from unforeseen shocks cannot be ruled out, knocking global growth back even more sharply. The decision by the United Kingdom electorate to leave the European Union (EU) is such a shock.

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