In the last decade, the world saw a shift in economic development from the North to the South. The growth rate of developed countries slowed dramatically, whereas the economies of emerging countries started to develop rapidly. Nowadays, this trend poses a major dilemma for the international community. Given that national economies are tightly interconnected, it might be difficult to sustain the growth of emerging countries in the long term if developed countries continue to suffer from stagnation. In fact, the North represents the most important market where emerging countries sell their products. In order to avoid world stagnation, economists have urged for the implementation of measures to support the rise of the South while boosting the growth of the North.
To support economic development in the South, it is essential to elaborate a strategic plan concerning three dimensions: society, economy and politics. As far as society is concerned, many experts have highlighted that it is essential to improve the quality of life in emerging countries. In fact, sustainable growth, in the long term, depends greatly on the level of literacy, health (measures though life expectancy) and standards of living (measured through the GNI per capita). Improving the level of these indicators (which together constitute the Human Development Index) through financial aid will have positive effects both on the labour market, by reducing unemployment, and on the internal demand, boosting the level of consumption.
However, financial aids might not be sufficient and it might be necessary to stimulate private investments in order to sustain growth in the South. To achieve this purpose, emerging countries and foreign banks should support private initiative through microcredit (i.e. the concession of small loans to sustain entrepreneurship and alleviate poverty among people who lack steady employment). This inclusive strategy would foster a bottom-up growth by reactivating the productive potential of the lower classes of the emerging countries societies, thus reintroducing them in the national economic system.
In addition, economists have suggested that the quality of the political environment in emerging countries might have an influence on the trend of economic development in the long run. A number of emerging countries are periodically accused by the international community of violating fundamental human rights and oppressing their population. As many have emphasized , the spread of democracy and the protection of human rights would stimulate the rise of a middle class and the spread of entrepreneurship among the population of the South, which would assure growth in the long run.
Regarding developed countries, the three-level program based on an economic, social and political dimension again might prove to be the way-out from the current economic stagnation. Firstly, advanced economies should boost their internal demand through the implementation of expansive monetary policies. Indeed, quantitative easing can foster consumption: by injecting money into the national economy the population will have the impression of being wealthier (i.e. monetary illusion). Thus, people will be pushed to increase their level of consumption, which will have positive spill over effects on the national economy as a whole. In order to achieve this, governments could also act though and expansive fiscal policy, raising public expenditure or decreasing the level of taxation.
This would primarily mean investing in education, known to be one of the key elements to help economic growth. In particular, developed countries and their national strategic firms should invest in research and technology to improve their know-how and to compete more efficiently with emerging countries in the global market.
Finally, as many Keynesian theorists suggest, developed countries should abandon the laissez-faire approach, which lead to the present stagnation, and reintroduce market regulation. Indeed, they should elaborate an efficient market regulation system, which could combine and balance the need for protection of flagship products and the commitment (based on the Marrakech Agreements establishing the WTO) to remove trade-distortive barriers that hinder global competition. The urgency for common rules to avoid crises such as that of 2007 has further been underlined also by the main central banks, which are still suffering the loss of reserves used to bail out national banks and investment funds.
Up to the present, emerging countries and advanced economies have failed to implement these three-level solutions that could probably grant a great and worldwide sustainable growth. This is probably due to the lack of a common plan conceiving a joint action to address the economic development dilemma. Since states cannot face stagnation nor sustain economic growth individually, the international community should gather to elaborate a multifaceted common strategy. To be effective, this plan should necessarily include economic but also social and political reforms, since these dimensions are tightly interconnected and depend on each other.
[Photo credit: Lending Memo]