Multipolarity to Bring Benefits and New Challenges to the Developing World
A more multipolar global economy will, on balance, be positive for developing countries as a whole—though not necessarily for each of them individually. Growth spillovers—flowing from trade, finance, migration, and technology channels— will induce technological transfer, spur demand for exports, and improve the terms of trade in developing countries as well as enable them to develop their domestic agricultural and manufacturing industries. For example, since 1990, bilateral trade f lows between the least developed countries (LDCs) and the major emerging economies have increased threefold; trade with emerging economies now accounts for a greater share of LDCs’ bilateral trade flows than their trade with major advanced economies. Moreover, a more diff use distribution of global growth will also create new external growth drivers, meaning that idiosyncratic shocks in individual growth pole economies will have less impact on the volatility of external demand in those countries than at present. This characteristic was evident in the aftermath of the 2008–09 financial crisis, when cross-border M&A originating in emerging economies accounted for more than a quarter of the value of all deals in 2009 and 2010. Greater multipolarity could also have a tangible effect on patterns of foreign aid, as increased aid disbursements by emerging economies push official development assistance to even greater shares of gross national income in LDCs.
The effect of an increasingly multipolar global economy is likely to differ across countries, however, and LDCs—many of which are heavily reliant on external demand for growth—are at the greatest risk of not being able to adapt to risks created by the transformation. LDCs that are net importers of commodities and mineral resources may face higher global prices because of increased global demand for raw materials. Even in cases where LDCs are net commodity or resource exporters, export-biased growth in LDC economies runs the risk of immiserizing growth. For LDCs with floating exchange rate regimes, critical elements of their response to a more multipolar global economy will be development of institutional policy frameworks, market microstructure, and financial institutions that can ensure the smooth functioning of foreign exchange markets.
Multilateral institutions can play a role in ushering in this new multipolar world by providing technical assistance and promoting policy learning forums that enhance understanding of the process of transition to a multipolar world economic order. Efforts to raise awareness and equip policy makers in developing countries with the necessary policy tools and financial capacity would help the policy makers to better position their countries in response to expected future challenges and risks, while capitalizing on their countries’ strengths and opportunities. Aid and technical assistance from international financial institutions to LDCs also have the potential to cushion the economic shocks and lessen volatility in the LDCs’ economies as they seek to adapt to the global forces involved in this transition. Furthermore, cross-border investment could also benefit from a multilateral framework similar to the World Trade Organization. Meanwhile, the IMF is well positioned to take the lead in guiding reforms in the international monetary system, including providing support for the design of coordination mechanisms for a multicurrency regime that would limit currency volatility and, hence, help LDCs mitigate external exchange rate risks.
Major transitions such as the one currently underway in the global economy always present challenges, because they involve large uncertainties and necessitate complex policy responses. The transition at hand is not just a matter of leaving behind old economic paradigms. Rather, it is about establishing the appropriate mindset and the proper policy and institutional responses—in developing countries, developed countries, and multilateral institutions—to facilitate the transition to, among other matters, better development outcomes. Developing countries have made considerable progress in integrating themselves into, and expanding their profile within, the traditional channels and institutions of international trade and finance. But much work remains to ensure that developing economies adapt to the transition now under way in the global economy in a manner that allows them to share the burden of system maintenance commensurate with their increased stakes in an open international system. It is also critical that major developed economies simultaneously craft policies that are mindful of the growing interdependency associated with the increasing presence of developing economies on the global stage and leverage such interdependency to derive closer international cooperation and prosperity worldwide.