In the latest release of the ‘World Economic Situation and Prospects’ for November, the United Nations Department of Economic and Social Affairs (UN-DESA) sheds light on the formidable fiscal challenges faced by governments in developing economies. These nations grapple with elevated levels of debt, soaring debt servicing costs, and substantial output losses triggered by the global pandemic crisis.
According to the report, more than fifty developing economies allocate over 10% of their revenues to interest payments, with 25 of these countries dedicating more than 20% of their revenues to this purpose. Furthermore, the pressing social and developmental needs in these nations have left governments with limited fiscal room and financial resources to pursue industrial and innovative policies. Among these countries, low-income nations find themselves in the most precarious position, as many teeter on the brink of debt distress or are already ensnared in a debt disaster.
The challenges are exacerbated by structural deficiencies in developing nations. Institutional capabilities remain weak, and innovation policies have suffered from a lack of political commitment. Additionally, these countries grapple with a shortage of scientific expertise and a workforce with limited skills. Innovation activities tend to concentrate in low-tech sectors, resulting in meager investments in research and development, limited participation by private enterprises, and insufficient collaboration with universities.
Given the current economic climate and prevailing industrial policy trends, the report highlights the formidable obstacles most developing economies will face in bolstering their productive and technological capabilities in the years ahead. The resurgence of industrial policy in developed nations, coupled with the growing political fragmentation of the global economy and the shifting of manufacturing away from many developing countries, may lead to reduced foreign direct investment (FDI) and fewer technology transfers to these nations.
Consequently, a wider technological chasm between developed and developing economies appears inevitable. Furthermore, the report warns of increasing risks of this divide expanding even further, especially in terms of research and development (R&D) investments, even within the realm of developing countries. In a climate fraught with a high risk of debt distress, low-income countries will continue to grapple with severe limitations in implementing industrial and innovation policies aimed at strengthening their productive capacities and facilitating the transition to green energy.
The UN report advocates that many developing countries remain entrenched in their static comparative advantages, failing to cultivate innovation and technological capabilities or target and harness their dynamic comparative advantages. Well-crafted and adequately funded industrial policies, strategically employing conditionalities, have the potential to bridge the gap between static and dynamic comparative advantages.
While some argue that developing economies, particularly the least developed ones, must first enhance their capital stock before delving into innovation, the report underscores that innovation is an ongoing learning process. Neglecting its development may lead to situations of “lock-in” and “path dependency” in commodities and low-productivity sectors, effectively trapping these countries in a cycle of underdevelopment.
