Slow growth, high debt, weak investment and the risk of fragmented trade are contributing to widespread discontent affecting developed and developing nations. Multilateral action and a revised international financial architecture are essential to address these challenges and support sustainable, inclusive growth.

The global economy, strained by crises and climate change, was experiencing slow growth and weak investment, and was unable to meet development needs, said international organisation the United Nations Trade and Development (Unctad) in its 'Trade and Development Report 2024'.

Macroeconomic and development policy needed a rethink, and there was an urgent need for global governance reforms across the global debt, financial and trade architecture, it said.

Multilateral action and a shift toward development-focused global finance were essential for helping countries to navigate the risks and opportunities of a new growth era to achieve sustainable development to address discontent, said Unctad secretary-general Rebeca Grynspan.

Despite opportunities for developing countries, owing to growth in South-South trade and demand for minerals driving the green transition, they faced mounting challenges in navigating a sluggish global economy.

A structural issue that underpinned many of the structural shifts was the diminishing role of manufacturing as an engine of development and growth. Manufacturing remained crucial for economic transformation, but its effectiveness as an engine of growth had been waning, highlighted Unctad macroeconomic and development policies branch globalisation and development strategies division head Anastasia Nesvetailova.

The comparative advantage of lower labour costs had diminished in relevance compared to modern industrial demands for higher skills and capital investment.

In 2010, only 18% of global trade was based on labour cost arbitrage. However, over the past two decades, manufacturing investment has halved while investment in service activities in the manufacturing sector surged to 70% of investments in 2023.

"This relative decline in manufacturing is a risk for advanced and developing countries because the loss of rewarding manufacturing jobs can fuel economic insecurity and a sense of social discontent.

"In response, many advanced economies are adopting new industrial and trade policies focused on addressing public discontent with globalisation. However, rising protectionism threatens the multilateral system where fair competition and market access remain essential for sustainable development," she said.

For many developing nations, a retreat from manufacturing exacerbated their reliance on commodities and hindered structural change, said Nesvetailova.

"This is evident in the global food system, which has shifted from a labour-intensive sector to a complex, financialised landscape dominated by a few under-regulated corporations. New technologies can also further accelerate the concentration of data in the hands of a few large companies," she said.

For example, despite Brazil's efforts to engineer soybeans for local conditions, the country was still exposed to vulnerabilities and concentration of key markets and sectors.

Brazil only captured around 36% of soy profits, as the economy relied heavily on foreign inputs for fertiliser and technology.

"This underscores the need for policies to integrate more effectively into complex value chains and along the whole process, including investment, research and development and intangible assets.

"A failure to respond to challenges posed by new technologies and ongoing financialisation will likely result in a significant portion of the global economy being controlled by large corporations and private entities, which will undermine inclusivity and public interest," Nesvetailova said.

Further, household incomes had dropped by 8% since 2020 owing to inflation, resulting in widespread social discontent across the world. Post-pandemic inflation, driven by supply chain disruptions and concentrated market power in key sectors, such as agriculture and energy, had eroded purchasing power in developing countries.

The report called for key policy shifts to ensure a sustainable and inclusive recovery, and to reverse trends of rising income inequality, stagnant real wages and jobless growth in developing economies.

Industrial policies that promoted economic diversification were required to address rising income inequality, stagnant wages and jobless growth.

These strategies should extend beyond manufacturing and consider the interplay between environmental, financial and technological factors, Unctad advised.

The report also urged countries to adopt a balanced approach to inflation and urged against over-reliance on monetary tightening.

Instead, it advocated for a mix of fiscal, monetary and regulatory policies to tackle the forces driving inflationary pressures, which should include concerted efforts to curb anti-competitive practices, address abuses of market dominance and reduce corporate concentration in key sectors.

"Monetary authorities should factor in how their decisions affect debt sustainability, financial stability and the financing of investment needs, particularly in developing countries."

Meanwhile, the slowdown in merchandise trade and rapid digitalisation calls for a rethink of development strategies, as the traditional model of manufacturing-led export growth becomes less effective and low-cost labour loses its importance in attracting foreign investment.

To address these challenges, developing countries should strengthen domestic industries, invest in renewable energy and implement strategic industrial policies to promote local production, thereby reducing reliance on imported fossil fuels and vulnerabilities to global shocks.

Countries should also foster regional trade and integration. Agreements such as the African Continental Free Trade Agreement and Association of Southeast Asian Nations Economic Community can help developing countries navigate the risks of fragmented trade and build more diverse and resilient economies.

Countries must also govern new technologies, the Unctad report advised.

"Urgent political action is needed to regulate emerging technologies, especially AI. Without global governance and agreed standards, the control of this key element of the world economy would be left in the hands of large corporations and private regulatory bodies, deepening inequalities and risks."

The Trade and Development Report 2024 urges countries to pursue new development

pathways focused on economic diversification, resilience and inclusive growth, moving away from only traditional manufacturing-led export models.

The green transition also presents new avenues for growth, especially through increased demand for critical minerals and raw materials, which are mostly in Africa and Latin America and are essential to drive the transition to electric vehicles, renewable energy and the digital economy.