By Lawrence Summers

The falling dollar generates anxiety almost everywhere. Americans and those dependent on American growth worry about the proverbial "hard landing" as inflation and interest rates rise with a weakening dollar, causing asset prices and output to fall. Europeans and others with currencies that float freely against the dollar worry that their currencies will bear a disproportionate share of the dollar’s decline and appreciate too far, leading to competitiveness problems. The falling dollar risks rising inflation, asset bubbles and the loss of macroeconomic control in countries that have tied their currencies to the dollar’s sagging mast.

The dollar’s decline may provoke anxiety but it should not be a surprise to anyone who has followed the global economy in recent years. History suggests that periods when a country’s economy turns down, short-term interest rates are declining and financial strains are increasing are likely to be periods when a nation’s currency depreciates. Moreover the US current account has for years now been financing consumption rather than investment, with the financing coming increasingly from debt rather than equity and shorter rather than longer-term debt.

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The writer is the Charles W. Eliot professor at Harvard University.

Small earthquake: few hurt. This is what the International Monetary Fund is saying in its latest World Economic Outlook: world output grew 5.4 per cent last year and will grow 5.2 per cent this year and 4.8 per cent in 2008, only 0.4 percentage points less than expected last July. What conclusion, then, are we to draw? Is a substantial financial shock at the core of the world economy nigh on irrelevant? The answer is: maybe so, but there are also appreciable risks.

According to the IMF, the world is in the midst of a period of growth unrivalled since the early 1970s. Between 2004 and 2008, it forecasts, global growth will average 5.1 per cent a year and the rate of growth of world output per head will average 4 per cent (see chart). The driver of global growth has been emerging economies in general and Asian emerging economies in particular. Between 2004 and 2008, says the IMF, growth of emerging economies will average 7.8 per cent a year, while high-income countries will average only 2.7 per cent. Never before has world growth been so much higher than that of high-income countries.

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Globalisation was supposed to mean the worldwide triumph of the market economy. Yet some of the most influential players are turning out to be states, not private actors. States play a dominant role in ownership and production of raw materials, notably oil and gas. Now states are also emerging as owners of wealth. This is creating widespread concern. Does that narrow focus make sense? The broad answer is No.

Fevered attention is currently focused on so-called "sovereign wealth funds". As Standard Chartered shows in an intriguing analysis, carried out with input from Oxford Analytica, these are not a new phenomenon: the oldest dates back to 1953. But today there are more funds, with far more money at their disposal than before. In all, they control some $2,200bn, with $2,100bn in the top 20 funds. The seven biggest belong (in order of estimated size) to Abu Dhabi ($625bn), Norway ($322bn), Singapore – GIC ($215bn), Kuwait ($213bn), China ($200bn), Russia ($128bn) and Singapore – Temasek ($108bn).

By definition, these funds exist because a country has a surplus of savings over investment that ends up in the hands of the government. In practice, this has happened for two reasons: ownership of commodity wealth (particularly oil and natural gas), and what amounts to forced savings from an export-oriented manufacturing economy, as in the cases of China and Singapore.

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The world economy is in its fourth year of buoyant growth. It has survived a host of perils: collapsing stock markets, terrorism, wars, soaring prices of oil and other commodities, protectionist pressures, a failing round of multilateral trade negotiations and persistent "global imbalances".

Yet new challenges are emerging – notably, this summer’s crisis in credit markets and the weakness in the US housing market – that may prove harder to cope with. At best, big adjustments lie ahead. At worst, the world economy may face a period of upheaval.

The driving forces behind today’s buoyant world economy are globalisation and the entry of countries with almost limitless human resources. China and India contain between them not far short of two-fifths of the world’s human population. The developing countries of east and south Asia contain slightly more than half of all the people on the planet and more than three times as many people as do all of today’s high-income countries.

The entry of these nations into the modern world economy is an event that falls short only of the industrial revolution in significance.

Driven by the collapse in the costs of collecting and communication of information, the low costs of transport by sea and air and ongoing economic liberalisation, the new players are becoming increasingly significant in world output, trade, consumption of resources and supply of capital.

In the first decade of the third millennium, the growth of the advanced countries has been remarkably weak. What has been outstanding is the soaring growth of the emerging economies. Never before has the gap between the performance of emerging and advanced countries been so large.

The remainder of the column can be read here. Comment from our expert panellists appears below.