By Martin Wolf 

Two storms are buffeting the world economy: an inflationary commodity-price storm and a deflationary financial one. Last week I argued that exchange-rate regimes were a link between these distinct events. This week, let us look at how to sail on these storm-tossed seas.

The place to start is with the world economy as a unit. The more globalised economies become, the more appropriate it is to think of the world economy in this way. So what have we learnt about the world economy as a whole? The answer is that it is running into limits on resources, at least in the short term.

Our civilisation is based on fossil fuel. But since the end of 2001, the real price of oil has risen some six-fold. Today, the real price is higher than since the beginning of the previous century. As the World Bank notes in its Global Development Finance 2008, global oil supply stagnated in 2007. This, argues the report, “contributed to the large decline in stocks in the second half of 2007 and to sharply higher prices”*. These increases may prove temporary, as happened after the spikes of the 1970s, or permanent. We do not yet know.

The remainder of this column can be read here. Debate from our expert panel appears below.

By Martin Wolf

Inflation is always and everywhere a monetary phenomenon - Milton Friedman

What explains the combination of a “credit crunch” in the US with soaring commodity prices and rising inflation across the globe? Are these unrelated events or part of a bigger picture? The answer is the latter. So far this is not a return to the 1970s. But action is needed to keep this true.

Inflation is a sustained rise in the price level: the result of too much money (or purchasing power) chasing too few goods and services. A one-off jump in commodity prices is not inflation. Nor need such a jump cause inflation. But a continuous rise in the relative price of commodities is a symptom of an inflationary process.

The remainder of this column can be read here. Debate from our expert panel appears below.

Privatisation was one of the great achievements of the Thatcher era. But it is becoming increasingly evident that the transfer of monopolies into the hands of regulated companies that own, run and develop the assets is flawed. This is excessively costly to consumers. It is also an obstacle to investment in risky long-term assets such as airports, nuclear power , electricity and gas networks.

This is not to argue that privatisation is devoid of benefits. Where competition could be introduced into the newly privatised industry, as in the case of telecommunications, the gains were huge. Elsewhere, privatisation was the way to allow essential activities to escape from the dead hand of Treasury curbs on public investment. Private finance was more expensive, but investments were at least made.

Yet, as recent work by Oxford University’s Dieter Helm makes clear, it is time to review the model. The bundling together of different functions in one regulated entity, and the rules on costs, particularly of capital, need rethinking.

A regulated utility consists of a set of assets, an operating function and a co-ordinating function. The second, in turn, consists of two activities: running the business day to day and planning and implementing investment projects. Professor Helm argues, persuasively, that lumping all these together has led to inefficiency and a rip-off of consumers*.

The remainder of this column can be read here. Click through to read the debate from our expert panel.

By Martin Wolf

Is it possible for the vast mass of humanity to enjoy the living standards of today’s high-income countries? This is, arguably, the biggest question confronting humanity in the 21st century. It is today’s version of the doubts expressed by Thomas Malthus, two centuries ago, about the possibility of enduring rises in living standards. On the answer depends the destiny of our progeny. It will determine whether this will be a world of hope rather than despair and of peace rather than conflict.

The challenge is stark. World real incomes per head could rise 4.5 times by 2050 and world population by 40 per cent. This would mean a sixfold increase in global output, concentrated in the developing world (see charts). Is such an increase feasible? The answer he gives is: yes and no – yes, because changes in incentives, technology and social and political institutions would make a benign outcome feasible; and no, because the path we are now on is unsustainable. Professor Sachs is an optimistic prophet of doom. He falls in between those environmentalists who see no solution and those free-marketeers who see no problem. The remainder of this column can be read here.

Read the debate - contributors so far include Jeffrey Sachs, Paul Collier, William Easterly, Dennis Bennett and Brian Davey.

Today, almost two-thirds of humanity lives in high-income or high-growth countries. That proportion is up from less than a fifth 30 years ago. Unfortunately, the remaining 2bn live in countries with stagnant, or even declining, incomes. What makes this even more important is the worrying fact that some two-thirds of the 3bn increase in global population expected by 2050 will live in countries today enjoying little or no growth.

The overriding challenge is to shift more poor countries into the high-growth category. This is addressed by the recently published Growth Report, product of a commission consisting mainly of policymakers from developing countries, under the chairmanship of Michael Spence, a Nobel-laureate economist at Stanford University.

So what does the report contribute? Nothing useful, argued William Easterly of New York University (this forum, May 28). He suggested, instead, that its pragmatism represented “the final collapse of the ‘development expert’ paradigm that has governed the west’s approach to poor countries since the second world war”.

Thereupon, Professor Easterly promptly offered his own expert opinion, namely, that “more economic and political freedoms are associated with much less poverty”. This is true. But it is harsh, to put it mildly, for Prof Easterly to condemn the report when he offers what appears to be even emptier advice.

The remainder of this column can be read here. Debate from our expert panel appears below.

Read the debate - contributors so far include William Easterly, Michael Spence, Martin Wolf and Clive Crook.