Monthly Archives: August 2008

By Martin Feldstein Read more

By Lawrence Summers

With two wars still continuing and violence in Georgia dominating the foreign policy debate; and with the financial crisis and economic insecurity for families dominating the domestic debate, US international economic policy is receiving less attention in this presidential election year than usual. The limited attention it has received has focused on concerns about specific trade agreements, not broader questions of international strategy. That is unfortunate. The next administration faces the prospect of having to make the most consequential international economic policy choices in a generation at a time when the confidence of governments in free markets is being increasingly questioned.

The current distribution of regional economic power is unlike anything that was predicted even a decade ago. The rise of the developing world, its growing share in global output and far greater share of global growth, is perhaps a quantitative but not a qualitative surprise. The qualitative surprise is this: with almost all the industrial world in or near recession, much of the momentum in the global economy is coming from countries with authoritarian governments that are pursuing economic strategies directed towards wealth accumulation and building up geopolitical strength rather than improving living standards for their populations. China, where household consumption has now fallen below 40 per cent of its gross domestic product – which must be some kind of peacetime record – is the most extreme example. Similar tendencies, however, can be seen in other parts of Asia, Russia and other oil exporting countries.

Even before the slowdown in the industrial world, a striking feature of the global economy was the substantial net flow of capital from the emerging periphery to the industrial centre. Rising oil prices have geopolitical as well as economic consequences. The run-up in oil prices over the past year has generated more than $10bn (€6.8bn, £5.4bn) a week in extra revenues for Opec members. Asian export powers and oil exporters have enjoyed a vast accumulation of wealth, adding about $1,000bn a year in assets.

These shifts have affected almost every global economic issue. The pressure created by the investment of these surpluses was one of the big factors driving the excesses that preceded our financial problems. Concern about the flow of imports from countries that have pursued a strategy of export-led growth is a big reason for the protectionist backlash now being seen in the industrialised world. It is now recognised that meaningful efforts to address climate change require a framework that induces China and other emerging markets to co-operate.

It has become a cliché to suggest that the world’s institutional approaches to economic co-operation need overhauling to take into account the rising economic clout of emerging markets and the decline in dominance of the group of seven leading industrialised nations (G7). This is correct. The steps taken so far – the initiation of the G-20 during the 1990s and the adjustments of voting shares in international financial institutions – are valuable if insufficient. Read more

by Pranab Bardhan

As the petro-authoritarianism of Russia flexes its muscles and the economic prowess of China struts in Olympic glory, developing countries in the world might start rethinking about the lectures on democracy and development they have heard all these years from the West. This is at a time when advanced capitalist democracies are reeling under the shock of unregulated financial overreach and years of living beyond their means, a far cry from the end-of-history triumphalism of capitalist democracy of less than two decades back.

The Chinese case in particular is reviving a hoary myth of how particularly in the initial stages of economic development authoritarianism delivers much more than democracy. This is also backed by the memory of impressive economic performance of other East Asian authoritarian regimes (like those in South Korea and Taiwan in the recent past). The lingering hope of democrats had been that as the middle classes prosper in these regimes, they then demand, and in the latter two cases got, the movement toward political democracy.

But the relationship between authoritarianism or democracy and development is not so simple. Authoritarianism is neither necessary nor sufficient for economic development. That it is not necessary is illustrated not only by today’s industrial democracies, but by scattered cases of recent development success: Costa Rica, Botswana, and now India. That it is not sufficient is amply evident from disastrous authoritarian regimes in Africa and elsewhere. Read more

by Mickey Levy

It is not just the rapid decline in home prices but the uncertainty about how much further they will fall that stands out as one of the largest negative factors hanging over the economy and financial markets. The current pace of adjustments suggests that uncertainty will begin to abate late this year and early 2009.

Falling home prices increase affordability and are necessary to reduce bloated inventories of houses for sale, but expectations that prices will fall further keeps potential buyers on the sidelines. And this same uncertainty creates havoc in financial markets by driving up credit losses and making it nearly impossible with any degree of reliability to value a sizeable portion of the over $10 trillion of mortgage securities held by banks, investment banks, Fannie Mae and Freddie Mac and a wide array of global investors. This has plagued mortgage markets and pushed up mortgage rates even as the Federal Reserve has eased 325 basis points. A key channel through which the Fed’s monetary easing is supposed to stimulate the economy has been gummed up. Read more

By Jagdish Bhagwati Read more

by Raghuram Rajan

Many commentators are looking for an increase in domestic demand in emerging markets to compensate for the slowdown in the US. Indeed, domestic consumption is picking up in several countries including China, while governments in Asia and the Middle East are turning to neglected public investment. Yet years of strong growth and cutbacks in public investment, which have restored economic health to emerging markets, have also eaten up excess capacity. Any increase in domestic demand, if it is not to result in bottlenecks and even higher inflation, will have to be accompanied by a shift in production from an external focus to an internal focus. This means that emerging market currencies will have to appreciate, and the weight of output will shift from traded goods such as T-shirts and electronics to non-traded goods such as real estate and health services over the next few years. Read more

As my colleague, Clive Crook, has already noted in his blog on several occasions, the journalist, Michael Kinsley, has started a conversation on “creative capitalism”, the controversial idea advanced by Bill Gates at the annual meeting of the World Economic Forum last January. Michael was kind enough to invite me to contribute. In the end, most of what I wrote was about capitalism itself, rather than creative capitalism (whatever that may be).

My starting point was that one would not get very far in understanding how capitalism might be changed if one did not first understand what it was. In the end, I posted four pieces, which I hope will also be of some interest to readers of this forum. They are entitled “what makes profit-maximisation possible”, “what Bill Gates really means by creative capitalism”, “profit-maximisation as the sole goal of a corporation” and “corporate social confusion”. They can be found here.

By Barry Eichengreen  

One of the chief ways financial market participants make sense of events is by drawing parallels with the past. The subprime crisis, when it first erupted, was widely perceived as the most dangerous financial crisis since the 1930s. The implication was that it was critical to avoid the policy mistakes that transformed that earlier crisis into a macro­economic disaster. The lesson drawn was that it was important to avoid an excessively tight monetary policy. Read more

By Jean Pisani-Ferry Read more

By Niall Ferguson  

The phrase “perfect storm” has been trotted out once too often to characterise the past year’s financial crisis. Yet the real perfect storm may still lie ahead. Read more