By Eswar Prasad
The worldwide financial crisis has dramatically shown how globalisation has linked together the fates of economies around the globe. The benefits of multilateralism on economic matters have become evident. But so has the potential for globalisation to cause collateral damage. Even as the G7 economies are pulling back from the edge of the precipice, many emerging markets are at the risk of tipping over. Read more
By Alberto Alesina and Francesco Giavazzi
A “new Bretton Woods” is the name given to a summit next month of leaders of the world’s top economies to map out a response to the global financial crisis.
The New York meeting received this label because it aims to reconsider the structure and the role of international economic institutions such as the G7, the International Monetary Fund and the Financial Stability Forum. Read more
Give credit where credit is due: Nouriel Roubini of New York University’s Stern School of Business was right. On February 20 2008, I wrote a column entitled “America’s economy risks the mother of all meltdowns”, based on his analysis of the 12 steps to disaster. Alas, not only has the US taken those steps, but it has also – with help from others, including the UK – dragged the world behind it. Read more
By Maurice Obstfeld, Jay C. Shambaugh and Alan M. Taylor
Since the early 1990s, central banks in many emerging markets and developing countries have accumulated foreign reserves at an unprecedented rate. The macroeconomic impact of these official flows has been profound and they have contributed significantly to global imbalances. Providing an explanation for these trends remains a major puzzle in international macroeconomics, and prevailing theories based on trade or debt deliver poor empirical performance. We argue that part of this great reserve accumulation is a response to the threat of financial instability in the context of rapidly expanding financial systems, increasingly mobile capital, and exchange rate objectives. The recent turbulence in global financial markets supports this view. 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
By Jean Pisani-Ferry Read more
By Lawrence Summers
It is quite possible that we are now at the most dangerous moment since the American financial crisis began last August. Staggering increases in the prices of oil and other commodities have brought American consumer confidence to new lows and raised serious concerns about inflation, thereby limiting the capacity of monetary policy to respond to a financial sector which – judging by equity values – is at its weakest point since the crisis began. With housing values still falling and growing evidence that problems are spreading to the construction and consumer credit sectors, there is a possibility that a faltering economy damages the financial system, which weakens the economy further.
After a period of intense activity at the beginning of the year with the passage of fiscal stimulus legislation, strong action by the Federal Reserve to cut rates and provide liquidity and the introduction of anti-foreclosure legislation, policy has again fallen behind the curve. The only important policy actions of the past several months have been those forced on the Fed by the Bear Stearns crisis. It would be a mistake to overstate the extent to which policy can forestall the gathering storm. But the prospects for a more favourable outcome would be enhanced if four actions were taken promptly.
First, the much debated housing bill should be passed immediately by Congress and signed into law. It provides some support for mortgage debt reduction and strengthens the government’s hand in its troubled relationship with the government-sponsored enterprises – Fannie Mae and Freddie Mac. While it is an imperfect vehicle – too limited in the scope it provides for debt reduction, insufficiently aggressive in strengthening GSE regulation and failing to increase the leverage of homeowners in their negotiations with creditors through bankruptcy reform – it would contribute to the repair of the nation’s housing finance system. Failure to pass even this minimal measure would undermine confidence. Read more
By Devesh Kapur, Pratap Mehta and Arvind Subramanian
Is a liberal international economic order losing intellectual support? Should developing economies be worried? If Larry Summers is the canary in the intellectual mine, his two columns in the Financial Times (April 28 and May 5) suggest that the answers to both questions are yes. Read more
By Lawrence Summers
Last week, in this column, I argued that making the case that trade agreements improve economic welfare might no longer be sufficient to maintain political support for economic internationalism in the US and other countries. Instead, I suggested that opposition to trade agreements, and economic internationalism more generally, reflected a growing recognition by workers that what is good for the global economy and its business champions was not necessarily good for them, and that there were reasonable grounds for this belief.
The most important reason for doubting that an increasingly successful, integrated global economy will benefit US workers (and those in other industrial countries) is the weakening of the link between the success of a nation’s workers and the success of both its trading partners and its companies. This phenomenon was first emphasised years ago by Robert Reich, the former US labour secretary. The normal argument is that a more rapidly growing global economy benefits workers and companies in an individual country by expanding the market for exports. This is a valid consideration. But it is also true that the success of other countries, and greater global integration, places more competitive pressure on an individual economy. Workers are likely disproportionately to bear the brunt of this pressure. Read more
By Dani Rodrik and Arvind Subramanian
First large downhill flows of capital – from rich countries to poor countries – led to the Latin American debt crisis of the early 1980s. In the 1990s similar flows begat the Asian financial crisis. Read more
By Martin Wolf
In the summer of 1972, as a “young professional” at the World Bank, I went on a mission to South Korea. It was my first experience of something extraordinary: a country that was developing at a breathtaking rate. The country had already enjoyed a decade of economic growth at close to 10 per cent a year. It continued to grow at close to that rate for another quarter of a century. Read more
Fast growth, huge current account “imbalances”, low real interest rates and risk spreads, subdued inflation and easy access to finance characterise the world economy. Is this party about to end? Probably not. But to identify the risks we must first decide what drives the strange world economy we see around us.
The two interesting alternative explanations are the “savings glut” and the “money glut”. Both share common themes: globalisation; the revolution in finance; the rise of China; low inflation; and macroeconomic stability. Beyond this, however, they diverge. In particular, they reverse the role of victim and villain: in the savings-glut story, the thrifty are the villains and profligate the victims; in the money-glut story, it is the other way round. This is a contemporary version of the old Keynesian versus monetarist dispute. Read more
What is going to happen to the world economy this year? The most important points on the short-term outlook were made by my colleague, Wolfgang Münchau, last week (“The good, the bad and the ugly scenarios for the year ahead”). Let us ask, instead, a bigger question: how strong and sustainable is the underlying dynamic of the world economy? As Lawrence Summers noted in his most recent column (“A lack of fear is cause for concern”, December 27), the world economy in aggregate grew more during the past five years than in any five-year period since the second world war. Growth is not merely strong. It is also widely shared. In 2006, according to the World Bank’s Global Economic Prospects, the economies of the high-income countries probably grew by 3.1 per cent, with the US achieving 3.2 per cent, Japan 2.9 per cent and even the sluggish eurozone 2.4 per cent. Meanwhile, the economies of the developing countries, led by the rising giants, China and India, expanded by 7.0 per cent, after 6.6 per cent in 2005 and 7.2 per cent in 2004. This performance has occurred in spite of significant economic and political shocks: the collapse of the stock market bubble in 2000, the terrorist attacks of September 11 2001, wars in Afghanistan and Iraq, the continued uncertainty about future large-scale terrorism, the jump in oil prices, protectionist rhetoric in a number of high-income economies and a breakdown in the Doha round of multilateral trade talks. The remainder of Martin Wolf’s column can be read here (FT.com subscribers only). Discussion from our guest economists is free.
What might the world economy look like in 2030? Nobody knows. But we can consider where present trends are taking us. We can assess, too, some of the dangers and opportunities. That is what the World Bank’s latest Global Economic Prospects report does*. This report does more than help organise our thinking. It should also cheer us up and spur us to do better. The past quarter of a century has been a time of unprecedented integration of the world economy, as technology advanced and the socialist sandcastles crumbled under the tide of economic liberalisation. As the report also notes: “Global income has doubled since 1980, 450m have been lifted out of extreme poverty since 1990 and life expectancy in developing countries is now 65 on average.” Globalisation has also proceeded apace: between 1970 and 2004, exports as a proportion of world output doubled to more than 25 per cent; new technologies have diffused rapidly across the globe; and total private financing of developing countries reached nearly $1,000bn in 2004. The persistence of these trends is striking. Moreover, among the encouraging recent features is the acceleration in the growth of incomes per head in the developing world (see chart), as south Asian growth rates and east Asian weights in the total both rose. So what might the world look like in 2030? The remainder of Martin Wolf’s column can be read here (FT.com subscribers only). Discussion from our guest economists is free – click ‘Comments’ below
By Lawrence Summers Against all odds, we are living in a time of plenty. Neither the after-effects of September 11 2001 nor a tripling in oil prices has prevented the world’s economy from growing faster in the past five years than in any five-year period in recorded economic history. Given this recent performance and the pricing-in by world markets of an optimistic outlook, one might have expected this to be a moment of particularly great enthusiasm for the market system and for global integration. Yet in many corners of the globe there is growing disillusionment. From the failure to complete the Doha trade round to pervasive Wal-Mart-bashing, from massive renationalisation in Russia to the success of populists in Latin America and eastern Europe, we see a degree of anxiety about the market system that is unmatched since the fall of the Berlin Wall and probably well before. Why is there such disillusionment? Some anti-globalisation sentiment can be seen as a manifestation of resistance to the US arising from the Bush administration’s foreign policy misadventures. But there is a much more troubling source: the growing recognition that the vast global middle is not sharing the benefits of the current period of economic growth – and that its share of the pie may even be shrinking. (Continues) Read more
Globalisation remains the great economic story of our era. It is also the great political story. The big question remains how likely is a reversal of our era’s move towards a more integrated global economy. History suggests, alas, that the onward march towards integration is not inevitable: economics may propose, but politics dispose.
This was the issue raised by Ben Bernanke, chairman of the Federal Reserve, in his address to this year’s annual economic symposium organised by the Federal Reserve bank of Kansas City at Jackson Hole, Wyoming. At the end of a brief overview of the history of economic integration, Mr Bernanke argued that “the social and political opposition to openness can be strong. Although this opposition has many sources . . . much of it arises because changes in the patterns of production are likely to threaten the livelihoods of some workers and the profits of some firms, even when these changes lead to greater productivity and output overall”. The need, he suggests, is to ensure that the benefits of integration are sufficiently widely shared.
Mr Bernanke concentrates, implicitly, on the politics of the high-income countries; and, second, he devotes attention to trade in goods and services. He is right to do so. The US and Europe remain the core of the global economy. Equally, nothing is more politically sensitive than trade.
The remainder of Martin Wolf’s column can be read here (FT.com subscribers only). Discussion from our guest economists is free – click ‘Comments’ below. Read more