By Heleen Mees
There is a fierce debate over the origins of the disappointing economic growth seen in advanced economies. On one side there is former world chess champion and political activist Garry Kasparov and internet entrepreneur Peter Thiel, while on the other, there is Kenneth Rogoff, a Harvard economist.
Mr Rogoff, who authored This Time is Different: Eight Centuries of Financial Folly (2009) with Carmen Reinhart, argues that the systemic financial crisis is the root cause of the prolonged economic slump in the western world. In their research, Mr Rogoff and Ms Reinhart found economic growth following a systemic financial crisis to be about a full percentage point below trend growth.
Mr Kasparov and Mr Thiel, on the other side, disavow Mr Rogoff’s claim that the collapse of advanced-country growth is the result of the financial crisis. In their view, the flailing western economies reflect stagnating technological development and innovation, and without radical changes in innovation policy, advanced economies are unlikely to see any prolonged pickup in productivity growth. Read more
By Eswar Prasad and Karim Foda
Despite a number of recent shocks, the global economic recovery is getting on to a firmer footing.
The latest update of the Brookings Institution-FT Tracking Indices for the Global Economic Recovery (TIGER) indicates that resurgent job growth and rising business and consumer confidence are solidifying the recoveries in many advanced economies. Emerging markets are still doing well but some of the shine is coming off these economies as they tighten policies to cope with inflationary pressures.
The Overall Growth Index for the G20 economies shows a slight uptick in recent months, led by a gradual rebound in real activity. After the initial post-recession surge, financial markets have pulled back a bit, at least in terms of growth in stock market indexes and valuations. One bright spot is the resurgent business and consumer confidence in both advanced and emerging economies. Read more
By Shankar Acharya
What might 2011 hold for us? Given the intrinsic uncertainty about the future, the really honest answer would be: I don’t know. But that would be far too boring a response and, perhaps more to the point, would not fill a column. So, at the risk of looking foolish in a year’s time, here are some predictions for 2011. Read more
Anybody who looks carefully at the world economy will recognise that a degree of monetary and fiscal stimulus unprecedented in peacetime is all that is prodding it along, not only in high-income countries, but also in big emerging ones. The conventional wisdom is that it will also be possible to manage a smooth exit. Nothing seems less likely. So let us consider the endgame, instead.
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So what did I make of this year’s annual meeting of the World Economic Forum at Davos? It felt like sitting at the bedside of somebody who had survived a heart attack but was unsure how long it would take to recover full vigour, if, indeed, he would at all. The mood of “Davos men” (yes, they mostly still are) was, as my colleague, Gideon Rachman, has pointed out, one of anxiety. Meanwhile, the participants in a still predominantly western meeting looked at the youthful vigour of emerging economies with admiration, envy and even fear.
For me, the highlight of the programme was the economic outlook session on Saturday.* This is not only because I was moderator. The starting point for the discussion was an obvious one: the policy interventions of late 2008 and 2009 have been a resounding success. The outcome has been a far briefer and shallower recession than most participants imagined a year ago. That is obvious from the successive consensus of forecasts for 2010. For almost every significant economy, the forecast for growth this year is higher than it was a year or even six months ago (see charts). The world economy survived the heart attack in the financial system. Read more
By Yu Yongding
China has rebounded from the global slump with vigour. In the second quarter, its official figures showed year-on-year gross domestic product growth of 7.9 per cent. Those who doubt the quality of China’s macroeconomic statistics can check its physical statistics: in June, electricity production increased 5.2 per cent, reversing the falls of the previous eight months. It is almost certain that China’s GDP will grow more than 8 per cent this year. Read more
By Shankar Acharya
In recent years, the rise of China and India has become a salient feature of the global economic landscape. Conferences and books have proliferated with titles such as “China and India Rising” and “Dancing with Giants”. Although individual contributions have often delineated carefully the differing paths taken by these two populous Asian nations, there has been a general tendency to lump the two countries together in discussions of global economic issues ranging from international trade to climate change. Read more
Is the current crisis a watershed, with market-led globalisation, financial capitalism and western domination on the one side and protectionism, regulation and Asian predominance on the other? Or will historians judge it, instead, as an event caused by fools, signifying little? My own guess is that it will end up in between. It is neither a Great Depression, because the policy response has been so determined, nor capitalism’s 1989. Read more
Did the meeting of the Group of 20 in London last week put the world economy on the path of sustainable recovery? The answer is no. Such meetings cannot resolve fundamental disagreements over what has gone wrong and how to put it right. As a result, the world is on a path towards an unsustainable recovery, as I argued last week. An unsustainable recovery might be better than none, but it is not good enough. Read more
The UK has followed the US and Japan into “unconventional monetary policy”. Meanwhile, Mervyn King, governor of the Bank of England warns the UK government of the dangers of further discretionary fiscal stimulus. Yet what are the implications of the policies followed by central banks? Are these not the big threat to monetary stability? Read more
The following is Martin Wolf’s testimony to the Senate Committee on Foreign Relations in the US, March 25, 2009
We are experiencing the most dangerous financial and economic crisis since the 1930s. But it is also a crisis for foreign policy: a deep recession will shake political stability a across the globe; and it threatens the long-standing US goal of an open and dynamic global economy. Perhaps most important, the US is currently seen as the source of the problem rather than the solution.
This crisis is, therefore, a devastating blow to US credibility and legitimacy across the world. If the US cannot manage free-market capitalism, who can? If free-market capitalism can bring such damage, why adopt it? If openness to the world economy brings such dangers, why risk it? As the shock turns to anger, not just in the US, but across the world, these questions are being asked. If the US wishes to obtain the right answers, it must address the crisis at home, and do what it can to rescue innocent victims abroad. This is not a matter of charity. It is a matter of enlightened self-interest. Read more
The summit of the Group of 20 leading high-income and emerging countries in London on Thursday seems set to achieve progress. But achievement must be measured not just against past performances, but against “the fierce urgency of now”. Unfortunately, it will come up short. Read more
By Kevin O’Rourke
This period last year seems an age ago. The fear then was of resource scarcity: of rising oil prices and increasing food prices, as biofuels crowded out food production and population continued to grow. Environmental worries also reflect resource scarcity, albeit of another type. Once this crisis is over, these concerns will inevitably return to the agenda, and could easily dominate it for the rest of this century. Read more
The London summit of 1933 marked the moment at which co-operative efforts to manage the Great Depression collapsed. The summit of the Group of 20 countries, in the same city, on April 2, must turn out quite differently. That may seem a simple task. It is not. The usual platitudinous communiqué would be a catastrophe. Read more
By Ronald McKinnon
As always, I am amazed by how much analytical ground Martin Wolf covers in each column; “Why agreeing on a new Bretton Woods is vital” is no exception. Let me first pick up on one point: the number of countries involved in the negotiation.
The original Bretton Woods agreement was essentially bilateral, and negotiated between the British Treasury (Keynes) and the US Treasury (White) in 1943-1944, with Canada sometimes acting as an umpire.
The post-war General Agreement on Tariffs and Trade cum World Trade Organisation negotiations were manageable and quite successful as long as they were also mainly bilateral – the eastern European bloc versus the US – with Most Favoured Nation treatment extended to most other countries.
Developing countries did have a marginal say. The old GATT exempted them from the requirement to reciprocally reduce their own tariffs. This was disastrous for them, and fortunately is being phased out under the new WTO. 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 John Muellbauer
Fed minutes released on October 7 disclosed that as recently as Sept 16, Fed officials thought risks to growth and inflation were roughly equally balanced. And Federal Reserve Chairman Ben Bernanke acknowledged on the same day that though the inflation outlook had improved somewhat, it remained uncertain. The market may have taken these views as representative of central banks round the world, particularly given the ECB decision of October 2 not to reduce rates. Following these releases, the Dow Jones index fell by about 6.5 percent as the market thought the internationally co-ordinated interest rate cut it had been expecting had become less likely. This and the knock-on effects on world markets then helped to force central banks to make the cut the market had expected, but on October 8.
Central banks’ caution about inflation risks is understandable given the experiences of 2008. Forecasting inflation is notoriously difficult. There have been big structural shifts in the world economy such as trade and financial globalisation and in individual economies, such as the decline in trade union power. Monetary policy itself has shifted to a far greater focus on inflation. Energy and food price shocks can be large and very hard to predict. Indeed, the speed of price changes tends to increase with big shocks. Most forecasting models used by central banks therefore put a large weight on recent inflation. This tracks inflation quite well except at turning points because the models miss key underlying influences. 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 Jagdish Bhagwati Read more
by Willem Buiter
From a cyclical perspective, things look bad for Europe, the US and most of the global economy. My contribution to summer cheer is to note that longer-term local and global economic prospects are likely to be worse than expected. So welcome to boom and bust. Welcome to subdued long-term growth prospects. Read more