By Daniel Gros The global economy has been hit by two shocks: the subprime lending crisis and high oil prices. The latter have faded into the background as prices have stabilised near record levels. But it would be a mistake to underestimate their importance. The recent surge in oil prices makes a rebalancing of the global economy more difficult, but it might in fact facilitate adjustment to the “subprime” credit crisis. The core of the issue is simple: oil producers tend to save about half of their windfall gains from higher oil prices. If the oil price stays around $90 a barrel, oil producers will increase their current account surpluses by $200bn-$300bn a year. The question will then be: who is willing and able to run corresponding deficits? Apart from the US, there are only two regions large enough to contemplate a shift in the external position of this order of magnitude: the eurozone and Asia (Japan and China).

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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.

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“Over the past decade a combination of diverse forces has created a significant increase in the global supply of saving – a global saving glut – which helps to explain both the increase in the US current account deficit and the relatively low level of long-term real interest rates in the world today.” Ben Bernanke, chairman of the Federal Reserve.*

Has the Federal Reserve been a serial bubble-blower? Or has it been responding to exceptional macroeconomic conditions? Not surprisingly, the implication of Ben Bernanke’s celebrated speech on the global “savings glut” implies the second view. Yet his self-exculpatory perspective is far from universally shared. So who is right? My answer is both. The Fed can indeed be accused of being a serial bubble-blower. But this is not because it has been managed by incompetents. It is because it has been managed by competent people responding to exceptional circumstances.

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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.

What struck me about Korea was the determination of its policy-makers to sustain rapid industrialisation. I saw the construction from scratch of the vast Hyundai shipyard at Ulsan that was soon to join the first rank of ship-builders. That bet itself demonstrated something even more remarkable: Koreans’ belief in their country’s ability to achieve global competitiveness.

For the Koreans, exports were both a tool of development and a test of its success. How different this was from east Africa and India, on which I was to work for the following five years. India was almost as sealed from the world economy as it was possible to be. Its annual growth in income per head had fallen in the 1970s to about 1 per cent a year, while industrial productivity seemed to be declining, despite its desperately low level.

The contrast between South Korea’s success and India’s failure was striking. Both used protection and other tools of industrial policy. Yet the orientation of India’s policies was inward-looking and anti-competitive, while that of South Korea was the opposite. In the literature on development and trade, the Korean strategy came to be called “export promotion”, because its economy did not have an overall bias towards the home market.

The contrast between South Korea and India raised the biggest questions in economics: why have some countries succeeded with development and others failed? Why has Korea jumped from poverty to prosperity in a lifetime? Why did India do badly then, but much better recently?

The broad question is the one Erik Reinert states in his title: How Rich Countries Got Rich… and Why Poor Countries Stay Poor. Reinert is a Norwegian professor who now teaches at Tallinn, Estonia. Ha-Joon Chang, a well-known Korean development economist, teaches at Cambridge. But both give strikingly similar answers to this question.

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By Adam Posen Two hundred and thirty-one years ago on Wednesday, the Continental Congress declared American independence. While the US constitution was in place 13 years later, much of the subsequent two centuries have been spent fighting over the locus of economic policymaking. The initial battles between the states and the federal government were of course driven by slavery, but the economic aspects of the dispute over federalism went on independently and far outlasted the civil war. Having a constitution settled nothing in this area. So Wednesday is a good opportunity to take a longer view on the implications of the recent European Union summit agreement for economic decision-making. Often, eurocrats use historical comparisons of European integration with the early years of the US as an excuse: “Look how far we have come in so few decades. What more could you expect?” Yet what the US experience demonstrates is that the question of whether or not the recent agreement leads to something that resembles a constitution matters far less than many think. In the US, the power of the centre relative to local politics in economic policy has varied for more than 200 years, even though there have been few constitutional amendments. The EU’s new agreement leaves the European Commission much too weak vis a vis the member states. The remainder of this column can be read here (FT.com subscription required). Discussion from our guest economists is free.

Finance is the brain of the market economy. Alas, like the brains of individual human beings, it can shift in an instant from greed to fear. Sometimes, as now, the brain behaves as if indifferent to risks and uncertainties. At other times, it is consumed by anxiety. Today, moreover, as I argued last week, the brain has become active, global and self-confident. Is it also creating huge dangers for the world economy? Critics would levy three big charges against modern financial capitalism: it is unjust; it is inefficient; and it is unstable. This charge sheet is as old as capitalism itself. Two objections are made to the rewards gained by financiers. The large one is that making large sums out of speculation, rather than production, is distasteful. But this distinction is arbitrary. What matters far more is whether the activities are economically helpful. A narrower objection is to the fiscal regimes under which successful financiers operate. Yet this, again, raises general questions about fiscal policy, not ones limited to the financial sector. Thus, the charge that there are injustices associated only with financial capitalism is hard to justify. The remainder of Martin Wolf’s column can be read here (FT.com subscription required). Discussion from our guest economists is free.

Posterity will regard the economic performance we are now witnessing as a golden age. It will also know, although we do not, how long this era lasts. That will depend on decisions now taken. Such a period offers opportunities. Posterity will blame those who fail to seize them. Even the International Monetary Fund was remarkably optimistic about the robustness of underlying growth in its latest World Economic Outlook. Should such optimism make one feel more confident about the future? Probably not. Nevertheless, the IMF’s case is at least plausible: the world economy is enjoying a remarkable period of broadly shared growth. Indeed, measured at purchasing power, the world is in a period of economic expansion unmatched since the early 1970s (see chart). Most important of all, every region of the world economy is now doing well. The remainder of Martin Wolf’s column can be read here (FT.com subscribers only). Discussion from our guest economists is free.

Why did the economies of continental Europe fail to converge on the US after their brilliant post-second world war resurgence and then, more recently, start falling behind again? Why are they mired in high unemployment? What do these facts tell us about their economic model? Last year’s Nobel laureate, Edmund (Ned) Phelps of Columbia University responds by arguing that continentals have chosen the wrong system: corporatism. As Prof Phelps noted in his Nobel lecture, he starts from a rejection of orthodox neoclassical economics. This, he insists, abstracted from the “distinctive character of the modern economy – the endemic uncertainty, ambiguity, diversity of belief, specialisation of knowledge and problem solving”. A central distinction, argues Prof Phelps, is between capitalism and corporatism. By capitalism, he means a system of free enterprise that embraces and motivates entrepreneurship. By corporatism, he means a system in which businesses have to negotiate change with the government and “social partners”. The remainder of Martin Wolf’s column can be read here (FT.com subscribers only). Discussion from our guest economists is free.