Transcript Document

World Economic Outlook and
Implications For Korea
Anne O. Krueger
Stanford University and Johns Hopkins University
To be presented at KSP Conference in Seoul, October 23, 2012.
OUTLINE
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Introduction
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The global economy performed very well in the last half of the twentieth century.
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Shifting structure of the global economy as the 21st century begins
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Cyclical factors dominate in the first decade
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European situation
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Inevitabilities going forward
•
Short-term outlook
•
Longer-term outlook
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Implications for Korean Economic Policy
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Conclusions
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Introduction
• The half-century after the Second World War was exceptionally successful
for the world economy. World economic growth remained strong
throughout.
• Until the past decade, however, the underlying structure of the global
economy and the determinants of growth changed only slowly. Over time,
those changes cumulated so that by 2000 the global economy had
changed significantly.
• Many lessons were learned, which is partly why economic performance
improved.
• But the difficulties of the last decade have raised many questions. There is
much more uncertainty about the future than at earlier times.
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The l950-2000 period was unique in
world economic history.
• Not only was there rapid growth in industrial countries, it was more rapid
than ever before. Until the 1990s, the world economy seemed
characterized by 3 groups of countries: industrial, “underdeveloped” and
centrally planned economies.
• World economic growth accelerated during the half century. Trade was an
engine of growth. Successive rounds of multilateral tariff negotiations
under the GATT and then the WTO led to greatly reduced trade barriers
among developed countries. Lower trade barriers (and falling transport
costs) led to increased trade volumes, which led to faster growth,
• Private capital flows had dried up after the experience of the 1930s and
the early years witnessed mostly official capital flows. It was only in the
1990s that private capital flows mushroomed.
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The 1950-2000 period (continued)
• As the half-century progressed, more and more “underdeveloped
countries” learned how to adapt their policies and grew rapidly. Until the
1970s, they benefited greatly from the tariff reductions of the industrial
countries, but did little to change their own trade barriers. Korea, Taiwan,
Hong Kong and Singapore, the “Asian tigers”, led the way in changing trade
(and other) policies and began growing rapidly. By the 1990s, many other
countries (most importantly China and India) were growing rapidly.
• The era was certainly one of “globalization” as lowering of trade barriers
and integration of the world economy was a key contributor to good
performance.
• Although there were crises (oil price increases in 1973 and 1979,
developing countries’ debt crises 1982-1988, Mexican crisis 1994, Russian,
Asian, and Brazilian in late l990s to name a few), none significantly
affected the entire world economy. Many parts of the world kept growing
during each crisis period.
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Shifting Structure of the
World Economy
• Most trends started during the half century but were not yet
quantitatively large enough to change global responses. But by 2000 that
was changing.
• The United States had emerged as the dominant economy after the
Second World War. Its share of world GDP and world trade fell almost
continuously throughout the fifty years as other countries grew rapidly. It
accounted for over 40 percent of world GDP after the Second World War,
and less than a quarter by 2000.
• The share of developing countries in world GDP and trade was low and
falling in the l950s and l960s. Recovery of lost share began in the 1970s,
but it was not until the 1990s that the share of the developing countries in
world trade and world GDP began rising rapidly.
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Shifting Structure of World Economy
(continued)
• Of course, the collapse of the U.S.S.R. also led to a structural shift as trade
and capital flows between the countries whose economies had been
centrally planned and the rest of the world rose.
• By 2000, tariffs among industrial countries on manufactures were very
low, but the momentum for multilateral tariff (and other trade barriers)
reductions had diminished. More and more preferential trade agreements
(PTAs) were formed. As of 2000, the most important was the European
Union (EU), which was a customs union that was established in the
context of multilateral trade integration. 17 countries in the EU entered
into a common currency area – the eurozone – at the end of the decade.
• Private capital flows resumed rapidly after the Asian crisis and dwarfed
official capital flows for all but the poorest countries.
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The First Decade of the
Second Millenium
•
Despite a downturn in 2000-2001 as the “tech” bubble burst and after 9/11, the
first half of the decade witnessed very rapid growth of the global economy. It was
the first time period in which all regions of the world shared growth. Moreover,
growth in the “emerging markets” accelerated. China, whose growth had been
rapid in the 1990s, was now large enough to be a major player, and Indian
economic growth was accelerating.
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Underlying that growth, however, were “global imbalances”. The current account
deficit of the United States, and the current account surpluses of China and – after
2005 – the oil exporters, led to very low real interest rates and excesses in financial
markets. Low real interest rates especially encouraged construction and real estate
investments.
•
When the construction boom lost momentum, the financial crisis began. An
overhang of new, especially residential, construction and falling housing prices
meant that the recovery would be slow as the housing overhang was absorbed.
The resulting loss of wealth and unemployment led to a sharp decline in world real
GDP. Only in 2009 did recovery begin, and it was weak.
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The European Difficulties
• The crisis started in the United States. Some countries were harder hit
than others, but most went into recession. A few, such as Canada and
Australia, were largely unaffected, but emerging markets experienced
sharp declines in exports at the outset of the crisis.
• As the weak recovery from the financial crisis was getting under way,
however, difficulties arose within the European Union. The first major
difficulties were in Greece, but Ireland and Portugal soon followed, and as
of early October 2012 Spain and Italy were experiencing continuing
problems.
• The Greek crisis was triggered by very large sovereign debt, much of which
was held by the private banks of EU countries, and the crisis rapidly spilled
over and became a sovereign debt and banking crisis.
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European Difficulties (continued)
• Concerns about the sustainability of the euro and the outlook for growth
within the euroarea have overhung the world economy. Reduced demand
from EU countries for exports has affected many, including China, whose
growth rate has fallen. Prospects for growth and the stability of European
financial institutions have dampened the outlook for other industrial
countries and emerging markets.
• Eurozone responses to the difficulties of the southern eurozone countries
have been slow, partly because of difficulties in reaching agreement
among the 17 sovereign nations, partly because of the different concerns
of the north and south, but also because of the politically painful
measures that need to be taken.
• That slowness, in turn, has aggravated anxieties in other countries. The
financial and trade linkages with the rest of the world are high and the
current recession and weak outlook affects all other regions.
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Inevitabilities Going Forward
• Even if the eurozone crisis had not happened, fiscal sustainability would
need to be restored in many countries. Large expenditures to offset the
recession led to huge runups in debt and in many countries fiscal
consolidation is called for.
• Moreover, the industrial countries and some others (especially China and
South Korea) are confronted with major challenges as their rapidly shifting
demographics will require significant fiscal adjustments to prevent
sovereign debt difficulties. It is estimated, for example, that in many
countries the labor force will begin falling within the next decade while
the fraction of elderly will rise. Because expenditures for health care and
social insurance are greater for the elderly than for the working
population, the number of workers per old person will fall sharply. Either
expenditures will have to be cut, or tax revenues increased, or some
combination of the two. Either way, more rapid growth will make the
transition easier.
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Inevitabilities Going Forward (continued)
• While a few countries have already successfully taken measures to avert
major problems (and starting sooner makes adjustment much easier),
many have not. And the fiscal challenge of restoring sustainability after
the increases in debt because of the financial crisis and meeting the
challenges of aging populations will confront most countries. How
countries meet these challenges will be an important determinant of
future growth.
• For the United States, there is a pressing, virtually immediate, challenge:
the fiscal cliff. It is estimated that the U.S. government’s fiscal balance will
shift by 5 percentage points of GDP between 2012 and 2013 unless action
is taken. To date, there is an impasse between parties as to how to do this.
• If the issue is satisfactorily addressed (by postponing the tax increases and
delaying the impact of some other measures), the outlook for the U.S.
economy in the short term seems good. If, however, there is no change in
current legislation, the negative effect on US GDP could be substantial.
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Whether Congress will act in time is unknown.
Short-term Outlook
• For the short-term, there are several uncertainties. Chief among them are:
the fiscal cliff, the decisions made in the euro area, and the short-term
evolution of some key emerging markets.
• The U.S. fiscal cliff is the most proximate. If nothing is done by the
beginning of the new Congress in January, there are serious risks that the
U.S. economy, whose short-term outlook is otherwise the most promising,
will lose momentum and even fall into another recession. It is clear that
no action will be taken until after the election.
• For purposes of looking ahead, I shall concentrate on the case where the
U.S. government somehow buffers the impact of the fiscal cliff. In that
case, the outlook for the American economy is reasonably bright:
construction seems to have bottomed out and may be picking up; the
employment numbers look reasonably good. These, and other indicators,
would suggest that the U.S. economy can expand at 2-3 percent in 2013
even if the rest of the world fares poorly.
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Short-term Outlook (continued)
• The second major uncertainty focuses on the euro area. Here, major
questions arise as to how the economies of Greece, Portugal, Spain and
Italy will fare (Ireland seems to be doing reasonably well). Questions arise
as to whether the governments, especially that of Greece, will carry out
their commitments under the IMF programs they are in. If not, the lack of
funding for Greece would trigger an immediate crisis. Even if the
programs are deemed to be sufficiently on track, some raise questions
about their political sustainability.
• Spain is sufficiently large so that there are questions about its banking
system and fiscal position whether it seeks an IMF-EU-ECB program or not.
• If those in programs cannot keep them on track, or if Spain or Italy does
request IMF support, there is tremendous uncertainty as to how markets
would react. Clearly, until these questions are resolved, economic activity
in the Euro area will be dampened, and even with resolution, much would
depend on the manner in which it takes place.
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Short-Term Outlook (continued)
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The short-term outlook for Europe is at best one for very slow growth. Japan, too,
for different reasons does not appear to have strong prospects.
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That leaves the large emerging markets, especially the BRICs (Brazil, Russia, India
and China), whose combined growth contributed importantly to the recovery in
2009 and 2010. It is clear that the emerging markets have not “decoupled” from
the industrial countries, but also that internal demand is more of a determinant of
their growth than in the past. In the cases of India and Brazil, the short-term
outlook is for slower growth, and even for China, observers are questioning how
deep the downturn will be.
•
The U.S. (if there is sufficient reduction of the fiscal cliff), along with a few other
smaller industrial countries (Nordics, Australia, Canada, perhaps the U.K., some
Eastern Europeans), are likely to be the higher-growth countries over the shortterm. But with the eurozone countries faring poorly, the Japanese economy
sluggish, and slower growth in the BRICs and probably other emerging markets,
the short-term outlook for the global economy is, at best, for slow growth over the
next several years.
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If prospects for the eurozone become clearer and more promising, the outlook for
the world economy will be considerably brighter.
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Longer-Term Outlook
• As already seen, even if the short-term issues are satisfactorily resolved,
governments will be confronted with the necessity for fiscal consolidation,
both because debt levels have become uncomfortably high and because of
looming demographics.
• The longer-term challenge is to address the fiscal (and related) issues and
simultaneously take measures to assure satisfactory growth rates. Fiscal
problems themselves will be more readily addressed with more rapid
growth. But a slowdown (and even decline) in labor force growth will by
itself slow the growth rate.
• For the industrial countries, measures to accelerate growth differ
depending on their current policies and prospects. In all of them, finding
policies that enable more rapid growth of labor productivity will be a
crucial ingredient. So, too, will the further integration of the international
economy.
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Longer-Term Outlook (continued)
• The growth of world trade has been an “engine of growth” throughout the
past half century. Much has been accomplished, but there could be
further gains. The Doha Round of trade negotiations seems dormant just
at a time when successful conclusion could itself contribute to growth and
also enable WTO members to address additional issues in services trade
and in agriculture.
• The international community could make a significant contribution to
longer-term growth prospects by spurring the WTO forward with regard to
remaining trade barriers. As many have pointed out, the evolution of
world trade has led to pressing needs for a stronger WTO. In light of the
urgent need to take measures to accelerate sustainable growth where
possible, failing to take advantage of opportunities for further trade
liberalization would be inexcusable.
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Long –Term Outlook (continued)
• Although actions have been taken to reduce the incentives for risk-taking
on the part of financial institutions, there remain issues regarding
institutions that are “too big to fail” and international coordination of
regulatory frameworks. Even potentially more dangerous, no effective
action has yet been taken to strengthen the capabilities of the
international community, presumably through the International Monetary
Fund, to avoid future global imbalances of the sort that contributed to the
financial crisis of the past decade. It is to be hoped that the issue will not
arise in the near future, and that measures can be taken before
imbalances reemerge as a major issue.
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Longer-term Outlook (continued)
• For all the countries facing demographic transition, shifting the
composition of production to more capital and skilled-labor intensive
methods, increasing the human capital of the labor force (including
technical skills as well as education), providing incentives for increased
labor force participation (especially for women), and removing distortions
in the economy will be vital. Such processes would entail appropriate
provision for incentives for innovation.
• As industrial countries move to make their economies more efficient and
more flexible, growth rates can be enhanced; at the same time, increased
opportunities will open up for those low-income countries that have not
yet been able to achieve rapid growth. They can use their abundant labor
to advantage, offsetting part of the loss in numbers in industrial countries.
In so doing, the market for goods made in industrial countries would
increase.
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Implications for Korean Economic Policy
• South Korea’s economic success is widely recognized throughout the
world, as the country has transitioned from one of the poorest in the
world to an industrial country. South Korean policy makers have generally
been adept at recognizing bottlenecks to growth and taking measures to
avoid them.
• As the South Korean economy has grown and become more complex, the
importance of reliance on policies that provide incentives for desired
outcomes has increased, and will continue to do so.
• In South Korea’s case, the demographic challenge is arising quickly.
Appropriate measures to address it will include increasing labor force
participation, upgrading human capital, and continued attention to
removal of distortions, particularly in the labor market.
• South Korea passed through a stage in which adaptation of methods
already developed in other countries provided a strong spur to growth.
Reliance on human talent and skills is already important and will become
increasingly so.
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Implications for South Korean
Economic Policy (continued)
• Increasing labor force participation, in Korea’s case, will probably entail at
least two thrusts: increasing women’s labor force participation and raising
the age of retirement. Average retirement age for workers in Korean firms
was only 57 in 2008, well below that in most OECD countries.
• Upgrading human capital will also be important. South Korea already has
one of the best track records in the world for primary and secondary
educational enrolments and achievements and spending on education is
high. The quality of tertiary education is good at the top universities, but
somewhat uneven. Focus on improving quality in tertiary institutions will
be crucial in enabling increases in productivity and in spurring innovation.
• More generally, like most other OECD countries, Korean policy makers will
need to examine existing regulations and incentives governing economic
activity. As recently as 2008, Korea was ranked 126th in the world (out of
l86 countries) in the “East of Starting a Business” by the World Bank. Much
has been improved since then, and the 2011 ranking was 24th. Policies to
strengthen competition in services appear to be particularly important as
a candidate for revision.
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Conclusion
• South Korea’s economic performance since the 1950s has been one of the
best in the world. That outcome came about because of the opportunities
catch-up provided, a healthy world economy, and good economic policy
making in South Korea. Recently, the economy has been moving further up
the “value-added chain”, and a higher proportion of growth will need to
come from the skills and quality of the labor force.
• There are still some opportunities for catch up but a higher proportion of
growth must be reliant on the upgrading of skills and innovation both
because the catch-up opportunities are smaller and because of the
impending demographic transition.
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Conclusion (continued)
• Policies will necessarily be focused largely on aspects of the quality of the
labor force. These will include increasing labor force participation, skill
upgrading, and measures to increase labor force flexibility. Of course,
increasing the flexibility of the economy in general is important, but South
Korea’s vital asset now and in the years ahead is and will be the skills and
flexibility of its labor force.
• Continued participation in the international economy will also be central
to Korea’s interests, as it has been in the past. The challenge of the
demographic transition will best be met if “old”, unskilled labor using
industries are transitioned out, while new, human capital and physical
capital using industries gradually emerge. Of course, this should come
about through market forces, and cannot be done by government fiat.
Government’s role will continue to be to provide incentives and
competition so that firms’ decisions are consistent with the overall needs
of the economy. Given past performance, I am confident that the Korean
economy will continue to be a stellar performer.
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