Transcript What’s Ahead for the World economy ? Lecture 17: AHEED

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WHAT’S AHEAD FOR THE WORLD
ECONOMY ?
LECTURE 17: AHEED COURSE “INTERNATIONAL AGRICULTURAL
TRADE AND POLICY”.
TAUGHT BY: ALEX F. MCCALLA, PROFESSOR EMERITUS, UC-DAVIS
APRIL 8, 2010. UNIVERSITY OF TIRANA, ALBANIA
Lecture Courtesy Professor Colin A. Carter UC -Davis
G-20 communiqué
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“The new normal”
 IMF forecasts global GDP will grow by 3.1% next year.
 Global stockmarkets have rallied by 64% since their
trough.
 Corporate finance is thawing (TED spread is 0.25%)
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Our forceful response helped stop the dangerous, sharp decline in global activity
& stabilize financial markets.
- Industrial output is now rising in nearly all our economies.
- International trade is starting to recover.
- Our financial institutions are raising needed capital, financial markets are
showing a willingness to invest & lend, & confidence has improved.
G-20 Pittsburg, Sept 2009
The Long Climb
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But unemployment is rising & much manufacturing
capacity remains idle.
 Many of the sources of today’s growth are
temporary - gov’t spending on fiscal stimulus.
 Underlying problems remain. In US & elsewhere
household debts are high & banks need to bolster
their capital.
That suggests consumer spending will be lower and
the cost of capital higher than before the crunch.
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3 Possible Patterns of Recovery
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Strong recovery
The world economy returns to its pre-crisis growth rate,
without regaining lost ground - this is what happens after
most financial crises.
Growth stays at a permanently lower rate, with investment,
employment & productivity growth all lower than before.
7 years after a bust an economy’s level of
output was 10% below the “but for” level.
IMF
Milton Friedman: in US deep recessions are
typically followed by strong recoveries.
The Long Climb -2
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Global spending must be rebalanced: indebted American
consumers must cut back, while thrifty countries should spend
more & save less.
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In China this means a stronger currency, bigger social safetynets & an overhaul of subsidies to increase the share of national
income going to workers. Share of wages & other household
income in GDP has fallen from 72% in ‘92 to 55% in ‘07 - so its
no wonder that China’s consumption only accounts for 35% of
GDP
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Germany & Japan need structural reforms to boost spending,
especially in services.
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The Long Climb - 3
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The path of productivity growth will determine the
nature of the new normal.
• In the rich world, innovation sets the pace. Elsewhere,
trade is often more important. Both are now under
threat.
• Cash-strapped companies are skimping on R&D.
Emerging economies are having to rethink their
reliance on exports for growth. Both rich & poor
governments will be tempted to intervene.
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The Long Climb- 4
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In any country, expansion of output = growth in
consumption + investment + net exports
GDP = C + I + G + (X - M)
Income (agg demand) = dom demand (C + I + G)
+ foreign demand (X-M)
Trade balance (X-M) = Output (GDP) - domestic
demand
Before the Crisis
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Drivers of growth in China: consumption (Gov’t + Household)
39%; Investment 39%, net exports 22%
• Drivers of growth in US: household consumption 70%; private
investment 15%; gov’t consumption + investment 20%; exports
12% & net exports - 5%
 The amount borrowed from or lent to foreigners is called the
current account surplus or deficit. If a country’s current account
surplus has risen, it means that either savings has increased or
investment has fallen, or both. The current account usually
refers to the current account of the balance of payments (BOP)
& contains the import & export items of goods and services as
well as transfer payments including net investment income.
•
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Japan vs US stock market
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During “lost decade” Japan suffered a “balance-sheetrecession”
Shanghai vs US stock market
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US Savings Rate
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GDP Growth Rates
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source: http://imf.org/external/datamapper/index.php
Current Acct. Balance (% of GDP)
The balance on goods, services, income, and current transfers is
commonly referred to as the "current account balance".
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source: http://imf.org/external/datamapper/index.php
Reserve Assets ($ Bil)
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source: http://imf.org/external/datamapper/index.php
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US Debt Problem
• Government debt has been a relatively consistent % of GDP,
but the debt of companies, consumers, & financial businesses has soared.
• The problem now is that the value of the assets that serve as collateral for
that debt (houses, stocks, cars, etc.) is plummeting.
• The stock of debt that banks & households still carry will take years
to pay off.
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• when growth declines by 2%, R&D spending drops by 3%
• Investment by venture capitalists is down 51%
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Industrial Design
• Rich countries make progress by inventing new products & techniques
whereas developing countries grow by assimilating know-how from elsewhere
• An emerging-market government can therefore promote this learning
process by keeping its currency cheap, which raises the domestic price of
traded goods relative to others.
• Thus productivity growth in the world is doubly endangered. In the rich
world it is threatened by a lack of resources for innovation, & in the
developing world it is threatened by the loss of tolerance for export-led
growth.
• If developing countries are forced to abandon their cheap currencies, Dani
Rodrik argues they could replace them with explicit
industrial policies instead.
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