Transcript The US deficit from the inside and the outside

International
linkages and policy
coordination
The Cambridge Alphametrics
Model
LINK meeting November 2006
Cambridge Endowment for Research in Finance (CERF)
Alphametrics Ltd.
What we can agree so far
 A short-term quarterly model such as LINK provides useful
information about the current state of the world economy
 Views on the merits of short-term policy-making depend on
the intuition of the policy-maker and the perspective of the
beholder
 The time-scale for resolution of major imbalances is longer
than the time-horizon of the model
 We need longer-term models
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What are the major imbalances
in the global economy ?
1. Income inequality
2. The US deficit
3. Pressure on the environment
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The Cambridge Alphametrics Model:
central elements
 The objective is to provide a quantitative
framework for scenarios of growth and
income distribution that takes account of
resource constraints
 The target is to identify and measure
processes that change the structure of the
world economy and economic possibilities in
each country and region
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The Cambridge Alphametrics Model:
understanding of the mid-term
 We need to understand historical processes
that have created major imbalances and get
ideas about the potential pay-off from
different patterns of development
 Without some degree of consensus it is
difficult to imagine that global imbalances
can be resolved
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Global inequality - income
 Countries in the top
20% measured by
per capita income
receive 60% of world
income
Distribution of world population and income
by country, 2005
100
80
60
40
 Those in the bottom
50% receive less
than 20% of world
income
20
0
0
10
20
Income
30
40
50
60
70
80
90
100
Population
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…and exports
Distribution of world population, income and
exports by country, 2005
 Countries in the top
20% of the income
distribution produce
75% of world
exports
 Those in the bottom
50% produce 7% of
world exports
100
80
60
40
20
0
0
10
20
Income
30
40
50
Exports
60
70
80
90
100
Population
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Model #1 Trade and income
 Export-led industrial
growth has made it
possible for many
countries to take
advantage of modern
technology and exploit
economies of scale and
specialization
 Other countries that rely
on primary products and
energy had a more
uneven experience
Shares of the total value of world trade in
goods and services, 1970-2005
100
Services
80
60
Manufactures
40
Energy
20
Primary products
0
1970
1975
1980
1985
1990
1995
2000
2005
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Trade balances by commodity
group
Percent of world population in countries with surpluses or
deficits in the specified range
Primary products
 Market prices are
very important for
exporters of primary
products
100
80
80
60
60
40
40
20
20
0
0
1
 Real demand is
more important for
exports of
manufactures and
services
Energy
100
2
3
4
5
1
2
Manufactures
3
4
5
4
5
Services
100
100
80
80
60
60
40
40
20
20
0
0
1
2
3
4
5
1
2
3
Ranges: <-7.5%, -7.5% to -2.5%, -2.5% to 2.5%, 2.5% to 7.5%, >7.5%
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Changes in shares of
manufactured export markets
9 market shares
showing the largest
absolute changes,
1970-2005
E Europe share in Fmr USSR
W Europe share in E Europe
80
80
80
70
70
70
60
60
60
50
50
50
40
40
40
30
30
30
20
20
20
10
10
10
0
1970
Together with
historical and
cultural factors,
policies on trade,
investment,
taxation, education
and infrastructure
are more important
than exchange rates
Other Asia share in China
1975
1980
1985
1990
1995
2000
2005
Other Asia share in Other Asia
0
1970
1975
1980
1985
1990
1995
2000
2005
0
1970
W Europe share in Fmr USSR
80
80
70
70
70
60
60
60
50
50
50
40
40
40
30
30
30
20
20
20
10
10
10
1975
1980
1985
1990
1995
2000
2005
0
1970
China share in Japan
1975
1980
1985
1990
1995
2000
2005
0
1970
Other Asia share in Japan
80
80
70
70
70
60
60
60
50
50
50
40
40
40
30
30
30
20
20
20
10
10
10
1975
1980
1985
1990
1995
2000
2005
0
1970
1975
1980
1985
1990
1995
2000
2005
1985
1990
1995
2000
2005
1975
1980
1985
1990
1995
2000
2005
USA share in Japan
80
0
1970
1980
W Europe share in Africa
80
0
1970
1975
0
1970
1975
1980
1985
1990
1995
2000
2005
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Model #2 The balance of
payments
balance of payments flows as % of GDP
selected countries 1980 - 2004
structural flows


Germany
UK
Japan
10
10
10
financial flows
5
5
5
change in reserves
0
0
0
-5
-5
-5
structural flows
include the
current account
and direct
investment
the interesting
question is the
impact on the
exchange rate
-10
1980
1985
1990
1995
2000
-10
1980
1985
Mexico
1990
1995
2000
-10
1980
Brazil
10
10
5
5
5
0
0
0
-5
-5
-5
1985
1990
1995
2000
-10
1980
1985
Indonesia
1990
1995
2000
-10
1980
10
5
5
5
0
0
0
-5
-5
-5
1990
1995
2000
-10
1980
1985
1990
1995
1995
2000
1990
1995
2000
India
10
1985
1985
China
10
-10
1980
1990
South Africa
10
-10
1980
1985
2000
-10
1980
1985
1990
1995
2000
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Exchange rate volatility
real and nominal exchange rate changes
selected countries 1980 - 2004
nominal exchange rate
real exchange rate


real exchange
rates have been
highly volatile in
nearly all
countries
there is zero
correlation
between
financial flows
and exchange
rates
Germany
UK
Japan
30
30
30
20
20
20
10
10
10
0
0
0
-10
-10
-10
-20
-20
-20
-30
1980
1985
1990
1995
2000
-30
1980
1985
Mexico
1990
1995
2000
-30
1980
Brazil
30
30
20
20
20
10
10
10
0
0
0
-10
-10
-10
-20
-20
-20
1985
1990
1995
2000
-30
1980
1985
Indonesia
1990
1995
2000
-30
1980
30
20
20
20
10
10
10
0
0
0
-10
-10
-10
-20
-20
-20
-30
1980
-30
1980
1995
2000
1985
1990
1995
1995
2000
1990
1995
2000
India
30
1990
1985
China
30
1985
1990
South Africa
30
-30
1980
1985
2000
-30
1980
1985
1990
1995
2000
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Model #3 Financial markets
 Movements in financial markets have
important
effects on investment and consumer spending
 Monetisation and financial liberalisation mean that
personal wealth is held in funds, equity, bonds,
bank deposits and real estate
 The market valuation of assets is relatively
uncertain yet investors measure the benefits in
financial terms and such influence spending
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An optimistic scenario
 The best foundation for sustained growth and improved
income distribution would be a consensus on a combination
of policies
 Structural policies would include energy saving and
accelerated relocation of production of tradeable goods and
services to low income regions. The USA may also need to
take action to save energy and build up export industries
 Financial policies would include support for demand
expansion in developing regions and a less conservative
stance in Europe
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Sustainable reflation
Trade surplus ($billion)
 W Europe and Asian
countries can bring
about a reduction of
the US trade deficit
by relying more on
domestic spending
and cutting their
combined trade
surplus
800
600
Rest of
world
400
200
China
Japan
Rest of Asia
0
1990
2000
2010
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Energy efficiency would be a
must and is possible
Energy consumption (tons of oil
per million $ income)
500
 Energy saving will
reduce damage to
the environment
and facilitate a
more balanced
pattern of trade
400
300
Rest of Asia
200
Japan
100
China
0
1990
2000
2010
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Growth generalized
Per capita income, 2007 - 2015
China
7.6%
Other Asia
7.3%
Latin America
6.0%
Africa
6.1%
Middle East
5.1%
Former USSR
7.1%
Eastern Europe
5.5%
Western Europe
2.7%
USA
2.2%
Other Dev
3.0%
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