Transcript Interest Rates? Oil? - The Economics Network

WHERE IS THE WORLD
ECONOMY HEADING?
Dr Derek Braddon
Reader in Economics
Bristol Business School
Year 12 Economics Conference
University of the West of England
Wednesday 27 June 2007
WHAT DRIVES THE FUTURE
ECONOMY?
Wealth and Population? Macro Issues?
Interest Rates? Oil?
Industrial
Restructuring? China &India?
KEY ISSUES
• Inflation: rich nations = 1 to 5%; poor
nations = 6 to 60%.
• Energy price problem, especially oil
• Start of new inflation problem?
• Major trade imbalances with USA
• Economic growth: major industrialised
nations enjoying faster growth; rich-poor
gap increasing; world poverty issue
WHAT WAS DRIVING THE ECONOMIC
RECOVERY?
• Very low interest rates
• Continued expansionary fiscal policy
• Recovery in company finances
• Buoyant consumer demand
• Some stock market recovery
GLOBAL SHORT TERM
INTEREST RATES
%
6
5
4
FED RES
ECB
BOJ
3
2
1
0
2000
2003
2007
SO WHERE ARE WE NOW?
•
•
•
•
Renewed threat of inflation
Impact of rising interest rates
Can growth impetus be maintained?
Problem of US deficits and world’s ability
to finance them
• Convergence of new challenges for global
economy – unprecedented combination of
pressures
THE FUTURE OF THE WORLD ECONOMY:
FOUR MAIN ISSUES
• Energy Prices
• The New Industrial Revolution
• Emerging Super-powers: India and China
• Poverty Eradication
THE ENERGY ISSUE
A CLASSIC SUPPLY & DEMAND
BATTLE
OIL
• World oil demand is increasing, driven by increasing
population, the industrialization of China and India
and huge US appetite for oil.
• Supply is keeping up with demand at present but
world oil production peaks around 2010-2015 when
demand will then exceed supply.
• Among other consequences, the oil price will increase
dramatically. Other fuel sources become economically
viable – but can they replace oil at rate required?
OPEC estimates, 2006
Actual
THE NEW INDUSTRIAL REVOLUTION
THE CHANGING FACE OF INDUSTRY
• Globalisation + Privatisation + International Capital Flows
+ Technology Revolution driving fundamental
transformation of all kinds of business.
• Merger and Takeover Boom - £1,260 bn in first half of 2007
alone (finance, energy, real estate) - 25% above record set in
2000
• Cyberspace Boom – Ohmae’s ‘invisible continent’ - global ecommerce will be worth US$ 8,000 bn next year - with
almost 90 per cent of all online transactions made in only 12
countries.
• Corporate restructuring: flatter management hierarchies;
joint ventures, strategic alliances and technology
partnerships changing meaning of ‘competition’; global
product & IT for scale and scope economies; optimal
location choice for research, design, production, marketing
etc; impact of ‘glocalisation’ and ‘mass customisation’.
[continued]
• ‘Out-sourcing’: companies focusing on core business
and buy in what they need from smaller, specialist
firms; and:
• ‘Off-shoring’: movement of jobs to low cost countries;
e.g.UK off-shores to India, China and East Europe –
e.g. in financial services, 50,000 jobs moved last year,
saving £1.5 bn.
• Overall, recognition that, in future, sustainable
competitive advantage will depend more on new
process technology than on products. “Human-made
comparative advantage has finally replaced natural
comparative advantage” (Thurow).
MANUFACTURING EVOLUTION
• Focus
1900-70
1971-2000 2001-20
Mass prod
Flex Prod
• Machine Tools
150
• Product Range 10 - 15
• % poor quality
25%
Source: Harvard Business Review, 2002
30 - 50
Mass Cust
20
100 - 1000
unlimited
0.02%
0.0005%
THE KEY POINT
For the first time in recent history, the whole planet is
either capitalist or highly dependent on capitalist
economic processes. But it is a new brand of
capitalism.
Productivity and competitiveness are mainly driven
by knowledge generation and information processing.
Firms and territories are organised in networks of
production, management and distribution; the core
economic activities are global - that is, they have the
capacity to work as a unit in real time, or chosen time,
on an international scale.
EMERGING SUPERPOWERS
India and China
WINNING THE ECONOMIC FUTURE:
INNOVATION AND DESIGN
• USA and Europe seem to assume that future growth for
them is innovation and design-led while India and
China will act as low-cost producers.
• Appealing idea for economists since it maintains the
Ricardian comparative advantage thesis intact –
therefore, theory appears to strengthen this view of
future world prospects
• Growing case-study evidence however that suggests the
‘design and innovation’ element of business is being
embedded more and more into leading companies in
both emerging economies.
CHINA
Growth has been very rapid
GDP growth at constant prices
16
14
12
10
8
6
4
2
0
1978
1981
1984
1987
1990
1993
1996
1999
2002
2005
CHINA
• China’s GDP has quadrupled since 1978. Measured on a
purchasing power parity (PPP) basis, China in 2004 was
the second-largest economy in the world after the USA.
• Has the third largest stock of foreign direct investment
in the world
• Has saving and investment = to 40% GDP
• Is the 3rd largest importer and 4th largest exporter in the
world – huge impact on commodity market (esp. oil)
• Its imports will drive up price of commodities and its
exports will cut prices of manufactured goods in world
markets – huge competitive challenge to existing players
INDIA
INDIA
• 10th most industrialised country in the world
• 4th largest economy in terms of purchasing power
• 3rd largest scientific and technical labour force in the
world with well-established IT base
• 2nd largest exporter of computer software and home to
software developments centres of some of world’s
largest companies. Over 200 of the Fortune Top 1000
global companies now use Indian software services and
professionals
• Extremely well-educated and competitive labour force
– another growing economic power for the future.
An Economic Overview of India
Strengths
Weaknesses
 sustained growth at 6.4 for over a
decade (but recent slowdown)
 strong export potential, current a/c
deficit low
 healthy forex reserves
 low external debt
 low inflation regime
 fiscal deficit high, debt / GDP ratio
high
 fiscal situation of states worse
 inadequate infrastructure, huge
funding need
 unsatisfactory investment climate
 rising gap between rich and poor states
 dependence on oil imports; effect of
monsoons etc
 slowing of reforms, coalition
consequences
 social indicators below world average
 political consensus on reforms
 deepening financial sector
 knowledge base advantage,
demographic surge
ENDING POVERTY
Can we save Africa?
AFRICA – THE STRUGGLE FOR SURVIVAL
• “Africa’s poverty is a scar on the conscience of the world” (Tony
Blair, World Economic Forum, Davos, June 2005). Only continent
to have become poorer in last 25 years.
• 150m African children live below the poverty line and two-fifths of
African children are malnourished (Oxfam).
• During this lecture, 900 children will have died from starvation
and related illnesses, > two-thirds in Africa.
• WHO believes 34m people have AIDS, 25m of these are in subSaharan Africa. During this lecture, 400 children in Africa will
have been made orphans due to AIDS.
• This is a continent that is staggering backwards on almost every
front - education, sanitation, infant mortality, disease eradication while the rest of the world moves forward in the 21st century.
AFRICA – THE STRUGGLE FOR SURVIVAL
• Universal free primary education in Africa, promised for 2015, at
current rates will not occur until 2130.
• Half the population of sub-Saharan Africa (SSA) live on less than
$1 per day.
• Africa's > $200 billion debt burden is the single biggest obstacle to
the continent's development.
• SSA countries spend almost $14 bn annually on debt service but
receive only $10 bn in aid.
• G8 finance ministers agreed at a meeting in London on 11 June
2005 to write off $40bn in debt owed by 18 of the world's poorest
countries, most of them in sub-Saharan Africa.
• Promising step forward but of 40 countries targeted, only 18 have
yet reached ‘Millennium Development Goals’ to qualify for debt
write-off.
WHERE IS THE WORLD
ECONOMY HEADING?
• In the short-run, further economic growth for
rich nations but with concerns about inflation
returning and the employment impacts of
global corporate restructuring.
• In longer run, greater economic instability as
the world tries to adjust to the emergence of
new economic powers, resolve the issue of
endemic poverty in Africa and contemplate a
world without oil but with major climate
change.