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EC120: The World Economy in Historical Perspective
Topics Week 24: “The Great Moderation” and (for some, some
times) the NICE (Non-Inflationary Constant Expansion) years,
1981 – 2007, before the Fall
•
1. The fundamental background: technological progress after 1980.
•
2. The macroeconomic experience 1980-2007: broad global growth,
punctuated by crises.
•
3. Japan’s extraordinary post-war experience: growth, capital flows,
and financial crises.
•
4. Asia in the Japanese Mirror: growth, capital flows, and financial
crises.
•
5. Contagion: the Asian crisis (1997-98) goes global: Brazil, Russia,
Argentina.
•
6. Illusions of stability at the beginning of the 21st century.
EC120 Spring 2017: Week 24, Topic 19, Slide 0
EC120: The World Economy in Historical Perspective
1a. Productivity growth after 1980: The Background
• Once again: the over-riding importance of productivity growth for
welfare.
• Was the disappointing economic performance of the 1970s
transitory, a product of a momentary spike in oil prices combined
with a lull in the pace of technological development, or is it to
become the new norm?
The future of work? Inside the Googleplex (or some such) or not?
EC120 Spring 2017: Week 24, Topic 19, Slide 1
EC120: The World Economy in Historical Perspective
1b. Technological Progress after 1980: The Optimistic Case
• While productivity has historically advanced in many directions
simultaneously, the promise of Information and Communications
Technologies (ICT) appears to many particularly great because:
− the cost of computing power has fallen exponentially since the 1950s
and is likely to continue doing so for the foreseeable future;
− ICT appears to be a “general purpose” technology (like steam power
and electricity) with applications throughout the economy.
• Hence, while the exact timing and nature of the impact of future
developments in ICT may not be clear, the outlook is promising.
2-1C Medical Android
Genome Analyzing Machine
EC120 Spring 2017: Week 24, Topic 19, Slide 2
EC120: The World Economy in Historical Perspective
1c. Technological Progress after 1980: The Pessimistic Case
• Diminishing returns to ICT quickly set in.
• Much ICT expenditure has resulted in much low-productivity
duplication.
• ICT has had a bigger impact on consumption than on production.
• To be used effectively, ICT requires high levels of human capital,
which much of the labour force does not possess, resulting in low
productivity (and low incomes) for many.
Sensory Overload
Computer Games
(Toshiba’s Bubble
Helmet)
EC120 Spring 2017: Week 24, Topic 19, Slide 3
EC120: The World Economy in Historical Perspective
1d. Technological Progress after 1980: The Current Balance (Spring, 2017)
• The burst of productivity experienced in the later 1990s has not
been sustained, as pessimists had forecast.
• The cost of computing power has continued to fall and new uses for it
– some anticipated, some not - have arisen, such as analyzing
massive data sets, automating certain healthcare functions and the
“internet of things”, as optimists anticipated.
• Has the promise of ICT thus simply been postponed, only requiring
more invention, more learning-by-doing, and more computing
power to be realized, or will it always be a mirage, forever receding
just out of reach? Or will productivity gains be realized selectively,
only to leave large numbers of workers either unemployed or
seriously under-employed.
EC120 Spring 2017: Week 24, Topic 19, Slide 4
EC120: The World Economy in Historical Perspective
2. The Macroeconomic Experience 1980-2007: Broad Global Growth
Punctuated by Crises
• Background
− The end of Bretton Woods, in a context of still-rapid economic growth (197173) and accompanied by rapidly increasing international liquidity
(and, not coincidentally, rising inflation) encouraged international bank
lending (re-cycling petro-dollars after 1973).
− In these circumstances, awash with cheap deposits, Western banks lent
freely (but often not wisely).
− As interest rates (both nominal and real) rose in the early 1980s,
many of these borrowers, facing repayment in foreign currencies of shortterm loans, defaulted, threatening the solvency of their lenders’ banking
systems while compromising borrowers’ continued access to foreign credit
markets. In the following decades, inflation gradually fell and growth
became more stable, but still vulnerable to largely unpredicted crises, often
linked to international capital flows.
• The sovereign debt of advanced economies (as a percentage of GDP), which
had been falling since the end of the Second World War, began to rise in
the 1970s (and is still rising) as countries have struggled to cope with less
favourable circumstances. See Jordà et. al. (2013), Fig. 1.
EC120 Spring 2017: Week 24, Topic 19, Slide 5
EC120: The World Economy in Historical Perspective
3a. Japan’s Post-War Miracle: Growth, Capital Flows, Financial Crises
• Background: the legacy of Japanese exceptionalism - the only non-Western
country to begin industrialization before 1914.
• Although defeated in 1945 and shorn of its Empire, Japan, like Germany,
still possessed significant economic capability.
• The Korean War (1950-1953) provided considerable macroeconomic
stimulus to Japan and greatly increased its foreign exchange reserves.
• With still-limited foreign exchange reserves and no foreign assets, Japan’s
growth in the 1950s relied heavily on exports to obtain raw materials and
capital goods, as it had before 1914.
Sony transistor radio
c. 1960 (left)
Toyota Toyopet
Corona, 1960
(right)
EC120 Spring 2017: Week 24, Topic 19, Slide 6
EC120: The World Economy in Historical Perspective
3b. Japan’s Post-War Miracle: Growth, Capital Flows, Financial Crises
[con’t.]
• Japan benefited from the great upsurge in international trade that began in
the 1950s, pegging its exchange rate at 360 yen to the US dollar in April
1949 and maintaining that rate until August 1971; capital flows were
stringently controlled while rapid productivity growth caused the yen to
be progressively undervalued; trade surpluses became very large.
• In the 1980s, to avoid further appreciation of the yen as currencies floated,
Japan agreed to a programme of macroeconomic stimulation and to
liberalization of its capital markets, leading to a huge, largely bank-led
credit surge that ended in disaster in the early 1990s.
• Nevertheless, Japan’s success set an extremely powerful example of the
effectiveness of technology-driven export-led growth (crucially aided by a
highly competitive exchange rate).
EC120 Spring 2017: Week 24, Topic 19, Slide 7
EC120: The World Economy in Historical Perspective
4a. Asia in the Japanese Mirror: Growth, Capital Flows, Financial Crises
• The success of Japan’s export-led economic model was first copied in
East Asia (South Korea, Taiwan), beginning in the 1960s.
• Familiar elements of the model:
− exchange rate targets were set at low levels, enabling internationally
competitive firms to earn high profits, which were expected to be used
to enhance technological capability, enabling these firms to expand
into new activities;
− the banking system was used to support favoured industries;
− exchange controls were used to keep the exchange rate low (hence
advantageous for exporters and industries that faced import
competition);
− government policies were generally supportive (infrastructure,
education, research subsidies) and have achieved notable success,
notably in the high-tech industries of South Korea and Taiwan.
EC120 Spring 2017: Week 24, Topic 19, Slide 8
EC120: The World Economy in Historical Perspective
4b. Asia in the Japanese Mirror: Growth, Capital Flows, Financial Crises [con’t.]
• Crisis first struck non-Japan Asia (but not China) in 1997, following a long
period of rapid growth.
• The crisis began in Thailand in July 1997, when the long-stable Thai
baht was abruptly and sharply devalued, causing great distress in the
banking system, which carried large amounts of short-term debt
denominated in foreign currencies.
• The crisis then spread within weeks to Indonesia, Malaysia, and the
Philippines, neighbouring countries that had also been growing rapidly
(albeit from a lower base) but which shared many of Thailand’s
problems (large current account deficits, high inflation, large amounts of
foreign-currency debt relative to reserves, property booms, and overstretched banks) but few direct trade or financial links.
• The crisis entered a new phase in October 1997, when it spread to
Taiwan and closely linked Hong Kong, and then, with particular
virulence, to South Korea.
EC120 Spring 2017: Week 24, Topic 19, Slide 9
EC120: The World Economy in Historical Perspective
6. Contagion: the Asian Crisis Goes Global - Russia, Brazil, and Argentina
• Russia, familiar problems and more: a flawed transition from a centrallyplanned economy to a market-based one; chronic government budget
deficits; a pegged exchange rate; falling oil prices.
• The result: devaluation and debt default, followed by financial panic.
» Collateral damage: hedge funds.
• Brazil: the risks of exchange-rate-based stabilization of inflation when
budget control is weak.
• Argentina: another episode in “a country sporting a famous history of serial
defaults” (Reinhart & Rogoff, p.53).
• The IMF was criticized by many for responding to these crises by imposing
harsh measures while extending only limited support.
EC120 Spring 2017: Week 24, Topic 19, Slide 10
EC120: The World Economy in Historical Perspective
7. Illusions of Stability at the Beginning of the 21st Century
• The US: until 2008, growth performance had been supported to an
important extent by a sequence of easy-money “bubbles”, first general stock
market expansion (burst 1987), then technology (burst 2001), then housing
and finance (burst 2008), the latter ushering in an unusually severe slump,
followed by an unusually weak recovery.
• The UK: an experience similar to the US, but with a more muted technology
“bubble” and a more virulent housing and finance “bubble”.
• The Eurozone: incomplete adaptation to a single currency accompanied by
large pre-crisis cross-border financial flows, similar to those in Asia in the
1990s, left the borrowing regions of the zone with few means of recovery
other than “internal devaluation” when the cross-border flows abruptly
ended in the crisis of 2008.
● Meanwhile, across a wide range of countries, real interest rates have been
falling, making, for the time being, the burden of debt lighter. (See Rachel &
Smith, 2015, Charts A5 and A1.A).
EC120 Spring 2017: Week 24, Topic 19, Slide 11
EC120: The World Economy in Historical Perspective
7b. Illusions of Stability at the Beginning of the 21st Century [con’t]
• Japan: a delayed and incomplete recovery from a credit “bubble” that burst
in 1990, resulting in an extraordinarily protracted gradual deflation
accompanied by a vast accumulation of debt and leading to unprecedented
attempts to stimulate the economy.
• Unresolved issues: will emerging markets, above all China and India, be able
to sustain their remarkable development when advanced countries,
traditionally the drivers of the global economy, are so fragile and growing so
slowly?
Modern Shanghai
Modern Mumbai
EC120 Spring 2017: Week 24, Topic 19, Slide 12
EC120: The World Economy in Historical Perspective
Summing Up: Interpretation and Assessment
In the absence of historical perspective, more questions than answers:
• Is the technological basis for economic growth weakening?
• Did the move to floating exchange rates after the collapse of Bretton Woods
gravely weaken the monetary discipline that had underpinned fixed
exchange rates?
• Export-led grow has been the primary path to development in the post-1945
era, but does it tend to result in under-developed domestic economies that
produce “savings gluts”, systematically generating export surpluses that
leave the global economy unbalanced? Will automation (“reshoring”) and
trade protectionism reduce or eliminate the possibilities of export-led for
developing economies.
EC120 Spring 2017: Week 24, Topic 19, Slide 13