Growth in the Post-Crisis World...Growth in the Post-Crisis World; Presentation by Michael Spence;...
Transcript of Growth in the Post-Crisis World...Growth in the Post-Crisis World; Presentation by Michael Spence;...
![Page 1: Growth in the Post-Crisis World...Growth in the Post-Crisis World; Presentation by Michael Spence; Macro and Growth Policies in the Wake of the Crisis; March 7 and 8, 2011 Created](https://reader033.fdocuments.us/reader033/viewer/2022052005/6018585687e2067aa161b758/html5/thumbnails/1.jpg)
Growth in the Post-Crisis World
Michael Spence
![Page 2: Growth in the Post-Crisis World...Growth in the Post-Crisis World; Presentation by Michael Spence; Macro and Growth Policies in the Wake of the Crisis; March 7 and 8, 2011 Created](https://reader033.fdocuments.us/reader033/viewer/2022052005/6018585687e2067aa161b758/html5/thumbnails/2.jpg)
Macroeconomic Stability
• Was before the crisis and still is a necessary but not sufficient condition for sustained high growth
• In domestic and global economy
• The challenge presented by the crisis is how to achieve it
• While most of the discussion is about policy
• I think it is a mistake to focus only on policy – the conceptual frameworks used by the private sector participants affect behavior via the accuracy or inaccuracy of the assessment of the dynamics of risk, and hence the self-regulatory properties of the system – which evidently failed in the crisis
![Page 3: Growth in the Post-Crisis World...Growth in the Post-Crisis World; Presentation by Michael Spence; Macro and Growth Policies in the Wake of the Crisis; March 7 and 8, 2011 Created](https://reader033.fdocuments.us/reader033/viewer/2022052005/6018585687e2067aa161b758/html5/thumbnails/3.jpg)
Growth Dynamics
• In advanced countries – long run growth driven by innovation
• In EM’s the main ingredients are
– Engagement with the global economy
– Inbound knowledge transfer
– Export diversification and continuous structural change
– Capital deepening: High investment rates (above 25-35% of GDP) financed mainly by domestic savings
• With capital/output ratios of 2.5 to 3.0, this will support growth at 7-10%
– High rates of public sector investment (5-7% of GDP)
– Policy setting is decision-making under uncertainty and has a pragmatic, experimental character to it in successful cases
![Page 4: Growth in the Post-Crisis World...Growth in the Post-Crisis World; Presentation by Michael Spence; Macro and Growth Policies in the Wake of the Crisis; March 7 and 8, 2011 Created](https://reader033.fdocuments.us/reader033/viewer/2022052005/6018585687e2067aa161b758/html5/thumbnails/4.jpg)
However There are Longer Term Issues
• Can be thought of as a series of adding up problems
• Environment, climate, water, energy, global governance and coordination
• These will force shifts in the growth models in all countries
• For example, almost all of the incremental energy consumption and carbon emissions will come from EM growth
– Even with a highly effective coordinated energy efficiency and mitigation strategy, carbon emissions, by my estimates will at best be flat for two decades
– In the race between growth and energy efficiency, growth will win in the short to medium run
• It is not a sustainable path
![Page 5: Growth in the Post-Crisis World...Growth in the Post-Crisis World; Presentation by Michael Spence; Macro and Growth Policies in the Wake of the Crisis; March 7 and 8, 2011 Created](https://reader033.fdocuments.us/reader033/viewer/2022052005/6018585687e2067aa161b758/html5/thumbnails/5.jpg)
Impact of the Crisis
• There was some concern that the crisis would be misinterpreted as a broad-based failure of the market driven capitalist approach
• And that the growth model would be rejected in favor of a more inward looking, state driven and interventionist approach
• Put another way, the global economy is too dangerous
• That has not happened in part I think because of the speed and completeness of the recovery in the developing countries
• There is heightened attention to initial positioning and to pre-built rapidly deployable mechanisms for handling the distributional effects of shocks
![Page 6: Growth in the Post-Crisis World...Growth in the Post-Crisis World; Presentation by Michael Spence; Macro and Growth Policies in the Wake of the Crisis; March 7 and 8, 2011 Created](https://reader033.fdocuments.us/reader033/viewer/2022052005/6018585687e2067aa161b758/html5/thumbnails/6.jpg)
Diversity of Views and Practice
• Policies and investments under the heading of economic and export diversification, SEZ’s , supporting urbanization, demonstration effects, and accelerating knowledge transfer have been used routinely
– But there are benefits and risks (incompetence, waste and capture)
– Varying degrees of success across cases
– No real way of knowing the counterfactual
– The limited duration principle
• The pace and sequencing of opening up on the current account side is important and is more art than science at this point
– probably the key metric or guideline is keeping the rate of job creation out ahead of job loss via foreign competition and productivity growth
• The capital account pace and sequencing similarly
• Generally, the crisis reinforced prior beliefs and lessons from experience and past crises:
![Page 7: Growth in the Post-Crisis World...Growth in the Post-Crisis World; Presentation by Michael Spence; Macro and Growth Policies in the Wake of the Crisis; March 7 and 8, 2011 Created](https://reader033.fdocuments.us/reader033/viewer/2022052005/6018585687e2067aa161b758/html5/thumbnails/7.jpg)
The Crisis and Developing Countries
• Two main channels of Impact
– 1. Exodus of capital and credit tightening
– 2. Huge fall off in trade – followed by a sharp recovery
• An impressively fast recovery
• China, India and Brazil bounced back in that order
– Substantial domestic ownership in financial sector
– Rapid response by central banks
– Trade bounced back
– Reserves
– No toxic assets
– Absence of excessive leverage and ,oimited balance sheet damage in the household
• EM’s had v-shaped recovery that policy makers and markets in advanced countries mistakenly expected with a cyclical mindset
7
![Page 8: Growth in the Post-Crisis World...Growth in the Post-Crisis World; Presentation by Michael Spence; Macro and Growth Policies in the Wake of the Crisis; March 7 and 8, 2011 Created](https://reader033.fdocuments.us/reader033/viewer/2022052005/6018585687e2067aa161b758/html5/thumbnails/8.jpg)
Partial Decoupling
8
![Page 9: Growth in the Post-Crisis World...Growth in the Post-Crisis World; Presentation by Michael Spence; Macro and Growth Policies in the Wake of the Crisis; March 7 and 8, 2011 Created](https://reader033.fdocuments.us/reader033/viewer/2022052005/6018585687e2067aa161b758/html5/thumbnails/9.jpg)
9
![Page 10: Growth in the Post-Crisis World...Growth in the Post-Crisis World; Presentation by Michael Spence; Macro and Growth Policies in the Wake of the Crisis; March 7 and 8, 2011 Created](https://reader033.fdocuments.us/reader033/viewer/2022052005/6018585687e2067aa161b758/html5/thumbnails/10.jpg)
Sustainability of Growth in EM’s
• In the context of a difficult, extended slow growth in advanced economies
• It looks like the growth is sustainable
– EM growth dynamics still in place
• structural change and supporting policies deeply embedded
– Economic size of EM group
– Trade within EM group
– Higher incomes and closer match between demand and supply sides of the economy
– China’s growth has become an important engine
– Main export partner for Korea, India, Brazil and lots of others
– The network structure of global has shifted
• Downside Risks to Baseline Case
– Another major downturn downturn in advanced countries
– Failure to deal with rebalancing of demand
– Serious outbreak of protectionism
– Mishandling the current distortions caused by advanced country recovery policies – low interest rates and QE2
– Growth falters in China
10
![Page 11: Growth in the Post-Crisis World...Growth in the Post-Crisis World; Presentation by Michael Spence; Macro and Growth Policies in the Wake of the Crisis; March 7 and 8, 2011 Created](https://reader033.fdocuments.us/reader033/viewer/2022052005/6018585687e2067aa161b758/html5/thumbnails/11.jpg)
Evolving Structure of Global Economy
• G20 85% of GDP and 66% of population
• EM’s will soon pass 50% of global GDP within a decade
• Asymmetries declining
• Systemic impacts are rising
• Old Hybrid’s
– Assumed correctly that the systemic impacts of EM’s were limited
– Enabled focus largely on domestic growth and development
– Won’t work now
– Systemic impact coming at much lower income levels – China and India
• Creates tensions and challenges for global coordination of policies
• EM’s are a double edged sword for advanced economies
– Big market opportunity
– Challenge to employment in tradable sector of advanced economies as they move steadily up the value added chain 11
![Page 12: Growth in the Post-Crisis World...Growth in the Post-Crisis World; Presentation by Michael Spence; Macro and Growth Policies in the Wake of the Crisis; March 7 and 8, 2011 Created](https://reader033.fdocuments.us/reader033/viewer/2022052005/6018585687e2067aa161b758/html5/thumbnails/12.jpg)
China and the Middle Income Transition
• Parallel Shifts in Structure in 12th Five Year Plan
• Middle income transition in China – Major internal structural change on supply side – Wages in Pearl River Delta post-Foxcomm
• Parallel shift in demand side structure involving national income and saving
– Required to have domestic demand drive growth and the structural evolution of the economy
• Global rebalancing of aggregate demand and elimination of current account
surplus and excess savings – but without loss of growth momentum
• The crisis and China’s growing size has made all of the above more immediate and urgent – Domestically and in the Global Economy
12
![Page 13: Growth in the Post-Crisis World...Growth in the Post-Crisis World; Presentation by Michael Spence; Macro and Growth Policies in the Wake of the Crisis; March 7 and 8, 2011 Created](https://reader033.fdocuments.us/reader033/viewer/2022052005/6018585687e2067aa161b758/html5/thumbnails/13.jpg)
Middle Income Transition is Difficult
13
![Page 14: Growth in the Post-Crisis World...Growth in the Post-Crisis World; Presentation by Michael Spence; Macro and Growth Policies in the Wake of the Crisis; March 7 and 8, 2011 Created](https://reader033.fdocuments.us/reader033/viewer/2022052005/6018585687e2067aa161b758/html5/thumbnails/14.jpg)
Five High Speed Transitions
• Japan
• Korea
• Taiwan
• Hong Kong
• Singapore
14
![Page 15: Growth in the Post-Crisis World...Growth in the Post-Crisis World; Presentation by Michael Spence; Macro and Growth Policies in the Wake of the Crisis; March 7 and 8, 2011 Created](https://reader033.fdocuments.us/reader033/viewer/2022052005/6018585687e2067aa161b758/html5/thumbnails/15.jpg)
Advanced Country Growth
• Is more uncertain for a number of reasons
– Fragility of the recovery on the balance sheet side
– Restoring fiscal balance and attendant risks
– Effectiveness of re-regulation
– Domestic demand shortfall and insufficient ability to access global demand
– Longer term structural shifts affecting growth and employment
– The direct impact of the evolving structure of the global economy and the EM’s comes on the tradable side of any economy
– Then there are indirect effects in the nontradable on employment wages and incomes
–
![Page 16: Growth in the Post-Crisis World...Growth in the Post-Crisis World; Presentation by Michael Spence; Macro and Growth Policies in the Wake of the Crisis; March 7 and 8, 2011 Created](https://reader033.fdocuments.us/reader033/viewer/2022052005/6018585687e2067aa161b758/html5/thumbnails/16.jpg)
Employment in the US Economy
16
![Page 17: Growth in the Post-Crisis World...Growth in the Post-Crisis World; Presentation by Michael Spence; Macro and Growth Policies in the Wake of the Crisis; March 7 and 8, 2011 Created](https://reader033.fdocuments.us/reader033/viewer/2022052005/6018585687e2067aa161b758/html5/thumbnails/17.jpg)
USA Structure
-
5,000
10,000
15,000
20,000
25,000
30,000
Net Difference Tradable Non Tradable
27,304
625
26,679
Ch
ange
in J
ob
s, in
Th
ou
san
ds
Total Change in Jobs, 1990-2008
Net Difference
Tradable
Non Tradable
17
![Page 18: Growth in the Post-Crisis World...Growth in the Post-Crisis World; Presentation by Michael Spence; Macro and Growth Policies in the Wake of the Crisis; March 7 and 8, 2011 Created](https://reader033.fdocuments.us/reader033/viewer/2022052005/6018585687e2067aa161b758/html5/thumbnails/18.jpg)
The Impact of EM Growth on US Structure
Value Added in the US Economy
18
![Page 19: Growth in the Post-Crisis World...Growth in the Post-Crisis World; Presentation by Michael Spence; Macro and Growth Policies in the Wake of the Crisis; March 7 and 8, 2011 Created](https://reader033.fdocuments.us/reader033/viewer/2022052005/6018585687e2067aa161b758/html5/thumbnails/19.jpg)
Value Added Does not Show the Same Pattern
19
-
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
5,000
Total Tradable Non-Tradable
Bil
lio
ns
of
Ch
ain
ed 2
00
5 D
oll
ars
Total Change in Value Added, 1990-2008
![Page 20: Growth in the Post-Crisis World...Growth in the Post-Crisis World; Presentation by Michael Spence; Macro and Growth Policies in the Wake of the Crisis; March 7 and 8, 2011 Created](https://reader033.fdocuments.us/reader033/viewer/2022052005/6018585687e2067aa161b758/html5/thumbnails/20.jpg)
Value Added Growth
20
7.8
8
8.2
8.4
8.6
8.8
9
9.2
1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009
Lo
g (
Bil
lio
ns
of
Ch
ain
ed 2
00
5 D
oll
ars
)
Log Tradable/Nontradable Value Added, 1990-2008
Tradable
Nontradable
![Page 21: Growth in the Post-Crisis World...Growth in the Post-Crisis World; Presentation by Michael Spence; Macro and Growth Policies in the Wake of the Crisis; March 7 and 8, 2011 Created](https://reader033.fdocuments.us/reader033/viewer/2022052005/6018585687e2067aa161b758/html5/thumbnails/21.jpg)
Valued Added per Person Employed – US Economy
21
![Page 22: Growth in the Post-Crisis World...Growth in the Post-Crisis World; Presentation by Michael Spence; Macro and Growth Policies in the Wake of the Crisis; March 7 and 8, 2011 Created](https://reader033.fdocuments.us/reader033/viewer/2022052005/6018585687e2067aa161b758/html5/thumbnails/22.jpg)
Big Employment Sectors – Non Tradable
22
![Page 23: Growth in the Post-Crisis World...Growth in the Post-Crisis World; Presentation by Michael Spence; Macro and Growth Policies in the Wake of the Crisis; March 7 and 8, 2011 Created](https://reader033.fdocuments.us/reader033/viewer/2022052005/6018585687e2067aa161b758/html5/thumbnails/23.jpg)
Tradable Sector Employment
Architectural, Engineering, and Related
Services
Auto
Information
Electronics
Retail*
Agriculture
Manufacturing I
Finance and Insurance
Manufacturing II (w/o Pharma)
Manufacturing III (w/o Electronics,
Auto, and Aero)
0.50
1.00
1.50
2.00
2.50
3.00
3.50
4.00
4.50
5.00
5.50
1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009
Jo
bs,
In
Mil
lio
ns
![Page 24: Growth in the Post-Crisis World...Growth in the Post-Crisis World; Presentation by Michael Spence; Macro and Growth Policies in the Wake of the Crisis; March 7 and 8, 2011 Created](https://reader033.fdocuments.us/reader033/viewer/2022052005/6018585687e2067aa161b758/html5/thumbnails/24.jpg)
Tradable Sector Value Added
• Value added is rising pretty much across the board in the tradable sector
• Including in the declining employment sectors (manufacturing) with complex value added chains that are partly migrating to other parts of the global economy
• Then there are sectors (finance, management of multinational enterprises, computer design, consulting etc) where employment and value added are rising, often quite rapidly
![Page 25: Growth in the Post-Crisis World...Growth in the Post-Crisis World; Presentation by Michael Spence; Macro and Growth Policies in the Wake of the Crisis; March 7 and 8, 2011 Created](https://reader033.fdocuments.us/reader033/viewer/2022052005/6018585687e2067aa161b758/html5/thumbnails/25.jpg)
Summary
• Value added per person is rising in the tradable sector
• The lower value added jobs are moving off-shore
• The tradable sector is not an employment engine
• The non-tradable sector has been absorbing the work force
• If its absorptive capacity diminishes as seems likely, then unemployment will remain stubbornly high
• What has shown up largely as adverse shifts in the income distribution may become an employment challenge.
• The evolution of the US income distribution is reflective of these trends.
• This is not a market failure in the global economy
• It is a distributional issue
25
![Page 26: Growth in the Post-Crisis World...Growth in the Post-Crisis World; Presentation by Michael Spence; Macro and Growth Policies in the Wake of the Crisis; March 7 and 8, 2011 Created](https://reader033.fdocuments.us/reader033/viewer/2022052005/6018585687e2067aa161b758/html5/thumbnails/26.jpg)
Outcomes
• Hard to know
– This is not a cyclical phenomenon – a journey we only take once
• There are policies that would partial counter these trends (education, infrastructure, technology incentives and investments)
• But not completely
• My best guess is the growth will return to something like normal
• But employment won’t
• Growth and employment (quantity, scope and incomes) are set diverge - and that is new
• And the income distribution, absence intervention, and perhaps a shift in values, will continue to move adversely