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ASCENT AFTER DECLINE

Regrowing Global Economies After the Great Recession

Otaviano CanutoVice President and Head of Network

Poverty Reduction and Economic Management (PREM) The World Bank

The XIII HSE International Academic Conference on Economic and Social Development

Higher School of Economics, Moscow, April 3-5, 2012

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Available for download at: http://www.worldbank.org/

ascent-after-decline

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Why this book and why now?The great recession of 2007-09 has left

permanent scars and the global recovery has lost steam (Eurozone’s debt crisis, damaged households balance sheets, depressed consumption and unemployment in the US).

Growth in several major developing countries like Brazil, China and India is significantly slower than earlier in the recovery (tightening monetary policy and low-growth path in advanced economies).

What can we do about it? What kind of policies can put the world economy back on track?  

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Three take-away messagesGovernment’s role remains paramount as

“investor” in the knowledge economy, and as a “guarantor” of the social contract.

Policies must be coordinated on a multilateral basis as single-country interventions are insufficient (reducing China-U.S. imbalances, promoting domestic growth-led strategy, shifting industrial policy, reactivating job creation).

Growth in emerging and developing economies has exhibited strong resilience. But for its full potential, advanced economies must also find how to ascend after declining.  

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The Challenges of Growth

Ch. 1 - by Otaviano Canuto, Danny M. Leipziger, and Brian Pinto

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Obstacles to Global Recovery

Are many: financial markets uncertainty, sovereign

indebtedness, solvency concerns (Euro area periphery),

maturing bank debt, households and bank exposure to real

estate stagnation, damaged balance sheets in advanced

economies.

And in the medium-term:

Rising debt levels; Reduced trade prospects; Global

imbalances.

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Rebalancing Global Demand

Internal rebalancing: fiscal consolidation vs. private

demand

External rebalancing: reduce CA deficits (US) and CA

surplus (China, emerging Asia)

But limited room for fiscal and monetary policy

maneuvering (QE2). Interaction between fiscal

consolidation, growth and debt dynamics.

Likely impact on emerging economies?

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The Changing Landscape for Growth

Can domestic resource mobilization offset capital

shortage and volatility?

Are returns from export-oriented, outward-looking

strategies declining?

Can China relinquish its dominance of low end

manufactures?

Will importers push back trade openness, at the

expense of developing countries?

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Forging the Link between Medium- and Long-Term Growth

Scarcer risk capital, more self-financing for

development

ICT and technological innovation as new opportunities?

Emerging markets and China: global growth drivers?

More-rapid convergence in the interest of both new and

old economic powers?

One goal: avoid suboptimal trajectory, below potential

output, political economy strains, and disorderly

convergence.

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Policy Responses (1/7)Rebalancing Global Growth

Ch. 2 - by Menzie Chinn, Barry Eichengreen, and Hiro Ito

Insulate growth from the pernicious effects of slowly declining current account imbalances, combined with capital flows searching for yield:

• Financial regulation—regulatory reform, particularly cross-boundary coordination.• Central bank policy—consider imbalances and asset prices in formulating monetary policy and minimizing threats to growth.• Fiscal policy—tighten fiscal policy proactively.• Cross-border coordination—countries must coordinate actions, and countries with large deficits urged to consolidate.• International financial architecture—access to emergency financing through pooled reserve arrangements, bilateral lines, or from a special facility at the IMF.

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Figure 2.1 Current Account Balances, 1996-2016

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Figure 2.2 U.S. Saving, Investment, and Current Account, 1968-2011

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Figure 2.3 Current Account Balance as a Percentage of Euro Area GDP, 1995-2010

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Policy Responses (2/7)Fiscal Policy and Growth

Ch. 3 - by Carlo Cottarelli and Michael Keen

How to adjust fiscal policy while maximizing the positive benefits for growth?High public indebtedness in advanced economies -> merely stabilizing it may have highly negative consequences for potential growth; lowering it to “safe” thresholds, would take a Herculean effort. To reduce public debt in advanced and emerging economies to 60 percent and 40 percent of GDP, respectively, by 2030: cyclically adjusted primary fiscal surpluses should increase by 8.25 percentage points of GDP for advanced economies and by 3 percentage points for emerging economies during 2011–20, and kept at this level until 2030. Will an adjustment of this magnitude have adverse consequences for growth because of the aggregate demand effects?

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Figure 3.3 Predicted Old-Age Dependency Ratio, 2009-50

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Figure 3.4 Projected Pension Spending with and without Reforms, 2010-30

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Figure 3.5 General Government Debt in Emerging Economies, 1998-2007

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Figure 3.6 General Government Balances and Debt in Advanced vs. Emerging Economies, 2007-2015

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Figure 3.7 General Government Net Debt Projections for Advanced Economies, Projected to 2030

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Figure 3.8 Precrisis and Postcrisis Output in Advanced Economies, Projected to 2014

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Figure 3.9 Actual and Debt-Stabilizing General Government Primary Balances, by Debt Ratio, 2010

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Policy Responses (3/7)Infrastructure Policy

for Shared Growth Post-2008

Ch. 4 - by Antonio Estache

Infrastructure as a quick fix during the global crisis?Public infrastructure projects seen as silver bullet to create jobs and keep up demand. Accounted for 20–30% of fiscal stimulus package in G20 countries.But infrastructure (which accounts for 12–18% of GDP) warrants as much scrutiny as the financial sector. Policy makers need pay more attention to the rents extracted by construction firms, bankers, and operators. Regulation must restore balance among key stakeholders (operators, users, and taxpayers).

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Figure 4.1 PPI Commitments to Infrastructure Projects in Developing Countries, by Implementation Status, 1990-2009

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Policy Responses (4/7)Rethinking Growth and the State

Ch. 5 - by Philippe Aghion and Julia Cagé

Not so much how large, but how smart should government be? Knowledge investment is fundamental for the State:• Increased education funding—particularly in research.• Worker retraining—subsidies likely needed to retrain workers as part of a liberalization of trade or entry strategy.• R&D spending—critical to firms’ long-run growth, and could be useful for macroeconomic stabilization.• Climate-related innovation—carbon pricing to discourage dirty technology, combined with subsidies to simultaneously encourage clean innovation.• Industrial policy—target subsidies to several firms in a given sector, spurring innovation as firms compete against each other, leading to higher productivity and stimulating new product creation.

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Figure 5.1 Relation between University Output and Autonomy in Selected European Countries

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Figure 5.2 Relation between Changes in Inherited Trust and Per Capita Income, 1935-2000

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Figure 5.3 Relation between Distrust and Extent of Entry Regulation

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Figure 5.6 Relation between Taxation and Growth in High-Corruption OECD Countries

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Figure 5.7 Relation between Taxation and Growth in Low-Corruption OECD Countries

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Policy Responses (5/7)Financial Shocks and

the Labor Market

Ch. 6 - by Tito Boeri and Pietro Garibaldi

Save first financial institutions or jobs? Despite vast sums spent to bail out and shore up the financial sector, unemployment remains high. Yet, financial institutions have systemic significance, State cannot easily decide which sectors to pick for saving jobs, and firms might build up leverage in anticipation of being helped (moral hazard). Going forward, a strong focus needed on job-creating competition policies and easing barriers to entry because the lion’s share of net job creation is in start-up firms.

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Figure 6.1 U.S. and Euro Area Unemployment Rates, 2000-10

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Figure 6.2 Stock Market Capitalization and Unemployment, Euro Area and U.S., 2000-10

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Figure 6.3 Unemployment-to-Output Response in G-7 Countries

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Policy Responses (6/7)Information Technology,

Globalization, and Growth

Ch. 7 - by Catherine L. Mann

Can IT boost growth prospects? Positive impact on total factor productivity growth as a result of innovation. Economic welfare and growth influenced by terms of trade, economies of scale, and variety. Secular fall in quality-adjusted prices of IT products (potential decline in the terms of trade) would favor consumers and importers.Economies of scale combined with the ability to import inputs could benefit exporting countries. Incentive for businesses to do existing things better is where the real IT benefits lie. A good strategy for a developing country might be to join a global supply chain and eventually create better conditions for using IT at home, which is where the growth potential of IT lies.

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Figure 7.1 Transformative Technology and Social Surplus

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Figure 7.2 Growth and International IT Trade: The Hypotheses

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Figure 7.3 Growth and International IT Trade: The Calculations

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Figure 7.4 Social Surplus and IT Trade in Selected Economies, 2000-07

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Figure 7.5 Variety vs. Concentration in Product Trade, Selected Countriesaverage of 1999 and 2006 Herfindahl indexes

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Policy Responses (7/7)Innovation-Driven Growth

Ch. 8 - by Paolo Guerrieri and Pier Carlo Padoan

Radical change undergoing: open innovation process, global innovation chains, and facilitating role of new technology platforms such as the Internet.A new growth strategy should seek:• Increase in human capital operating through technology, which has a bigger impact on GDP than deregulation.• Harmonization has a bigger impact on services than deregulation, while technology benefits more from deregulation.• Technology accumulation, the ultimate growth driver, which is strongly supported by human capital accumulation.Delay in implementing policy change will be costly for productivity and growth.

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Figure 8.1 Real Income Sources in Europe and Japan Compared with the U.S., 2007

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Figure 8.2 Effects of Deregulation and Harmonization

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Figure 8.3 Effect of a 5 Percent Increase in Human Capital

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Figure 8.4 Comparative Effects of Policy Scenarios on Output

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To continue with issues related to the global economic crisis and growth:

http://blogs.worldbank.org/growth/blogs/otaviano-canuto

Thanks!

Otaviano CanutoVice President and Head of Network

Poverty Reduction and Economic Management (PREM) The World Bank

The XIII HSE International Academic Conference on Economic and Social Development

Higher School of Economics, Moscow, April 3-5, 2012