Global Imbalances and Policy Co-ordination:

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Global Imbalances and Policy Co-ordination
Advancing an Analytical Framework

University of Campinas, October 2006
CERF University of Cambridge
Alphametrics Ltd.
UNDP International Poverty Center
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Outline

• The project
• How it started
• Why is this necessary Is this any different?
• Some findings
• Why macro-financial imbalances cannot continue
• An US-led recession is not good for anyone
• Developing blocs have a critical role
• But is not good enough yet. Next steps
• Revise assumptions, improve specification, etc.
• Open geometry in a trade income model
  scenarios
• Analysis of financial stocks flows model
  scenarios
• Income distribution in a co-ordinated policy
  response

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The projects background

• NN.AA. SAM tradition Stone, Pyatt, Roe, etc.
• Central planning Tinbergen, Kalecki, Eclac,
  etc.
• Modelling and planning pioneering work of the
  CEPG (Francis Cripps, Wynne Godley, etc.)
• Alphametrics model of the world economy
• CERF and the Cambridge heritage
• A network IPC (UNDP), G24, FERE, IDEAs, JNU
  (IN), Unicamp, IPEA (BR), Shangai IPC Univ.,
  others (CEFID-AR Fed.Uni.Rio )

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What we want to know about the world economy

• Trade, finance, growth and distribution
• History and new factors
• Structure and dynamics of adjustment
• What outcomes can we expect if we do not do
  anything ?
• Can policies make a difference ?
• Global policies require coalitions
• Coalitions require common understanding

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How we can understand such a huge and complex
system ?

• Central preconceptions
• global development is a historical process
• discard sh.term noise avoid forecasting
• coping with limitations and learning to interpret
• Data incomplete/imperfect but improving
• Model stylised patterns, structural relations,
  dynamics of adjustment, global linkages.
• Scenarios consistent baseline, plausible
  developments and shocks, co-ordinated policy
  action target-instruments

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Findings history sustainability

• The past 30 years
• Growth
• ... integration
• ... imbalances
• Will this pattern continue ?
• What do we mean by sustainable growth ?

by 2015 trade would exceed 50 of world income
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Who succeeds in the global market today ?

• Global markets are dominated by large companies
  and production is concentrated in specific
  regions
• 5 of the market is shared by countries with
  almost half the world's population

Nigeria, Indonesia, Pakistan, India,
Bangladesh and many other countries in Asia,
Africa and America
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Industrial exports
Exports of manufactures, billion US at 2004
prices

• The market has been dominated by Western Europe,
  the USA, Japan and the rest of Asia
• China is attracting attention as a new entrant

excluding intra-bloc trade
9
The world market for manufactures
Imports of manufactures, billion US at 2004
prices

• The USA and Western Europe provide the main
  markets although Asian imports are growing
• The rest of the world exchanges energy and raw
  material exports for manufactures

excluding intra-bloc trade
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Hard times ahead ?

• The US has a massive deficit
• US economic growth relies heavily on internal
  demand
• Growth in the rest of the world relies on growth
  in the US
• With rising interest rates and the high price of
  oil, will US growth continue ?

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The view in Washington
( p.a.)

• International institutions and the CBO forecast
  continuing growth at historical rates
• The US will continue to be the main driver of
  world trade and financial flows

Average growth of the U.S. economy
(1970-2004) 2.8
Growth Rate of U.S.
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The U.S. deficit
( of GNP)
Current Account Balance

• If the historical pattern continues
• the trade deficit will reach 8 per cent of GNP
• payments on external debt will cost nearly 2 per
  cent of GNP

Trade Balance
13
U.S. external debt
( of GNP)

• Net external liabilities of the USA are about 30
  per cent of GNP and growing fast
• Net liabilities could reach 80 per cent of GNP
  within the next 10 years

Net Position of the US vis à vis the Rest of the
World
14
The stock of personal debt

• Debt of the personal sector is now one-and-a-half
  times income
• With continued deficits, personal debt would
  reach about two-and-a- half times income in ten
  years from now

Debt of the personal sector as of disposable
income
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Asset appreciation
Asset prices in real terms

• Accumulating debt has been backed by ever-rising
  asset prices
• If this continues, equities and houses should be
  priced at one-and-a-half times their (already
  high) value ten years from now?

House price index
SP 500 index
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If the U.S. economy starts to slow down
( p.a.)

• When household spending reaches a plateau
  relative to income, growth will slow down

Average growth of the U.S. (1970-2004) 2.8
Consensus forecast for U.S growth
Slowdown
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With a slowdown the U.S. deficit flattens

• A moderate slowdown (about 0.5 per cent per
  annum) may stabilize the U.S. trade deficit at 6
  of GNP
• But this is not sufficient to bring financial
  flows back into balance

U.S. Trade Balance of GNP
Slowdown
Consensus
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Could the slowdown result in a recession ?
( p.a.)
Average growth of the U.S. (1970-2004) 2.8

• Weakening sentiment may affect
• - asset prices
• - credit expansion
• - household spending
• - jobs
• - tax revenue
• How will governments and monetary authorities
  respond ?

Slowdown
Recession
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Recession would be generalized

• The rest of the world would pay a price through
• - reduced growth of exports to the US
• - knock-on impact on confidence and spending
  elsewhere

Deficit as of GNP
Recession
Slowdown
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What can the rest of the world do to reduce the
risk ?

• A more balanced and sustainable growth process in
  each world region
• Less dependence on the USA
• Less reliance on high-cost imported energy
• Closer regional integration
• Growth sustained by domestic spending as well as
  exports

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Sustainable domestic reflation

• Asian countries can bring about a reduction of
  the US trade deficit by relying more on domestic
  spending and cutting their trade surpluses

Trade surplus (billion)
Rest of world
China
Japan
Rest of Asia
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Reduce dependence on other regions
Share of US import market for manufactures

• With strong domestic spending, Asian countries
  will be less dependent on growth of exports to
  the US and other global markets

China
Japan
Rest of Asia
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Increased energy efficiency

• Energy saving will reduce damage to the
  environment and facilitate a more balanced
  pattern of trade

Energy consumption (tons of oil per million
income)
Rest of Asia
Japan
China
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Structural policy Industrial development
GNP targets ( p.a.)

• FDI ODA to support investment and income growth
  in Africa, the Middle East and developing America

Middle East
Africa
Developing America
25
FDI and ODA Africa
Market share of exports of manufactures from
Africa ()
30

• African exporters have less than 5 of the
  regional market (although this is starting to
  grow)
• To achieve a significant catch-up in per capita
  income they need larger shares of regional
  industrial markets

Africa
25
20
15
Other
10
Western
Ded
Europe
Middle
5
East
Ding
US
America
0
26
FDI and ODA Developing America
Market share of exports of manufactures from
developing America ()
45
US

• Regional integration is proceeding in America
• Lower-income countries still need a significant
  boost for per capita income to start to catch up

40
Developing
35
America
30
25
20
15
10
Other
Ded
Middle
Western
5
Africa
Europe
East
0
27
Reduced US deficit

• Stronger demand in the rest of the world boosting
  US exports
• Reduced pressure on the global oil market
• No recession, but domestic spending would slow
  down

US trade balance as of GNP
Agr raw mats
Energy
Manufactures
Trade balance
28
Growth generalized
Per capita income, 2005 - 2015