One of the most interesting studies to come out of the Centre for Economic Policy Research is a tome aimed at the world’s politicians and fiscal authorities. Entitled "Rebalancing the Global Economy: a primer for policy makers", the study brings together papers from a number of economists. It recognises from the outset that there is no clear agreement on how best to bring about a state of affairs where saving countries spend more and spending countries save more. There are no simple levers to pull here, but we have all had a sharp and lengthy lesson in the consequences of massive capital imbalances. It follows from the lessons of the 2007-2009 global financial meltdown that a hands-off stance is not going to work either.
The scope of the publication is ambitious and one can only wish that there was some way of subjecting politicians of all stripes to a compulsory reading of it, cover to cover, followed by a searching examination, with severe penalties for failure. Would it do any good if they did all read it? I doubt that they would suddenly discover any magic formula, or single set of levers that they could pull, but they would understand the scope of the problem a good deal better.
One of the basic tenants of this primer is that trade integration remains key to economic growth. The protectionism that any prolonged economic slump always engenders just makes it harder for less developed countries to tap into the more dynamic markets. The editors point out that while there are widely diverging views, even among the contributors to the primer, about the welfare implications of global imbalances, and what may follow from attempts to re-balance the world economy, that there will be large effects from whatever policy responses are made, is clear. As the editors put it: “Whatever one’s views, the implications of the policy responses to large imbalances will have major repercussions for developing economies”. And not just for developing economies. The law of unintended consequences lurks for the developed economies as well.
In the Report, Caroline Freund, an economist with the World Bank, and one of many distinguished authors contributing to the study, points out that although global trade collapsed once the financial crisis kicked in, on the plus side – if there is a plus side - global imbalances also corrected rather sharply. They fell some 26% from 2007 to 2009. However, Freund points out that it is not enough just to look at the overall scope of the correction. You have to ask how much of that fall is sustainable because it comes from a rebalancing of exports and growth, versus being simply a direct effect of the crisis which one could expect to reverse as the crisis fades and global trade growth resumes.
Freund points out that prior to the crash, global trade imbalances grew at a brisk pace, achieving an average growth rate of 11% from 1990 to 2007 – not exactly a sustainable state of affairs in the long term. To put this in context, in the 20 years prior to 1990 the rate of actual global economic growth was barely 1% and even during this low growth era, global imbalances jogged along at an average of 6% year on year growth. By 2007 a massive savings glut had accumulated in exporting countries, with money chasing after smaller and smaller yields and the correct pricing of risk going out the window. The whole Primer is full of wonderful nuggets of economic fact (e.g. global trade plunged 12.2% in 2009, a collapse not seen since the Great Depression) and excellent observations and analysis. Definitely a must-read…Further reading on the global financial crisis and global economic policy:
- Only White Swans on the Road to Revulsion, by James Montier
- Economic Ebb and Flow, a World of Challenges and Opportunities, by Hamish McRae
- India and Brazil—Still Winners as the Global Economy Collapses?, by Maya Bhandari
Tags: asset price bubbles , banking , fiscal stimulus , global imbalances , protectionism , sovereign debt , trading