Is the global economy rebounding?

Carnegie Endowment hosted a session about global recovery in the aftermath of the global financial crisis yesterday. Four analysts shared their forecasts and views about where the global economy is heading now.

Hans Timmer, lead economist of Development Prospects Group at the World Bank, argued that though gradual recovery is happening , the pace would depend not only on performance of the US economy but also on the magnitude of rebound in the emerging economies. During the crisis, the emerging economies plunged the most, so in order to rebound strongly, they have to grow strongly. He argued that Fareed Zakaria's misread the numbers in his recent column in the sense that he holds the view that if the US spends enough, things will be okay. Rebound in the developing countries, especially the emerging economies, will determine how fast the global economy will be pulled out of this mess. In the emerging economies, the decline in imports was higher than the decline in exports; the opposite is true for high-income countries. The developing countries reconsidered their investment projects and used up their inventories while reducing imports, deepening the crisis.

He opined that the present rebound (industrial production), which has been visible since the first quarter of 2009, does not reflect a real recovery and might just be a "technical rebound". In the last five months, Asian exports and imports have increased. Japan’s growth is driven by imports by other Asian nations. Commodity prices have also begun to move up. The strength and sustainability of rebound would depend on investment levels and inventories build up and the looseness of international credit supply.

Jorg Decressin, division chief of European Department at IMF, argued that the global recovery is definitely real but is heavily policy dependent. It is a subdued recovery. Consumer confidence is gradually rebounding and so is trade. Interest rate is near zero and a lot of liquidity has been injected into the global economy. However, for sustainable recovery, private demand has to take the place of public demand. Moreover, global imbalances in trade have to be corrected and fiscal deficits have to be brought down. External deficit countries will have to invest less and save more while external surplus countries have to invest more and save less. China alone cannot do it because Chinese total consumption is almost 25 percent of the total US consumption. The Middle East countries also have to step in but they too are constrained by their own challenges. So, rebalancing will take time and recovery will be slow. It is not a self-sustaining recovery.

Philip Suttle, director of Global Macroeconomic Analysis at IIF, argued that the rebound is real and does not look “technical” to him. He made six points:

• Inventories will be rebuilt steadily rather than suddenly in the coming quarters
• Global financial condition is getting better. The transmission mechanism of money is working pretty good
• There is an upward revision to capital spending plans
• Housing collapse appear to be ceasing, especially in the US and UK
• Fiscal stimulus is starting to kick in.
• Labor market conditions will begin to improve.

All these positive signs signal that rebound is real and the trend is upwards. However, there are chances of “double-dip”, as happened during the first half of 1980s, but is not very likely. Events that could cause “doubled-dip” are (but unlikely):

• Emerging markets don’t deliver
• More financial turmoil (like Lehman Brothers debacle)
• High inflation forcing policymakers to tighten up monetary and fiscal policies (he argues that this is possible because our errors in predicting inflation have typically been on the high side)

Uri Dadush, director of International Economics program at Carnegie, argued that stimulus and credit restoration has led to nascent recovery. Rebounding might be slow but it cannot be too slow because it is already a very low level. He argued that in six to twelve months from now, the stimulus will have to be withdrawn. The recovery will then depend on how much the private sector will be able to pick up from the public sector-driven growth path. In the next six months, recovery will persist. Asia, the Europe, and the US have to rely on their own restructuring and domestic demand for sustained growth, he said.

The discussion was focused exclusively on the emerging economies and the OECD countries, though the panelists kept on saying ‘developing countries’, trying to mean as if they were talking about the whole world. Nobody even mentioned Sub-Saharan Africa (except for Hans, who briefly said the focus of the next G20 would be on the developing countries, poverty reduction, and the financial crisis’s impact on the poor). No trading blocs like SAARC, SADC, AU, MENA, and BIMSTEC, among others were mentioned. It might partly be because only a handful of countries drive the global trade and economy and if they don’t grow, others might not as well.

Also, it appeared that the recovery they were talking about was based on the existing system. What would a recovery look like in a reformed system, where some banks are nationalized and investment banks and hedge funds are under tight supervision? The looseness in credit from these institutions is already restrained. Moreover, a huge chunk of liquidity and investment source-- derivatives markets-- is pretty much in doldrums now. So, the recovery now look like just stocking up of inventories. After it is near-full, the real recovery would actually depend on how we fill up the liquidity void created by busted investment banks, hedge funds, subprime markets and derivates markets. Due to these markets’ absorptive capacity, inflation was pretty low despite high liquidity in the past seven years (?!?). It won’t be the same now. So, where will the trend in recovery stop or satiate?

Climate and life in Nepal, as seen by a BBC reporter

This article is based on a recent Oxfam report:

But an Oxfam report released earlier this week has warned that poor harvests, water shortages and extreme temperatures - the consequences of climate change - will plunge millions of rural poor in Nepal into hunger.

In Bhattegaun, an hour's walk away from the road through forested hills, the effects are already apparent. A stream that provides water has dried up to a thin trickle.

Each day 35-year-old Naina Shahi gathers what she can for her three children and carries it back to her two-room hut.

Prabin Man Singh, who works for the international aid agency, Oxfam, says that with the changes in weather patterns the daily struggle for survival has been accentuated.

"Food production has fallen because of variable rainfall, so they don't have enough to feed the whole family. "There is a water scarcity in the hills and women have to walk a longer distance to get water," he says.

Two issues warrant immediate and close monitoring:

(i) late monsoon will decrease agriculture production, which is the backbone of the economy and more than 70 percent of the population depend on it for living. This will also have a huge impact on economic growth rate and per capita income.

(ii) late but heavy monsoon might wreak havoc, especially destroying property, landslides, farmed land (further decreasing production), increase the number of internally displaced people, and cause starvation, among others. This might fuel social conflict.

Skidelsky on economics and Keynes

The FT interviews Robert Skidelsky, the biographer of Keynes. Some interesting perspectives:

Skidelsky on if economists failed to foresee the dangers posed by uncontrolled capitalism hinged on mathematical models and detached from reality:

Skidelsky believes economists missed the danger signs ahead of the financial crisis. They were preoccupied with sophisticated mathematical models – a serious weakness, he says, in academic teaching of the discipline – and they were over-confident in self-regulation of the market.

He blames this mindset on the revival of anti-Keynesianism in the 1970s when government intervention in the economy made way for supply-side theory of tax cuts and labour market deregulation. But Keynesians, too, were guilty of overreaching: they assumed the state was capable of fine-tuning demand to mitigate the effects of the economic cycle. Today, Keynesianism has reasserted itself through multi-billion pound government interventions to stimulate the economy and recapitalise the banking system. Skidelsky is no statist but he says the crisis has exposed serious weaknesses in economic policy, from the Bank of England’s inflation targeting (“They did not have the tools”) to the Labour government’s belief in light-touch regulation.

A famous quote from Keynes:

The long run is a misleading guide to current affairs. In the long run we are all dead. Economists set themselves too easy a task ... if they can only tell us that when the storm is past the ocean is flat again.

Hans Rosling’s new presentation

Hans Rosling gave a fantastic presentation (combining academic substance plus technology) at a talk show. Watch the interesting presentation about growth, healthcare, and infant mortality.

 

Equally interesting are his 2006 talk and 2007 talk.

Chang calls for constructive debate on industrial policy

Ha-Joon Chang has a new paper on industrial policy (I think it is still a draft), which he presented at ABCDE conference in South Korea recently. He tries to push the debate over industrial policy in a constructive path, i.e. how to make industrial policy work better rather than wholly criticizing it despite knowing that every country in one way or the other, even under the WTO rules, engages in industrial policy. Below is a summary of main point of the paper.

Chang argues for "selective industrial policy", which basically is a policy that deliberately favors particular industries over others, against the dictates of market, to enhance (not necessarily) efficiency and promote productivity growth. Almost all industrial policy measures involve selectivity and targeting; the real difference lies in the degree of targeting. A more targeted industrial policy would mean easier monitoring and lesser "leakages".

He argues that the state can sometimes “beat the market" because it designs policies based on a national and long-term perspective, rather than sectional, short-term perspective. This is close to the development experiences of Japan, South Korea, Taiwan, and Singapore in the post WWII period. [Rodrik also makes a similar argument for selective intervention to clear information externalities and coordination failures in the market. For instance Brazil directly aided its steel, aircraft and shoe industries (high levels of protection and public ownership, R&D investment and subsidized credit); Chile aided its grape, forestry, and salmon industries (R&D investment), and Mexico aided its motor vehicle and computer industries (ISI initially followed by preferential tariff policies under NAFTA)].

Chang shows evidence that industrial policy had been practiced for a long time, even in the existing bastions of free market economy. The US government ran a huge industrial policy-- between 1950 and 1980, 47-65% of national R&D spending was financed by the US government as against approximately 20% in Japan and Korea and 30% in Europe. The US and Britain had the world's highest levels of tariff protection during their respective catch-up periods (45-55%). The successful countries right now provided subsidies to promote targeted industries, set up state-owned enterprises or public-private joint ventures for risky projects and regulated FDI, among other measures. In the post-WWII period, Japan was the first country that used the term industrial policy (sangyo seisaku) to mean selective industrial policy.

According to Chang, industrial policy measures in East Asia included:

1. coordination of complementary investments (Big Push)
2. coordination of competing investments through entry regulation, "investment cartels", and (in declining industries) negotiated capacity cuts
3. policies to ensure scale economies (e.g., licensing conditional upon production scale, emphasis on the infant industries starting to export from early on, state-mediated mergers and acquisitions)
4. regulation on technology imports (e.g., screening for overly obsolete technologies, cap on technology licensing royalties)
5. regulation on FDI (e.g., entry and ownership restrictions, local contents requirement, technology transfer requirements, export requirements)
6. mandatory worker training for firms above a certain size, in order to resolve the collective action problem in the supply of skilled workers due to the possibility of "poaching" [It is like reducing information externalities by publicly investing in industries-oriented/job-oriented education.]
7. the state acting as a venture capitalist and incubating high-tech firms
8. export promotion (e.g., export subsidies, export loan guarantees, marketing help from the state trading agency)
9. government allocation of foreign exchanges, with top priority to capital goods imports (especially for export industries) and the bottom priority to luxury consumption goods imports.

He maintains that industrial policy cannot be measured purely in terms of financial transfers because the effect of many of industrial policies (especially at the sectoral level and the economy-wide level) are not quantifiable. Also, the impact of a country's industrial policy cannot be fully measured in few years because of "super-sectoral" policy measures that address issues like complementarities, linkages, and externalities-- all of these take years, even decades, to come to full shape. For instance, Korea's resurgence in steel trading took years after Heavy and Chemical Industrialization (HCI) was launched in 1973. Chang rejects the notion that the East Asian countries could have grown even faster if there were no industrial policies. He also dismisses the argument that East Asian countries were more productive because of culture (high savings rate, strict work ethic, high-quality bureaucracy).

These countries must have had some country-specific "countervailing forces" that were so powerful that they cancelled out all the harmful effects of market-distorting industrial policy and still generated the highest growth rates in human history (6-7% annual growth rate in per capita income over four decades). I find this highly implausible. Are these skeptics really seriously suggesting that, without industrial policy, these powerful countervailing forces would have made the East Asian countries grow at- what?-9%, 10%, or even 12%, when no country in history has ever grown at faster than 7% for an extended period, industrial policy or not?" [...] "Korea's savings rate on the eve of its economic miracle was barely 5% and started rising after growth took off. At the end of colonial rule, literacy rate in Korea was only 22% and its industrial base was smaller than that of Ghana. After 1950s, Korea and Taiwan did not get an exceptionally high amount of foreign aid.

He believes that industrial policy did work in East Asia and its relevance has not died yet.

If industrial policy is so bad, how is that in every era, the fastest growing economies happen to be those with a strong industrial policy- Britain during the mid-18th century and mid-19th century, the US, Germany, and Sweden during the late 19th and the early 20th century, East Asia, France, Finland, Norway, and Austria in the late 20th century, and China today.

Chang argues that industrial policy should be taken as a standard policy measure rather than an extreme argument intended to generate a fear of government takeover of industries. Rather than wholly rejecting or criticizing it, it is helpful to debate on how it can be improved and really targeted at reducing market inefficiencies. For this to happen, developing countries need the institutional reforms that would aid the objectives of a good industrial policy. This way industrial policy can be disassociated with past ISI policies , which did not produce as good a result in Latin America as the selective industrial policy produced in East Asia. In order for industrial policy to work, there has to be some experimentation at home (Chang calls it "trying at home"), i.e. policies should be tried at home rather than copying from somewhere else. Even if bureaucratic capability is weak, industrial policy can be tried, i.e. you don't have to wait for first-order conditions to implement industrial policy.

He opines that export-oriented industrial policy helps to inculcate better discipline in bureaucracy because the “objective, hard-to-manipulate” performance indicator is pretty much free of lobbying and special interest pressure, i.e. export performance indicators are less open to manipulation by the recipients of state support than domestic performance indicators.

Economic development is impossible without good export performance. He argues that the failure to promote enough exports is one of the reasons why Latin American stint with ISI was not successful as those in East Asia. Balance of payments could be a strong constraint to economic growth.

Even if a country can export some goods with comparative advantage, industrial policy is still needed because there might be other sectors that could turn out to be more favorable if productive capabilities are built in time (with state support). For long run growth, it is not enough to rely on comparative advantage-conforming industries. For instance, a small rise in wages, which in turn could be caused by rise in exports of narrow set of goods, could undermine the balance of an economy. Avoiding this would require upgrading from export industries to comparative advantage-defying industries, which requires even stronger industrial policy. Example: Heavy and Chemical Industrialization (HCI) program in South Korea. He thinks that globalization has not diminished the role of industrial policy as some form of tariff structure, however minimal, always exist in WTO rules.

Export policy would require a mixture of free trade, export promotion, and infant industry protection—all part of an industrial policy. He argues that many proponents of industrial policy do not fully appreciate how critical export is for the success of industrial policy, while many opponents do not fully appreciate how export success also requires industrial policy.

After over 8 years, where does AGOA stand?

Africa Growth and Opportunity Act (AGOA), signed in May 18, 2000, provides Sub-Saharan African exports (mostly textiles and apparel) duty and quota free entry into the US markets and also provides for trade facilitation and technical assistance to African producers. After more than eight years, how much has African countries actually benefited and if it is helping them achieve what AGOA was supposed to. Mwangi Kimenyi, Brookings Institution, argues that though trade volume has increased multiple folds, the AGOA's impact on stimulating growth and increasing employment have been limited. It is not good news since AGOA is usually touted as one of the best trade and investment strategies offered by US to the Sub-Saharan African countries. At present, 37 countries are AGOA-eligible.

What's the impact of AGOA? First, there is always an increase in volume of trade whenever there is free trade or trade under preferential trading agreements. The imports to US from Sub-Saharan Africa (SSA) increased by multiple folds-- in 2008, the US imported $81 billion of duty free goods from AGOA-eligible countries, up from $7.6 billion in 2001. Kimenyi argues that though there has been an increase in trade volume, the African countries have not been able to exploit fully the opportunities given to them by AGOA. The share of African countries' exports in global trade is very low.

In 2008 total apparel imports to the U.S. were valued at $93 billion, of which SSA accounted for $1.1 billion (1.26 % of the total market). In the same year, Bangladesh alone exported $3.5 billion worth of apparel (3.79 % of total market)—more than double the entire exports from SSA. Also of concern is that African exports under AGOA have declined in recent years. For example, African AGOA exports in 2004 and 2007 accounted for 54.5% and 36.5% of total exports to the United States respectively.

Also, AGOA has not fully helped the African countries diversify their production structure. Some of the goods that are exported now are the same covered under Generalized System of Preferences (GSP). Importantly, almost 96 percent of the exported items are energy related, which would have been exported anyhow due the continuing rise in demand for energy in the global market.

Of the AGOA exports, $52.8 billion of exports (95.7 percent) consisted of energy related products (mainly crude oil). Thus, the real benefits of AGOA to African countries are much lower than what aggregate numbers show—about $3.5 billion of exports.

He argues that since the African countries have been unable to exploit the opportunities provided by both GSP and AGOA, emphasis should be put on helping the countries overcome their trade-related shortcoming. Two important recommendations are:

-Cutting down the cost of doing business: SSA countries are not competitive because of a lack of infrastructure, ports, electricity; regulatory burden and licensing procedure. The Doing Business Report shows that the ease of doing business in SSA is the lowest when compared to other regions.

-Investing in value addition: Economic transformation is required for development and policies should be designed to help in diversification of production and export goods so that increased production also means increased value addition.

Other recommendations include simplifying the approval process (especially on health and safety standards while importing to the US); evaluating proposed preferences to less developed countries (providing similar access to other developing countries that are already established in the field destroy SSA investment and exports); revocation of status (investors might pull back investment if there is a possibility that a given AGOA-eligible country could be stripped off the AGOA benefits due to political reasons); harmonizing member positions (African countries should have a collective, concerted voice through the African Union so that they are well represented and well heard during trade negotiations).

A demand-determined economy

A country-specific policy package that recognises economies to be demand-determined would have the following components: (i) an expan fiscal budget, consistent with the rule that the overall deficit not exceed public investment; (ii) an accommodating monetary policy that tolerates moderate inflation in order to achieve higher growth by providing subsidised credit for poverty reduction programmes (the target could be that the real interest rate equals the sustainable growth rate of per capita income—the Golden Rule); and (iii) a managed exchange rate regime that seeks to promote exports and alter the relative price of tradeables and nontradeables without causing unmanageable inflation spirals.

That's from Degol Hailu and John Weeks on IPC's One Page#92. The point is that low income countries can implement counter-cyclical economic policies if they adopt a demand-determined economy framework instead of price-determined economy framework.