Ben Bernanke on economy recovery in the US

In an op-ed published in The New York Times, Ben Bernanke argues that the US government should not repeat the mistakes made during the Great Recession. The federal government should provide more aid to state and local governments in addition to the social protection measures for the unemployed people. This is crucial to stabilize aggregate demand and restore full employment.  

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Many other states face ominous budgetary outlooks, too, implying the need for draconian reductions in essential services to state residents and large potential job cuts. Furloughs have already begun in New Jersey. Since February, state and local governments collectively have laid off close to 1.5 million workers.

We have been here before. I was the chairman of the Federal Reserve during the global financial crisis and the subsequent Great Recession. As part of the recovery effort, Congress responded with a stimulus package of nearly $800 billion. But that package was partly offset by cuts in spending and employment by state and local governments. Like today, with sharp declines in tax revenue as the economy slowed, states and localities were constrained by balanced-budget requirements to make matching cuts in employment and spending. This fiscal headwind contributed to the high unemployment of the Great Recession, which peaked at 10 percent in late 2009. Together with a subsequent turn to austerity at the federal level, state and local budget cuts meaningfully slowed the recovery.

In the current recession, unemployment rates have been much higher than 10 percent, and even with recent job gains the Congressional Budget Office estimates that, without further action from Congress, the unemployment rate at the end of 2020 will most likely be close to 11 percent. Those numbers are particularly dire for people of color. Black, Latinx and Native American communities not only face a far greater health risk from Covid-19; they also face higher rates of unemployment than white families. States and localities are in desperate need of additional federal intervention before the bulk of the CARES Act funding expires this summer. Budget gaps like the one in New Jersey cannot be closed by austerity alone. Multiply New Jersey’s problems to reflect the experiences of 50 state governments and thousands of local governments and the result, without more help from Congress, could be a significantly worse and protracted recession.

The CARES Act allocated $150 billion to state and local governments. This new aid package must be significantly larger and provide not only assistance for state and local governments but also continued support for the unemployed, investments in public health and aid as needed to stabilize aggregate demand and restore full employment.

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Government's counter-cyclical measures are helpful in maintaining demand

Despite strict lockdowns, supply chains disruptions, sharp economic contraction, and high unemployment rate, the COVID-19 recession is not expected to as worse as an economic depression. Zachary Karabell argues that this is due to the large fiscal stimulus by government and a commitment to unlimited liquidity by the central bank. It largely applies to the US economy, but some variant of it is true for all economy. 

Specifically, two factors are at play here. First, average unemployment benefit is higher than average wage per week, meaning that consumption demand across most households is in fact relatively strong. Second, the job losses are mostly in sectors required face-to-face contact, meaning that unemployment is not economy-wise. 

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There are two reasons, one positive and one decidedly not. The positive reason is that for all the clunky ineptitude of the social safety nets created in April by Congress in the form of direct payments, small business relief and expanded unemployment benefits, those considerable amounts of money ended up buoying the depressed fortunes of tens of millions of people. In fact, given the extra $600 a week emergency supplement provided by the federal government, many people at the lower end of the wage spectrum pre-COVid have been taking home more money weekly than when they were employed. The average amount earned by the 40 million people who have received unemployment at some point since March was less than $750 a week; the average amount received under the various emergency programs? $970 a week. That helps explain why overall economic activity hasn’t declined in lock-step with unemployment or with the contraction of so many industries. Those juiced benefits are due to expire in July, however, raising the prospect that unless those are extended further the trajectory will worsen.

The other reason isn’t so benign. In terms of unemployment statistics and how we discuss work, a job is a job is a job. But in terms of wages and a living wage, all jobs are not created equal. Not even close. For many millions of jobs, the pay is barely above what constitutes the poverty line and isn’t enough to cover food and shelter for one person let alone a family. Hence the strong push in recent years to raise the minimum wage to at least $15 an hour, which many cities such as Seattle have done but which the federal government has not.

In the current crisis, the preponderance of job losses have been human service industries, ones that depend of face-to-face contact and cannot be shifted via Zoom into the digital realm. Those industries – restaurants, hospitality, travel, tourism, retail stores, events – are also amongst the lowest paid. Overall, average earnings in the U.S. are $28 an hour. But earnings for leisure and hospitality are $16 an hour and for retail $20 an hour. Those tens of millions of workers were never accounting for the same level of consumer spending or home sales or travel dollars or economic activity as the tens of millions who work in construction or manufacturing or technology or higher-end service industries such as finance and consulting or public servants like teachers and police. The result is that you can have 15-20% unemployment with 40 million people out of work at one point or another in the past months and not have a one-to-one hit to economic activity. 

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Are economies facing reduced level and growth rate of potential output?

The latest World Economic Outlook (April 2015) by the IMF focuses on potential output growth. It argues that the world economy is facing a slower ‘speed limit’ (potential output growth) due to the impact of aging, lower capital and productivity growth. Hence, unless there are appropriate policy responses to foster innovation, productive capital investment and effective responses to aging, the major economies will have to ride on lower speed limits.

Potential output is a measure of an economy’s productive capacity with stable inflation and is affected by the supply and productivity of labor and capital. The slower capital accumulation and labor growth (due to ageing) have led to lower potential growth in advanced economies. However, in emerging economies, this is caused by slower total factor productivity growth. After the global financial crisis, both the level and growth rate of potential output has reduced.

Even if capital investment increases as economic conditions improve, labor growth may not be as rosier as population age and workers retire. This is going to impact potential output growth as well in both advanced and emerging economies. Furthermore, the productivity growth may be weaker than before as the previous drivers (past technological improvements and enhanced educational attainment) don’t have similar strong impact as before because the catch-up gap with advanced economies is already narrow. Hence, potential output in advanced economies will remain below pre-crisis level (despite an improvement over 2008-2014). But, emerging economies will see lower potential output than before.

Now, to raise potential output growth, pro-active policy measures may help. Some of these as outlined in the report are as follows:

• Encourage innovation and enhance productivity by high R&D investment
  • Strengthening patent system, tax incentives, appropriate subsidies
• Improve labor productivity by improving education quality
  • Focus on secondary and higher education
• Higher infrastructure spending
• Improved business conditions and more efficient product market
• More female participation in the labor market
• Fiscal policy effective to boost investment and capital growth. Monetary policy may also support aggregate demand.

Bernanke, Summers and Krugman on secular stagnation (saving glut and liquidity trap)

Here is a summary of the interesting debate on secular stagnation started by Bernanke on his blog at Brookings.

Achieving full employment, low and stable inflation, and financial stability are the three core objectives of economic policy. Larry Summers argued that achieving these three objectives simultaneously is difficult because slowdown in population growth and the pace of technological advance result in lower capital investment by firms and subdued household consumption. It means difficulty in attaining full employment.

So, inadequate aggregate demand leads to low growth and less than full employment. Low aggregate demand will eventually lead to low aggregate supply as productive capacity of the economy is restrained. The solution is to jack up public infrastructure spending in case real interest rate cannot be lowered below a threshold (zero) to stimulate private investment. In the face of secular stagnation and relatively ineffective monetary policy, the US should turn to fiscal policy (productivity-enhancing public infrastructure spending).

Bernanke is skeptical that the US economy is facing secular stagnation. First, if real interest rate (nominal interest rate minus inflation) is negative, then any investment will appear profitable. Hence, prolonged subdued capital investment is not realistic right now. Second, the current slowdown may be caused by temporary headwinds that may be dissipating soon. Third, better investment opportunities abroad will mean that there are will be more outward FDI, which would weaken dollar and then boost US exports. This in turn will increase growth and employment. Returns to capital investment may not be low everywhere at the same time.

Summers responded that (i) saving and investment may not equate at full employment smoothly due to interest rate adjustment (secular stagnation is all about saving > investment); (ii) excess saving may flow abroad if returns to investment are attractive; (iii) at zero real interest rate, government debt service is very cheap and hence it can borrow without adding much debt overload to finance public infrastructure spending (Keynesian fiscal stimulus effect kicks in); (iv) savings-investment balance is for the global economy, so economies with excess savings may consider reducing their savings or increasing their investment (narrow the gap between desired savings and desired investment).

Bernanke responded again arguing that the secular stagnation hypothesis holds true if the whole world is suffering from such a phenomena. Else, such trends in the US would be negated by FDI and exports boost to other countries that have relatively better aggregate demand. Hence, another policy implication is that the US should work on lowering or elimination of FDI outflows and export barriers.

Paul Krugman added that Summers paid insufficient attention to international capital flows (which he agreed in response to Bernanke). But, this does not mean that even if they were accounted for the secular stagnation concerns are obviated. Secular stagnation occurs when “countries face very persistent, quasi-permanent liquidity traps”. Japan is an example. Japan faced really low nominal interest rate since 1990 and persistent deflation as well. Real interest rate was still positive and the other economies offered relatively better investment opportunities (the US and the EU saw such low rates only after 2008). But still Japan was stuck in low growth equilibrium for a long time. Policies to boost demand are the call of the hour right now.

Why are oil prices falling globally?

Net oil importing countries (including those who import only) are enjoying the low petroleum prices in the international market as it helps them to manage public finance by lowering fuel subsidies and strengthening balance sheet of state-backed petroleum suppliers and distributors. In the case of Nepal, Nepal Oil Corporation is seeing net losses narrow down (there is still loss in the sale of LPG cooking gas) and consumers are enjoying the declining fuel prices. Non-food inflation seems to be cooling down as well. The government recently allowed the NOC to adjust fuel prices based on international prices (basically the price IOC charges to NOC plus taxes, interest payment on past loans, transportation losses and commission). Lets hope that domestic fuel prices is also increased when international fuel prices start to climb up.

For now, what are the main causes of lower fuel prices? It has to do with a combination of demand and supply forces, along with lower cartel power of OPEC, at play. The Economist lays down the main causes as follows:

1. Low demand arising from low economic activity, increased efficiency and a switch to alternative sources of energy
2. Turmoil in Iraq and Libya has not affected their output.
3. The US has become the world’s largest oil producer (it is importing less oil now).
4. Saudi Arabia and some Gulf countries are unwilling to lower supply (and hence their share in total world output) to put upward pressure on prices.

The combined effect of these forces are lowering oil prices since the high of $115 a barrel in June 2014.

Value added export and global trade landscape

The OECD and WTO have come up with trade in value added database covering mostly OECD countries. It presents an entirely different picture of the ongoing trade related debate, especially the huge trade surplus (gross) of China and the charges about currency manipulation (deliberately keeping value of currency low). The RCA, which gives an indication of comparative advantage in export of individual product, is also quite different than what is shown by gross trade figures. Value added data could be a better measure of trade flows.

Source: Oxford Analytics

The new value added database shows that China might not have the as large balance of trade surplus as it appears to be when we look at gross trade figures. In fact,  the US deficit with China appears to be 25% smaller than is suggested by conventional gross trade figures. Surprisingly, Japan's surplus with the US is 60% larger than suggested by gross trade figures. Even more surprising is the revelation that only 4% of the value of an iphone is attributable to China itself, with the rest being imported for final assembly (physical components and technical services).

It will be interesting to see the value added export of Nepal when the database includes Nepal as well.

What caused the global financial crisis?

Justin Yifu Lin and Volker Treichel argue that it is not the global imbalances, but excess demand in the US that caused the global financial crisis. Here is an abstract of their recent paper:

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The world is currently still struggling with the aftermath of the worst economic crisis since the Great Depression. Following a description of the eruption, evolution and consequences of the global crisis, this paper reviews alternative hypotheses for the causes of the global financial crisis as well as their empirical evidence. The paper refutes the frequently voiced view that the global crisis was caused by global imbalances that reflected economic policies of East Asian countries. Instead, it argues that global imbalances were the result of excess demand in the United States, resulting from both the public debt in the United States arising from the Afghanistan and Iraqi wars and tax cuts and the overconsumption by households supported by the wealth effect from the housing bubble in the United States. The housing bubble itself was the outcome of the Federal Reserve's low interest rate policy in the aftermath of the burst of the "dot-com" bubble in 2001, the lack of appropriate financial regulation, and housing policies aimed at expanding the mortgage market to low-income borrowers. It was possible to maintain the large trade deficits of the United States for such a long period of time because of the dollar's reserve currency status. When the housing bubble in the United States burst, the global crisis ensued. The paper also analyzes why China's trade surplus increased significantly in general and with the United States in particular in recent years, and argues that this increase was caused by both the relocation of the labor-intensive tradable sector of East Asian economies to China and high corporate saving rates in China as a result of its dual-track approach to reform.

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EU debt crisis and weak global demand will affect South Asia’s growth prospect in 2012 and 2013

In its newly released Global Economic Prospects (GEP) 2012, the World Bank argues that GDP in South Asia slowed to an estimated 6.6 percent in 2011, from 9.1 percent in 2010, reflecting a sharp slowdown industrial production and trade in the second half of last year. The slowdown in the region is led by India, which accounts for 80 percent of South Asia’s GDP.

The report states that the regional deceleration in growth reflects internal and external headwinds. On the domestic front, more restrictive macroeconomic policy stances, aimed at reducing stubbornly high inflation and unsustainably large fiscal deficits, have contributed to weaker domestic demand. Higher borrowing costs, elevated inflation, moderating economic activity and some local factors (e.g. policy uncertainty, stalled reforms, and deteriorating political and security conditions) have contributed to a significant slowdown in investment growth.

 

Here are major points from the report (related to South Asia):

• Exports are negatively affected by weaker foreign demand. Demand for the region’s exports of goods and services is projected to slow in calendar year 2012 and lead to a near halving of export growth to 11.6 percent in 2012, from 21 percent in 2011, due to stagnant GDP in the European Union and the projected global slowdown, including the influence of tighter monetary policy in China and fiscal consolidation in Europe.

 

• The Euro Area represents about one-fourth of South Asia‟s merchandise export market, of which Germany and France account for 40 percent and 20 percent, respectively.
• Terms of trade losses are estimated at about 1.9 percent of GDP for the region in aggregate, led by a 4.3 percent of GDP decline for Nepal, while Bangladesh and Sri Lanka saw a smaller negative impact of close to 1.5 percent of GDP, and India and Pakistan saw negative impacts of close to 1.8 percent of GDP (estimated January through September 2011 terms of trade impacts relative to 2010).

• Remittances have grown only modestly.
• The slowdown reflects moderation in domestic demand, given a deceleration in investment growth that has faced headwinds of rising borrowing costs, high input prices, slowing global growth and heightened uncertainty.
• The region’s GDP growth is projected to ease further to 5.8 percent in 2012, before strengthening to 7.1 percent in 2013.
• Regional growth is estimated to have exceeded the long-term average of 6 percent (1998-2007), reflecting above trend activity in Bangladesh, India and Sri Lanka.
• High inflation and fiscal deficits remain concerns going forward.
• Household spending has been curbed by persistently rising prices cutting into real incomes and higher borrowing costs.

• South Asian governments have limited space with which to introduce fiscal stimulus measures, due to large fiscal deficits, and the possibility of monetary easing is constrained by sustained high inflationary pressures.

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Forecast:

• A deepening of the Euro Area crisis would lead to weaker export growth, worker remittances and capital inflows to South Asia.
• Trade: The Euro Area represents about one-fourth of South Asia’s merchandise export market, with Bangladesh, the Maldives and Sri Lanka particularly exposed to a downturn in European demand for merchandise. Moreover, export financing from Europe, an important component of trade credit, is particularly vulnerable to drying up, as was the experience during the 2008 financial crisis.
• Remittances: Worker remittances remain a critical source of foreign exchange in South Asia—equivalent to 20 percent of GDP, as of 2010, in Nepal, 9.6 percent in Bangladesh, 7 percent in Sri Lanka and 5 percent in Pakistan. If the global conditions were to deteriorate sharply, remittances growth could stall, resulting in weaker incomes, weaker foreign currency earnings and slower domestic demand growth within the region.
• Finance: Financial sector impacts through heightened global risk aversion (reversal of capital inflows, higher international borrowing costs and slowing FDI) are likely to be felt strongest in India, which is the most integrated with global financial markets, along with the Maldives and Sri Lanka, where 2012 external financing needs (current account financing and external debt repayments) are projected to reach 9.8 percent, 18 percent and 7 percent of GDP, respectively. Countries heavily reliant on foreign assistance, such as Afghanistan, Nepal and Pakistan, could be hit hard if fiscal consolidation in high income countries were to result in cuts to overseas development assistance.
• South Asia’s exposure (investment) to a sudden withdrawal of European banks is relatively small and limited to ‘core’ countries.

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Recommended measures:

• Given the lack of fiscal space in South Asia, inflationary pressures and consequent limited room for monetary policy easing, fiscal consolidation through greater revenue mobilization (particularly in Pakistan, Sri Lanka, Bangladesh, and Nepal) and expenditure rationalization (especially in India) could play a key role in helping to protect critical social programs.
• Expanding the drivers of growth also holds potential. With markets in the United States and Europe expected to experience prolonged weakness, South Asian countries have the opportunity to re-think and pursue new sources of growth in both domestic and external markets. This may include focusing on export growth toward faster growing emerging markets, as well as internal  market enhancements through structural and governance reforms. Such actions would help boost export demand, help raise investment, provide better jobs and generate an environment for more inclusive growth.

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Global scenario:

Last year was characterized by the Tohoku quake in Japan, the European debt crisis and the downgrade of the US sovereign ratings, which affected financial markets around the world. Below is an estimation of the losses:

• In a matter of five months, stock markets around the world recorded $6.5 trillion (or. 9.5 percent of global GDP) in wealth losses, with developing-country stock markets losing 8.5 percent of their value, from July-end 2011 and early January 2012.
• Gross capital flows to developing countries to plunged to $170 billion in the second half of 2011, only 55 percent of the $309 billion received during the same period of 2010.
• Yields on the sovereign debt of developing countries declined by an average of 117 basis points (between the end of July and early January), as did those of almost all Euro Area countries, including France (86 bps) and Germany (36 bps), as well as non-Euro Area countries such as the United Kingdom (18 bps).

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Major points from the report:

The World Bank has lowered its growth forecast for 2012 to 5.4 percent for developing countries and 1.4 percent for high-income countries (-0.3 percent for the Euro Area), down from its June estimates of 6.2 and 2.7 percent (1.8 percent for the Euro Area), respectively.

Global growth is now projected at 2.5 and 3.1 percent for 2012 and 2013, respectively. Using purchasing power parity weights, global growth would be 3.4 and 4.0 percent for 2012 and 2013, respectively.

It argues that slower growth is already visible in weakening global trade and commodity prices. Global exports of goods and services expanded by an estimated 6.6 percent in 2011 (down from 12.4 percent in 2010), and are projected to rise by only 4.7 percent in 2012.

Meanwhile, global prices of energy, metals and minerals, and agricultural products are down 10, 25 and 19 percent respectively since peaks in early 2011. Declining commodity prices have contributed to an easing of headline inflation in most developing countries. Although international food prices eased in recent months, down 14 percent from their peak in February 2011, food security for the poorest, including in the Horn of Africa, remains a central concern.

Developing countries have less fiscal and monetary space for remedial measures than they did in 2008/09. As a result, their ability to respond may be constrained if international finance dries up and global conditions deteriorate sharply.

Existing global economic conditions (which is far weaker than last year):

• Europe appears to have already entered recession.
• Growth in several major developing countries (Brazil, India and, to a lesser extent, Russia, South Africa and Turkey) has slowed, mainly reflecting policy tightening initiated in late 2010 and early 2011 in order to combat rising inflationary pressures.
• As a result, and despite relatively strong of activity in the United States and Japan, global industrial production and trade have slowed sharply.
• Global trade volumes declined at an annualized pace of 8 percent during the three months ending October 2011, mainly reflecting a 17 percent annualized decline in European imports.

The need of fiscal tools for short run stabilization

David Romer argues that fiscal tools are needed for short run stabilization, especially when the economy is in a liquidity trap (zero lower bound on nominal interest).

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The first lesson is straightforward: we need fiscal tools for short-run stabilization. Before the crisis, there was broad agreement among macroeconomists and policymakers that short-run stabilization was almost exclusively the province of monetary policy. Monetary policy is more flexible; it is more easily insulated from political pressures; and it can more easily be put in the hands of independent experts. We thought that the zero lower bound would bind infrequently and not sharply; and that in the unlikely event that it did bind sharply, monetary policymakers had other tools they would use in place of reductions in the policy interest rate.

We now know that this view was wrong. We suffered shocks larger than what almost anyone thought was within the realm of reasonable possibility. The constraint imposed by the zero lower bound turned out to be huge (for example, Rudebusch, 2009). And central banks did not use tools other than the policy rate on a scale even remotely close to large enough to make up for the loss of stimulus caused by the zero lower bound.

Perhaps this lack of aggressiveness in using those tools reflects an understanding of the costs of using them that has eluded conventional analyses. But central bankers have yet to provide evidence of such costs. A more likely possibility, in my view, is that the culture of central banking makes it much easier to take unusual steps when the financial system is at risk than when the threat is “merely” one of years of exceptionally high unemployment. But regardless of the reason, monetary policy was not used aggressively enough to prevent very large demand shortfalls.

So, countries needed other tools. And the alternative to monetary tools is fiscal ones. For that reason, almost every major country adopted substantial discretionary fiscal stimulus in the crisis (U.S. Council of Economic Advisers, 2009). Given that we could face another major demand shortfall in the future, it follows that we need instruments of discretionary fiscal stimulus as part of the macroeconomic toolkit.

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After reviewing available evidence on the effectiveness of fiscal policy, Romer argues that when monetary policy does not respond, conventional fiscal stimulus is effective. Also, when monetary policy is constrained, austerity measures do not lead to expansion. He also makes a point that to understand fiscal policy responses to the crisis, political economy considerations are central.

Defense versus foreign aid: Which one to cut during trying times?

Here is an interesting article in The Economist that looks at why the public support slashing foreign aid but not defense spending during austerity era. The stimulating debate is over the spending on fighter jets to bomb dictators and free the repressed people and slashing spending on providing anti-Malaria bed nets to the same repressed people.

The author argues that with the drumbeating of ineffectiveness of aid in reducing poverty and spurring growth, the public is more willing agree to slash foreign aid that is supposedly not working than defense spending. And, the debate usually drags like the never-ending battle between Sachs and Easterly over aid’s effectiveness. It is ideological belief most the time. A belief that the government should concentrate more on defense and law enforcement (i.e. smaller government, not smarter!), and let the markets determine the rest. Read the full article.

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Congress is slashing foreign aid to fight malaria in large part because the one category of government spending that the American public actually wants to slash, by a wide margin, is foreign aid. Meanwhile, the public opposes cuts to the defence budget (though they oppose cuts to education, Medicare and domestic anti-poverty programmes even more). So the fact that the political sphere is debating whether or not to bomb Muammar Qaddafi's tanks, rather than whether or not to raise spending on anti-malarial bed nets in Malawi, isn't really that surprising. But why does the public want to cut foreign aid, rather than defence? One reason is that for the past decade and more, both serious development experts like William Easterly and unserious politicians, mainly on the right, have been strenuously arguing that most foreign aid doesn't work. In fact, in Mr Easterly's case, one of the things he argued didn't work (in his excellent book "The White Man's Burden") was centrally planned efforts to distribute anti-malarial bed nets. He thought this was one of those things that would work better with a market solution: we should subsidise at most $8 of the cost of each $10 bed net, but let the rest of the distribution work itself out via market mechanisms.

Again, it's not surprising that the public doesn't want to spend more on foreign aid for anti-malarial bed nets, when people keep telling them such aid doesn't work. What makes the situation more piquante is that, as Jeffrey Sachs argued in a 2009 article in Scientific American, in the specific case of bed nets, the claim appears to be completely wrong. The reason anti-malarial bed nets hadn't been much of a success in Africa before 2005 or so was that donors and executing agencies hadn't spent enough money buying them, and hadn't yet figured out how to distribute them.

[…]Mr Easterly and Mr Sachs have a long-running and intense debate on this and other development issues. I usually agree with Mr Easterly more than Mr Sachs, but in the specific case of bed nets he's had to retreat; more recently he's been sensibly pointing out that even if free distribution works better, you have to figure out a reliable way of identifying organisations that will actually do the distribution for free (rather than selling them illicitly, failing to distribute, etc), and there's no obvious scalable way to do that. But this only raises a further problem for the "bomb Libya or fight malaria" paradigm: how can you even ask the question if spending more on anti-malaria campaigns may not have any effect, since it's about the quality of the agencies, not the amount of funding? If there's no fungible way to shift effort from bombing Libya to fighting malaria, how can there even be a trade-off here?

Still, let's stipulate that shifting spending from the government bombardment of Libya to government anti-malaria efforts in the developing world would work. Certainly, few public-health experts would dispute that many health problems can be most efficiently addressed by having the government undertake preventive measures and distribute them for free. But here's the thing: you will hear approximately no voices on the right-hand side of the political aisle making this case in the United States today. The strategic direction of conservative political thought over the past 30 to 50 years has been to minimise the consensus on the extent of public goods: to argue that there are almost no areas of the economy or society in which government has a constructive role to play,except for national defence, and a few other areas such as law enforcement. Certainly not health.

I would suggest that if we're wondering why the American public devotes so much of its political attention to wars, and so little to anti-malarial bed nets, we might want to consider the role played by consistent efforts over the past 30 years to convince the public that government has almost no legitimate or positive role to play in society apart from a few narrow categories, including law enforcement and national defence, and not including health care. People who believe that virtually all social and economic endeavours, apart from defence and law enforcement, are best addressed by leaving them up to market forces and private industry will not naturally see much else for political discussion to focus on apart from military activity and law enforcement. To put it another way: if we don't think peaceful humanitarian interventions (like anti-malaria campaigns in Malawi) work, then, yes, military humanitarian interventions (like bombing Libya) are the best possible use of American resources towards humanitarian ends. If we do think government humanitarian programmes like anti-malaria campaigns in Malawi work, then I would expect to see a rather different attitude towards foreign aid and public health-care spending than I have seen in American politics these last few years.

To put things in one last way: it simply isn't true that we aren't faced with calls for peaceful humanitarian interventions as often as we are faced with calls for military ones. We are faced with calls for peaceful humanitarian interventions all the time. People are asking for more money for USAID. People are asking for more money for UN peacekeepers. People are asking for more money for the United States Institute for Peace. They're asking for more money for the Global Fund to Fight AIDS, Tuberculosis and Malaria. If you want America, collectively, to be doing more of this sort of thing and less of the bombing sort of thing, then what you need to do is to argue that those sorts of activities are central missions of the United States government, because the most powerful political forces in America over the past couple of decades have been arguing that they aren't, and that's why we're not doing more of them.

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Analytical framework of the economic crisis in the US and the EU

Mohamed A. El-Erian explains what happened and what needs to happen in the Western economies:

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Each development, and certainly their occurrence in tandem, points to the historic paradigm changes shaping today’s global economy – and to the anxiety that comes with the loss of once-dependable anchors, be they economic and financial or social and political.

Restoring these anchors will take time. There is no game plan as of now, and historic precedents are only partly illuminating. Yet two things seem clear: different countries are opting, either by choice or necessity, for different outcomes; and the global system as a whole faces challenges in reconciling them.

Some changes will be evolutionary, taking many years to manifest themselves; others will be sudden and more disruptive. Yet, as complex as all of this sounds – and, by definition, paradigm changes are complicated affairs that, fortunately, seldom occur – a simple analytical framework may help shed light on what to look for, what to expect and where, and how best to adapt.

The framework relies on an often-used analytical shortcut: identifying a limited set of explanatory variables in what statisticians call “a reduced-form equation.” The objective is not to account for everything, but rather to pinpoint a small number of variables than can explain key factors, albeit neither perfectly nor fully.

Using this approach, it is possible to argue that the future of many Western economies, and that of the global economy, will be shaped by their ability to navigate four inter-related financial, economic, social, and political dynamics.

The first relates to balance sheets. Many Western economies must deal with the nasty legacy of years of excessive borrowing and leveraging; those, like Germany, that do not have this problem are linked to neighbors that do. Faced with this reality, different countries will opt for different de-leveraging options. Indeed, differentiation is already evident.

Some, like Greece, face such a parlous situation that it is difficult to imagine any outcome other than a traumatic default and further economic turmoil; and Greece is unlikely to be the only Western economy forced to restructure its debt. Others, like the United Kingdom, have moved quickly to take firmer control of their destiny, though their austerity drives will inevitably involve considerable sacrifices.

A third group, led by the US, has not yet made an explicit de-leveraging choice. Having more time, they are using the less visible, and much more gradual, path of “financial repression,” under which interest rates are forced down so that creditors, including those on modest fixed incomes, subsidize debtors.

De-leveraging is closely linked to the second variable – namely, economic growth. Simply put, the stronger a country’s ability to generate additional national income, the greater its ability to meet debt obligations while maintaining and enhancing citizens’ standards of living.

Many countries, including Italy and Spain, must overcome structural barriers to competitiveness, growth, and job creation through multi-year reforms of labor markets, pensions, housing, and economic governance. Some, like the US, can combine structural reforms with short-term demand stimulus. A few, led by Germany, are reaping the benefits of years of steadfast (and underappreciated) reforms.

But growth, while necessary, is insufficient by itself, given today’s high unemployment and the extent to which income and wealth inequalities have increased. Hence the third dynamic: the West is being challenged to deliver not just growth, but “inclusive growth,” which, most critically, involves greater “social justice.”

Indeed, there is a deep sense that capitalism in the West has become unfair. Certain players, led by big banks, extracted huge profits during the boom, and avoided the deep losses that they deserved during the bust. Citizens no longer accept the argument that this unfortunate outcome reflects the banks’ special economic role. And why should they, given that record bailouts have not revived growth and employment?

Calls for a fairer system will not go away. If anything, they will spread and grow louder. The West has no choice but to strike a better balance – between capital and labor, between current and future generations, and between the financial sector and the real economy.

This leads to the final variable, the role of politicians and policymakers. It has become fashionable in both America and Europe to point to a debilitating “lack of leadership,” which underscores the extent to which an inherently complex paradigm change is straining traditional mindsets, processes, and governance systems.

Unlike emerging economies, Western countries are not well equipped to deal with structural and secular changes – and understandably so. After all, their histories – and certainly during what was mislabeled as the “Great Moderation” between 1980 and 2008– have been predominantly cyclical. The longer they fail to adjust, the greater the risks.

Those on the receiving end of these four dynamics – the vast majority of us – need not be paralyzed by uncertainty and anxiety. Instead, we can use this simple framework to monitor developments, learn from them, and adapt. Yes, there will still be volatility, unusual strains, and historically odd outcomes. But, remember, a global paradigm shift implies a significant change in opportunities, and not just risks.

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Transatlantic economies whipsawed by globalization

Jeff Sachs writes:

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A failure of economic strategy and leadership lies behind the near simultaneous collapse of market confidence in the euro zone and US economies. No need to blame the rating agencies: governments in Europe and America have been unable to cope with the realities of global capital markets and competition from Asia – and deserve the lion’s share of the blame.

I’ve watched dozens of financial crises up close, and know that success means showing the public a way out that is bold, technically sound and built on social values. Transatlantic leadership is falling short on all counts. Neither the US nor Europe has even properly diagnosed the core problem, namely that both regions are being whipsawed by globalisation.

Jobs for low-skilled workers in manufacturing, and new investments in large swaths of industry, have been lost to international competition. Employment in the US and Europe during the 2000s was held up only by housing construction stoked by low interest rates and reckless deregulation – until the construction bubble collapsed. The path to recovery now lies not in a new housing bubble, but in upgraded skills, increased exports and public investments in infrastructure and low-carbon energy. Instead, the US and Europe have veered between dead-end, consumption-oriented stimulus packages and austerity without a vision for investment.

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Sachs outlines three fiscal policies for the US and the EU.

• Expand investments in human and infrastructure capital.
• Cut wasteful spending, for instance in misguided military engagements in places such as Iraq, Afghanistan, and Yemen.
• Balance budgets in the medium term, in no small part through tax increases on high personal incomes and international corporate profits that are shielded by loopholes and overseas tax havens.

Links of Interest (2011-07-12)

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1. De and Iacovone on Did NAFTA increase productivity?. “The results show that the North American Free Trade Agreement stimulated the productivity of Mexican plants via: (1) an increase in import competition and (2) a positive effect on access to imported intermediate inputs. However, the impact of trade reforms was not identical for all integrated firms, with fully integrated firms (i.e. firms simultaneously exporting and importing) benefiting more than other integrated firms.” Here is more on NAFTA.

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2. Li, Mengistae and Xu diagnose development bottlenecks in China and India. “The analysis finds that China has better infrastructure, more skilled workers, and more labor-hiring flexibility than India, but a worse access to finance and higher regulatory burden. Infrastructure appears to be a key constraint for India: it lags significantly behind China, yet it has important indirect effects for the effectiveness of labor flexibility. Labor flexibility is also likely a major constraint for India, as evident in the predominance of small firms, the importance of firm size in accounting for India's disadvantage in productivity, and the complementarity of proxies of labor flexibility with infrastructure and access to finance. Interestingly, regulatory uncertainty has adverse effects in India but not in China.”

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3. Khanal and Satyal weigh in the socio-economic impact of remittances. Their basic argument is that the failure to find jobs (or create due to laxity in implementing such policies) is leading to an exodus of workers to foreign employment destinations. They also argue that remittances have not helped in “reducing poverty”. I wonder how they define it because the latest study on remittances find that it has helped to reduce absolute poverty.

The increase in imports, consumption, aiding real estate and housing bubbles, and change in labor supply of returnees are some of the concerns. Remittances have done both good and bad to the economy, both at the household and macro levels. It in itself is not bad. When there are few existing chances of employment in economy and chances of finding new are very slim, exodus of workers is normal. Systematizing such supply of labor by giving training and helping them find good employment opportunities, if they like, elsewhere is not a bad policy in the short run. In the long run, retaining the required at home is crucial. For that, channeling remittances in productive usages as opposed to consumption of imported goods is essential. Nepali policymakers have failed on this front. And, that is the danger.

We are seeing symptoms of Dutch Disease in the economy. Letting it not be a Dutch Disease itself requires a both short run and long run policies. The former is due to our compulsion as we can’t just chock the flow of money just to check ‘brain drain’ (or ‘brain gain’?). People will go anyway if there are no opportunities at home or the opportunities elsewhere are higher than at home. Systematizing this process (though a second best option) in the short term is good for the nation. The first best option is creating opportunities at home, which can be done gradually. Work should be started on both fronts. Note that even if there are opportunities at home, people still do migrate.

Here is Santosh Pokharel’s take on why remitters are drifting away form using formal remittance channels (high fees and lack of awareness).

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4. Bernstein on Obama’s hat tip to Keynes. “The President signaled an understanding of the effectiveness of stimulus along with the need for more of it.” Krugman on “He’s just not that into you”.

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5. Campos and Nugent on why the global financial crisis has been wasted.

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6. Ezekwesili on the birth of the Republic of South Sudan.

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7. Nepal’s budget for FY 2011-2012: The upcoming budget in a new format to make Nepal’s accounting system compatible with international accounting. Any expenditure under the grants and subsidies heading will be considered as recurrent expenditure. Therefore, grants and subsidies that currently fall under capital expenditure will be moved to recurrent expenditure. Revenue and grant will be shown in the income part instead of revenue. Under this heading, tax, other revenues and foreign grants will be included. The principal refund that is currently shown in the revenue heading will be moved to financing part. The principal payment will be moved from the expenditure part.The new budget will have loan investments, capital investment, foreign loans and borrowing under the financing heading. It will be shown under this heading after adjusting refund of loan investment and principal payment of foreign and domestic borrowing. Meanwhile, peace, social inclusion and infrastructure will be the priority (so they say!). Civil servants salary to be hiked by at least 20 percent. Earlier, I argued for why the public sector salary should be increased. Here is my take on Nepal’s policies and programs for FY 2011-2012.

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The record of the Washington Consensus

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For 30 years, Washington has been shopping a trade-not-aid based economic diplomacy across Latin America and beyond. According to what is generally known as the “Washington consensus”, the US has provided Latin America loans conditional on privatisation, deregulation and other forms of structural adjustment. More recently, what has been on offer are trade deals such as the US-Colombia Free Trade Agreement: access to the US market in exchange for similar conditions.

The 30-year record of the Washington consensus was abysmal for Latin America, which grew less than 1% per year in per capita terms during the period, in contrast with 2.6% during the period 1960-81. East Asia, on the other hand, which is known for its state-managed globalisation (most recently epitomised by China), has grown 6.7% per annum in per capita terms since 1981, actually up from 3.5% in that same period.

The signature trade treaty, of course, was the North American Free Trade Agreement (Nafta). Despite the fact that exports to the US increased sevenfold, per capita growth and employment have been lacklustre at best. Mexico probably gained about 600,000 jobs in the manufacturing sector since Nafta took effect, but the country lost at least 2m in agriculture, as cheap imports of corn and other commodities flooded the newly liberalised market.

This dismal economic record prompted citizens across the Americas to vote out supporters of this model in the 2000s. Growth has since picked up, largely from domestic demand, and exports to China and elsewhere in Asia.

Interestingly, the only significant card-carrying members of the Washington consensus left in Latin America are Mexico and Colombia.

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More by Kevin Gallagher here.

Going beyond Keynesianism to avoid another global crisis

High income countries are facing a “new normal” (a combination of low growth, high unemployment and low returns on investment). Some of the European countries are facing sovereign debt crisis and may require restructuring. Middle-income countries are experiencing short-term capital inflows, putting appreciation pressure on currency and equity and real estate markets prices. Surge of food, fuel and commodity prices is hurting the poor. With these economic problems what can be done to avoid another global crisis?

Justin Lin argues that “a global push for investment along the line of Keynesian stimulus is the key for a sustained global recovery; however, the stimulus needs to go beyond the traditional Keynesian investment.” But the problem lies in avoiding the Ricardian trap—a situation where the government spending fails to boost aggregate demand as people expect increases in taxes in the future (and save now) to pay for existing deficit that funds government spending. Lin suggest:

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To avoid the Ricardian trap, it is important to go beyond conventional Keynesian stimulus of “digging a hole and paving a hole” by investing in projects which increase future productivity. So the investment will increase jobs and demands for capital goods now and increase the growth and government’s revenue in the future. The increase in revenue can pay back the cost of investment without increasing household’s future tax liability.

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Krugman argues that this still misses the point:

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It’s one thing to have an argument about whether consumers are perfectly rational and have perfect access to the capital markets; it’s another to have the big advocates of all that perfection not understand the implications of their own model.

So let me try this one more time.

Here’s what we agree on: if consumers have perfect foresight, live forever, have perfect access to capital markets, etc., then they will take into account the expected future burden of taxes to pay for government spending. If the government introduces a new program that will spend $100 billion a year forever, then taxes must ultimately go up by the present-value equivalent of $100 billion forever. Assume that consumers want to reduce consumption by the same amount every year to offset this tax burden; then consumer spending will fall by $100 billion per year to compensate, wiping out any expansionary effect of the government spending.

But suppose that the increase in government spending is temporary, not permanent — that it will increase spending by $100 billion per year for only 1 or 2 years, not forever. This clearly implies a lower future tax burden than $100 billion a year forever, and therefore implies a fall in consumer spending of less than $100 billion per year. So the spending program IS expansionary in this case, EVEN IF you have full Ricardian equivalence.

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Setting a deadline for the Doha Round

A “High Level Trade Experts Group”, co-chaired by Jagdish Bhagwati and Peter Sutherland, argues that passage of the Doha Round is doable in 2011, but this would require increased attention of world leaders. The Group has called for December 31, 2011 as the deadline for the passage of the Doha package.

• Doha is doable this year; rapid progress is being made in closing the negotiating gaps; this started in November 2010.

• Getting the deal done requires head-of-state attention; they must authorize, or personally negotiate the last trade-offs framed by the draft agreement that their WTO ambassadors hope to have ready for April.

• The window for this deal is the first half of 2011; after that all bets are off until 2013 at the earliest (due to elections in the US).

Major points from the document:

-A development friendly trade deal must demand less of countries in a way that is proportionate to their state of development. The final Doha package should be measured against this criteria.

-The Doha Round’s development mandate will be delivered in two key ways: (i) complete exclusion of all LDCs from any obligations except binding their tariff schedules at the current level (‘Round for Free’); and (ii) the concept of agreed ‘modalities’ for tariff cuts (subsidy reductions in agriculture) in principle agreed by all member, but in practice tempered by various forms of ‘flexibility’ for developed and developing countries. The last Doha negotiations in 2008 failed over differences in defining one of these flexibilities—a  special safeguard mechanism for agricultural exports to developing countries.

-The use of formula plus flexibility system is both the greatest potential strength and fatal weakness of the Doha Round. Positive in the sense that tariff landscape will be compressed across the board, with the highest farm tariffs in the developed world compressed. Also, industrial tariff in developing countries will also go down. Weakness in the sense that unless it is clear where all countries will exercise their flexibilities to shield tariff lines from cuts through exclusions or where the special safeguard mechanism will apply, it is impossible, or at least very difficult, to value a final package in a way that makes it possible to sell to domestic constituencies.

-Because completion of the Doha Round would demand political concessions, it cannot be completed solely by trade negotiators as it needs a much stronger and direct involvement of political leaders.

Why the Doha Round should be completed?

• It will act as an insurance policy against future protectionism. It will consolidate unilateral liberalization agreements since the end of the Uruguay Round in 1994.
• It will help reform global farm trade, particularly it will make the EU’s Common Agricultural Policy irreversible and seriously constrain any future US Farm Bill from increasing support should commodity prices fall. It would also eliminate all export subsidies for agricultural goods.
• It will provide new market access through tariff reductions and the contraction of market share of those countries whose agriculture subsidies will be withdrawn.
• It would protect the WTO and the multilateral trading system itself. A permanent collapse would likely provoke a wave of preferential trading agreements.
• Unless the Doha Round is finished and the WTO moves to 21st century trade issues, it will find itself stuck with out-dated disciplines while deeper disciplines are established by the EU’s, the US’s and Japan’s deep RTAs, with new sets added when China, India and Brazil internationalize their own supply chains
• Even if tariff reductions and the dismantling of non-tariff barriers can be achieved bilaterally, the multiplier effect of a multilateral agreement is considerably higher. Also, agricultural subsidy reform will be agreed multilaterally or not at all.

Structure of a final package

Agriculture

• Under current draft texts the EU would reduce its MFN duties on agricultural imports by close to 60%. The highest and most distorting tariffs will be cut proportionally more, with only 4% of tariff lines treated as sensitive and therefore subject to smaller cuts. As a compensation tor these partial exemptions import quotas amounting to 4% of domestic consumption must be opened and subjected to zero or very low duties. IT will translate into real new market access opportunities from day one of implementation. Agricultural exporters in developing countries, in particular Brazil and Argentina, and in developed countries, in particular Australia, New Zealand, and the US will likely benefit the most.
• The support to products like cotton and sugar in the US would be severely constrained, but negotiators still have to tackle this issue. Also, the form and functioning of the special safeguard measure for developing countries need to be worked out.
• Under trade distorting domestic support to agriculture, developed countries will reduce substantially the ceilings currently applied (by up to 80% in the case of the EU and up to 70% in the case of the US).
• The current text foresees the complete elimination of all forms of export subsidies by 2013 by developed countries, and by 2016 by most developing countries, with the remainder by 2021.

Industrial goods

• Among developed countries, which represent more than two third of the world’s final demand, tariffs would be virtually eliminated, with no tariff remaining above 6%. Duties levied by the EU on its total imports of industrial products would go down by 44%, more than in any previous round, amounting to $12.5 billion saved on exports to the US. On the US market, the amount of duties paid on imports would go down by $12 billion.
• For China, the current draft modalities would lead to a 22% reduction of duties levied on imports, well below the 36% cut that Chinese exporters would face on foreign markets.
• Other emerging countries need to make further tariff reductions.

-->Tariff reductions in particular sectors that are highly traded is needed as well. Sectoral tariff reduction would increase the gains for all countries.

--> The Doha Round should also include a new package on environmental goods and services, whose market is worth US 150 billion annually. The WB has already defined a list of 45 environmental goods that can form the basis for negotiation.

Services

• Given the fundamental role of services in the effective and efficient management of an economy, a strong outcome in services has huge potential spillover benefits for both developed and developing WTO members.

Package for LDCs

• The LDCs are not expected to implement any tariff reductions and are requested only to bind their tariffs at the level they currently apply. Since many of them depend on preferential market access to economies, multilateral liberalization erodes the preferential margin for their exports, which could pose as a challenge in the short-term as they will face stiff competition from advanced developing countries such as China and Brazil. This concern is partly addressed by eliminating tariff on certain products in a phased manner. Also, granting duty free quota free (DFQF) market access for all exports from all LDCs to all OECD countries and a set of major emerging economies would be helpful to LDCs. It could boost LDCs’ exports by 44% or US$ 7 billion a year.
• Since cotton is of crucial importance to several LDCs, the Doha Round will also have to address trade distorting subsidies to cotton farmers in developed countries.
• Aid for Trade (AfT) should be maintained as a necessary complement to boost LDCs’ productive capacity and help them reap the benefits of the Doha Round.

Trade facilitation

• Trade facilitation negotiation is a clear success story of the Doha Round. The WTO members have tabled more than 70 new proposals for improving the transit of goods between markets, charges levied for transit, penalties for minor breaches of customs regulations, the standardization of customs documentation and prompt publication of conditions for import and export.
• The proposed improvements in trade facilitation would increase trade by US$130 to US$450 billion annually. The benefits for developing countries could by far exceed the gains in other areas for negotiation. Meanwhile, the developing countries themselves should take initiatives to reform domestic policies and infrastructure to ease border-crossing for goods and services and the development aid that will be provided by developed countries to implement these reforms.

Here (the main paper by Antoine Bouet and David Laborde 2009) is an updated estimation of the potential costs of a failed Doha Round. The total cost of failure of the Doha Round is estimated to be US$ 1.171 trillion in forgone world exports if protectionist measures persist. Meanwhile, welfare loss are estimated to be US$ 193 billion. Here is earlier estimates of the Doha Round. Here is a piece about the industrial and export interests of Nepal in the Doha Round of trade negotiations. Here is a link to the recent WTO workshop on the Doha Round.

Aid & Pakistan’s political economy

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[…] The deep pockets of the United States' civilian program in Pakistan-in the form of $1.5 billion a year in development assistance-don't seem to contain the leverage to push those reforms through.

[…] The IMF's view matters, because Pakistan has been waiting for the remaining $3.5 billion from an $11.3 billion bailout package that kept Pakistan's economy from collapse in the wake of the 2008 financial crisis. But that support carries explicit conditions, including progress on both energy pricing and tax reform.

[…] U.S. policymakers should note well this series of events and remember a simple lesson. Billions of dollars of U.S. assistance-and a sustained diplomatic focus on the reform agenda-have not given the United States the ability to dictate the outcomes of Pakistan's political process. This is inconvenient for the United States, but not surprising. For the United States and for other major donors in Pakistan, money has never brought leverage.

[…] Pakistan's energy sector demonstrates the difficulty in achieving the kind of influence donor countries would like to have. For decades, the World Bank and the Asian Development Bank-armed with sums greater than the current Kerry-Lugar-Berman U.S. aid package-have urged the Government of Pakistan to finally reduce the price subsidies on electricity, to no avail. Time and again, project documents cite the same problems, the donors recommend the same solutions, the government of Pakistan promises to implement the same reform, the government breaks (and donors lament) the same promises. Meanwhile, the basic politics maintaining the status quo have not changed-there are too many reaping the benefits of subsidized power, and ordinary consumers feel they aren't getting service that warrants paying more.

[…] When Vice President Biden visited Islamabad this week, he promised that the United States would "keep the entire commitment" of the pledged $7.5 billion in Kerry-Lugar assistance. This assurance will surely be welcomed by Pakistan, and it's a fair reflection of Pakistan's short-term and long-term importance to U.S. interests. Adjusting where and how aid is spent-including by taking the requests of the Pakistani government into account-is necessary to respond to the real needs on the ground. (On that note, we applaud the decision to put $190 million into direct smartcard grants to help Pakistani flood victims rebuild their lives). But U.S. policymakers should not expect the aid money to give the United States greater influence on economic reforms in Islamabad. This is not the point, nor the potential, of U.S. aid.

[…] The key point is that certain aid projects can carry both direct benefits (better services and infrastructure for the people of Pakistan) and indirect benefits (incentives for the Pakistani political system to achieve greater results with their existing resources). Here are a few examples to consider: U.S. investments in energy generation and transmission capacity can be linked to public commitments to raise electricity tariffs  only when brownouts have been reduced below an announced benchmark. In this grand bargain, as service quality improves, tariffs would go up, and another round of aid investments would be delivered. In another case, U.S.-financed tools can be deployed to help Pakistani citizens hold their government accountable-with regular reports on simple indicators of development, for example, or an easily accessible database of all development projects funded from internal or external resources.  Or a pilot Cash on Delivery aid contract in one or more Pakistani provinces could put levers in the hands of education reformers and help their ideas gain traction.

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More by Nancy Birdsall et al. here.

Did Global Imbalances Cause the Global Financial Crisis?

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Global imbalances -- the coexistence of large deficits and surpluses in the global economy, such as too much spending by U.S. consumers and too little by Chinese consumers -- were not a major cause of the global crisis, according to a new working paper by Luis Serven and Ha Nguyen. In fact, how international capital flowed before and during the crisis suggests global imbalances are the result of structural distortions in global financial markets and major individual economies, which have led to a steady rise in demand for U.S. assets from the rest of the world. Without changes in those structural and policy choices, global imbalances could persist. This contradicts the conventional view that global imbalances are caused by unsustainable, high demand for goods in the U.S. and other rich countries and that a correction must involve major U.S. trade adjustment and depreciation of the dollar. The paper also evaluates the future of global imbalances, especially their impact on developing countries.

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Full paper here . The paper argues that global imbalances were not among the main causes of the financial crisis.

US$ 100 Trillion Additional Credit Needed to Support Global Growth

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Credit levels will need to double over the next 10 years, growing by US$ 103 trillion, to support consensus-projected economic growth. This doubling of credit could be achieved without increasing the risk of major crisis, finds More Credit with Fewer Crises: Responsibly Meeting the World’s Growing Demand for Credit, a report released by the World Economic Forum in collaboration with McKinsey & Company.

Asia will face the challenge of meeting the high credit demand growth of US$ 40 trillion with less developed financial systems and capital markets. In the European Union, a further US$ 13 trillion of credit in the form of bank lending will be needed. To supply this, banks will require additional capital that, after retained earnings, could lead to a capital shortfall of US$ 2 trillion. Analysis shows that the US would continue to need to draw on global savings, potentially by up to US$ 3.8 trillion in 2020, in order to fund its credit needs, unless there is a marked increase in US domestic savings rates.

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More here

Nepal’s BoT with India, the US, Germany & Japan

Nepal's trade deficit with major trading partners (US$ million)
Year	Balance of Trade (BoT)	India		United States		Germany		Japan
		Total	% of BoT	Total	% of BoT	Total	% of BoT	Total	% of BoT
1990	-375	-44	12	36	-9	54	-14	-108	29
1991	-243	-68	28	54	-22	103	-43	-106	44
1992	-124	-59	48	75	-61	131	-105	-63	51
1993	-175	-66	38	94	-54	166	-95	-71	41
1994	-283	-80	28	109	-39	132	-47	-70	25
1995	-444	-93	21	88	-20	107	-24	-65	15
1996	-988	-375	38	89	-9	78	-8	-81	8
1997	-1244	-344	28	89	-7	114	-9	-68	5
1998	-990	-294	30	93	-9	86	-9	-42	4
1999	-624	3	-1	151	-24	75	-12	-24	4
2000	-850	-267	31	173	-20	87	-10	-32	4
2001	-813	-260	32	185	-23	61	-7	-27	3
2002	-785	-210	27	89	-11	31	-4	-22	3
2003	-954	-572	60	141	-15	16	-2	-18	2
2004	-1113	-650	58	112	-10	22	-2	-16	1
2005	-1257	-691	55	81	-6	22	-2	-28	2
2006	-1568	-919	59	74	-5	1	0	-19	1
2007	-1967	-1000	51	57	-3	-3	0	-41	2
2008	-2206	-1222	55	52	-2	7	0	-46	2
2009	-2121	-1079	51	21	-1	6	0	-40	2

Note: Numbers are rounded to the nearest whole number; For % of balance of trade (BoT), negative value means trade surplus as a percent of total trade balance, and vice versa. Source: Key Indicators for Asia and the Pacific 2010 (xls).

Total trade deficit as of 2009 was US$ 1079 million (US$ 1.079 billion). Trade deficit with India accounted for 51 percent of the total trade deficit; with the US 1 percent surplus of total trade deficit; and with Japan two percent of total trade deficit. Surprisingly, there was trade surplus of around US$ 3 million with India in 1999. With the US, there generally is trade surplus, which is decreasing continuously since 2003. The high trade deficit with India is partly because of a result of high petroleum and fuel imports. These figures slightly vary depending on which database (WB’s WDI, IMF’s DOTS, ADB’s Key indicators, and the GoN’s data) you use. But, the trend is pretty much the same. It looks like trade deficit is a permanent feature of Nepal’s performance in external trade.

In 2009, after two successive years of negative growth, exports increased by 13.5 percent. Meanwhile, imports have been increasing at a rapid pace, reaching 28.2 percent in 2009. Over the period 2005-2009, average exports, on an annual basis, increased by 4.7 percent, but imports surged by 16 percent. Total exports and total imports in 2009 amounted to US$ 698 million and US$ 2820 million, which means that total exports represented 25 percent of total imports.

India is by far the most important export and import destination, accounting for 60 percent of total exports and 53 percent of total imports. Trade deficit with India was around US$ 1079 million with the world (excluding India) was US$ 1042 million.

The other significant export destinations are the US, Germany, Bangladesh, the UK, France, Canada, Italy, Japan, and Turkey. Meanwhile, the other significant imports destinations are China, Singapore, Thailand, Japan, Saudi Arabia, Indonesia, Germany, Australia, and the US.