Global Imbalances and Policy Co-ordination: CERF – University of CambridgeAlphametrics Ltd. Advancing an Analytical Framework University of Campinas, October.

Global Imbalances and Global Imbalances and Policy Co-ordination:Policy Co-ordination:

CERF – University of Cambridge Alphametrics Ltd.

Advancing an Analytical Framework

Advancing an Analytical Framework

University of Campinas, October 2006

UNDP: International Poverty Center

CERF and Alphametrics

OutlineOutline The projectThe project

How it started…How it started… Why is this necessary… Is this any different?Why is this necessary… Is this any different?

Some findingsSome findings Why macro-financial imbalances cannot continueWhy macro-financial imbalances cannot continue An US-led recession is not good for anyoneAn US-led recession is not good for anyone Developing blocs have a critical roleDeveloping blocs have a critical role

But is not good enough yet. Next steps:But is not good enough yet. Next steps: Revise assumptions, improve specification, etc.Revise assumptions, improve specification, etc. Open geometry in a trade & income model: scenariosOpen geometry in a trade & income model: scenarios Analysis of financial stocks & flows: model & Analysis of financial stocks & flows: model &

scenariosscenarios Income distribution in a co-ordinated policy response Income distribution in a co-ordinated policy response


The project’s backgroundThe project’s background

NN.AA. & SAM tradition: Stone, Pyatt, Roe, etc.NN.AA. & SAM tradition: Stone, Pyatt, Roe, etc. ‘‘Central planning’: Tinbergen, Kalecki, Eclac, Central planning’: Tinbergen, Kalecki, Eclac,

etc.etc. ‘‘Modelling and planning’: pioneering work of Modelling and planning’: pioneering work of

the CEPG (Francis Cripps, Wynne Godley, etc.)the CEPG (Francis Cripps, Wynne Godley, etc.) Alphametrics model of the world economyAlphametrics model of the world economy CERF and the Cambridge heritageCERF and the Cambridge heritage A network: IPC (UNDP), G24, FERE, IDEAs, JNU A network: IPC (UNDP), G24, FERE, IDEAs, JNU

(IN), Unicamp, IPEA (BR), Shangai’ IPC & Univ., (IN), Unicamp, IPEA (BR), Shangai’ IPC & Univ., others (CEFID-AR; Fed.Uni.Rio; …)others (CEFID-AR; Fed.Uni.Rio; …)


What we want to know about What we want to know about the world economythe world economy

Trade, finance, growth and Trade, finance, growth and distribution: distribution: History and new factorsHistory and new factors Structure and dynamics of adjustmentStructure and dynamics of adjustment

What outcomes can we expect if we What outcomes can we expect if we do not do anything ?do not do anything ?

Can policies make a difference ?Can policies make a difference ? Global policies require coalitionsGlobal policies require coalitions Coalitions require common understandingCoalitions require common understanding


How we can understand such How we can understand such a huge and complex a huge and complex system ?system ? Central preconceptions: Central preconceptions:

global development is a historical processglobal development is a historical process discard ‘sh.term noise’ & avoid ‘forecasting’discard ‘sh.term noise’ & avoid ‘forecasting’ coping with limitations and learning to interpretcoping with limitations and learning to interpret

Data: incomplete/imperfect but improvingData: incomplete/imperfect but improving Model: stylised patterns, structural relations, Model: stylised patterns, structural relations,

dynamics of adjustment, global linkages.dynamics of adjustment, global linkages. Scenarios: consistent baseline, plausible Scenarios: consistent baseline, plausible

developments and shocks, co-ordinated developments and shocks, co-ordinated policy action: target-instrumentspolicy action: target-instruments


Findings: history & Findings: history & sustainabilitysustainability

The past 30 yearsThe past 30 years GrowthGrowth ... integration... integration ... imbalances... imbalances

Will this pattern Will this pattern continue ?continue ?

What do we mean by What do we mean by sustainable growth ?sustainable growth ?

0

10

20

30

40

1970 1980 1990 2000 2010

GDP Exports

trillion US$, 2000 prices

by 2015 trade would exceed 50% of world

income


Who succeeds in the global Who succeeds in the global market today ?market today ?

Global markets are Global markets are dominated by large dominated by large companies and companies and production is production is concentrated in concentrated in specific regionsspecific regions

5% of the market is 5% of the market is shared by countries shared by countries with almost half the with almost half the world's population world's population ****

% of world % of world exportsexports

% of world % of world populationpopulation

3030 33

8080 2020

9595 5656

remaining 5% ** remaining 44%

** Nigeria, Indonesia, Pakistan, ** Nigeria, Indonesia, Pakistan, India, Bangladesh and many India, Bangladesh and many other countries in Asia, Africa other countries in Asia, Africa and Americaand America


Industrial exportsIndustrial exports

The market has The market has been dominated been dominated by Western by Western Europe, the USA, Europe, the USA, Japan and the rest Japan and the rest of Asiaof Asia

China is attracting China is attracting attention as a new attention as a new entrantentrant

0

1000

2000

3000

4000

5000

1970 1980 1990 2000

USA

W Europe

Other Asia

China

Rest of World

Japan

Exports of manufactures, billion US$ at 2004 prices

excluding intra-bloc trade


The world market for The world market for manufacturesmanufactures

The USA and The USA and Western Europe Western Europe provide the main provide the main markets although markets although Asian imports are Asian imports are growinggrowing

The rest of the The rest of the world exchanges world exchanges energy and raw energy and raw material exports for material exports for manufacturesmanufactures

0

1000

2000

3000

4000

5000

1970 1980 1990 2000

USA

W Europe

Other Asia

China

Rest of World

Imports of manufactures, billion US$ at 2004 prices

excluding intra-bloc trade


Hard times ahead ?Hard times ahead ?

The US has a massive deficitThe US has a massive deficit

US economic growth relies heavily on US economic growth relies heavily on internal demandinternal demand

Growth in the rest of the world relies Growth in the rest of the world relies on growth in the USon growth in the US

With rising interest rates and the With rising interest rates and the high price of oil, will US growth high price of oil, will US growth continue ?continue ?


The view in WashingtonThe view in Washington

International International institutions and institutions and the CBO forecast the CBO forecast continuing continuing growth at growth at historical rates historical rates

The US will The US will continue to be continue to be the main driver the main driver of world trade of world trade and financial and financial flowsflows

-4

-2

0

2

4

6

8

70 75 80 85 90 95 00 05 10 15

Average growth of the U.S. economy (1970-2004) = 2.8%

Growth Rate of U.S.

(% p.a.)


-10

-8

-6

-4

-2

0

2

70 75 80 85 90 95 00 05 10 15

Trade Balance

Current Account Balance If the historical If the historical

pattern continuespattern continues

the trade deficit the trade deficit will reach 8 per will reach 8 per cent of GNPcent of GNP

payments on payments on external debt will external debt will cost nearly 2 per cost nearly 2 per cent of GNPcent of GNP

The U.S. deficitThe U.S. deficit(% of GNP)


-100

-80

-60

-40

-20

0

20

80 85 90 95 00 05 10 15`

Net Position of the US vis à vis the Rest of the World

U.S. external debtU.S. external debt

Net external Net external liabilities of the liabilities of the USA are about 30 USA are about 30 per cent of GNP per cent of GNP and growing fastand growing fast

Net liabilities Net liabilities could reach 80 could reach 80 per cent of GNP per cent of GNP within the next within the next 10 years10 years

(% of GNP)


0.4

0.8

1.2

1.6

2.0

2.4

2.8

70 75 80 85 90 95 00 05 10 15

Debt of the personal sector as % of

disposable income

The stock of personal debtThe stock of personal debt

Debt of the Debt of the personal sector is personal sector is now one-and-a-now one-and-a-half times incomehalf times income

With continued With continued deficits, personal deficits, personal debt would reach debt would reach about two-and-a- about two-and-a- half times income half times income in ten years from in ten years from nownow


0.0

0.4

0.8

1.2

1.6

2.0

2.4

2.8

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

70 75 80 85 90 95 00 05 10 15

House price index

S&P 500 index

Asset prices in real terms

Asset appreciationAsset appreciation

Accumulating Accumulating debt has been debt has been backed by ever-backed by ever-rising asset pricesrising asset prices

If this continues, If this continues, equities and equities and houses should be houses should be priced at one-and-priced at one-and-a-half times their a-half times their (already high) (already high) value ten years value ten years from now? from now?


-4

-2

0

2

4

6

8

85 90 95 00 05 10 15

Consensus forecast for U.S growth

Slowdown

Average growth of the U.S. (1970-2004) =

2.8%

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

If the U.S. economy starts to slow If the U.S. economy starts to slow downdown

(% p.a.)


-8

-7

-6

-5

-4

-3

-2

-1

0

90 92 94 96 98 00 02 04 06 08 10 12 14

Slowdown

Consensus

U.S. Trade Balance[ % of GNP ]

A moderate A moderate slowdown (about slowdown (about 0.5 per cent per 0.5 per cent per annum) may annum) may stabilize the U.S. stabilize the U.S. trade deficit at trade deficit at 6% of GNP6% of GNP

But this is not But this is not sufficient to sufficient to bring financial bring financial flows back into flows back into balancebalance

With a slowdownWith a slowdown the U.S. deficit flattens the U.S. deficit flattens


Could the slowdownCould the slowdown result in a recession ? result in a recession ?

-1

0

1

2

3

4

5

90 92 94 96 98 00 02 04 06 08 10 12 14

Average growth of the U.S. (1970-2004) = 2.8%

Recession

Slowdown

Weakening Weakening sentiment may sentiment may affectaffect

- asset prices- asset prices

- credit expansion- credit expansion

- household - household spendingspending

- jobs- jobs

- tax revenue- tax revenue

How will How will governments and governments and monetary monetary authorities respond authorities respond ??

(% p.a.)


Recession would be generalizedRecession would be generalized

-6

-5

-4

-3

-2

-1

0

90 92 94 96 98 00 02 04 06 08 10 12 14

Recession

Slowdown

The rest of the The rest of the world would pay a world would pay a price throughprice through

- reduced growth of - reduced growth of exports to the USexports to the US

- knock-on impact - knock-on impact on confidence and on confidence and spending spending elsewhereelsewhere

Deficit as % of GNP


What can the rest of the What can the rest of the world do to reduce the risk ?world do to reduce the risk ?

A more balanced and sustainable A more balanced and sustainable growth process in each world regiongrowth process in each world region

Less dependence on the USALess dependence on the USA Less reliance on high-cost imported Less reliance on high-cost imported

energyenergy Closer regional integrationCloser regional integration Growth sustained by domestic Growth sustained by domestic

spending as well as exportsspending as well as exports


Sustainable domestic Sustainable domestic reflationreflation

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

0

200

400

600

800

1990 2000 2010

Rest of Asia

Rest ofworld

China

Japan

Trade surplus ($billion)


Reduce dependence on other Reduce dependence on other regionsregions

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

0%

20%

40%

60%

1990 2000 2010

Rest of Asia

China

Japan

Share of US import marketfor manufactures


Increased energy efficiencyIncreased energy efficiency

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

0

100

200

300

400

500

1990 2000 2010

Rest of Asia

China

Japan

Energy consumption (tons of oil per million $ income)


-4

0

4

8

12

16

90 92 94 96 98 00 02 04 06 08 10 12 14

GNP targets (% p.a.)

Developing America

Middle East

Africa

FDI & ODA to FDI & ODA to support support investment investment and income and income growth in growth in Africa, the Africa, the Middle East Middle East and and developing developing AmericaAmerica

Structural policyStructural policy * Industrial development * Industrial development


FDI and ODAFDI and ODA * Africa * Africa

African exporters African exporters have less than 5% have less than 5% of the regional of the regional market (although market (although this is starting to this is starting to grow)grow)

To achieve a To achieve a significant catch-significant catch-up in per capita up in per capita income they need income they need larger shares of larger shares of regional industrial regional industrial marketsmarkets

Market share of exports of manufactures from Africa (%)

0

5

10

15

20

25

30

Addition to achieve 10% GNP growth

Actual (2004)

Africa

D’ing America

Middle East

Other D’ed Western

Europe

US


FDI and ODAFDI and ODA * Developing America * Developing America

Regional Regional integration is integration is proceeding in proceeding in AmericaAmerica

Lower-income Lower-income

countries still countries still need a significant need a significant boost for per boost for per capita income to capita income to start to catch up start to catch up

Market share of exports of manufactures from developing America (%)

0

5

10

15

20

25

30

35

40

45

Africa

Developing

America

Middle East

Other D’ed Western

Europe

USAddition to achieve 10% GNP growth

Actual (2004)


Reduced US deficitReduced US deficit

Stronger demand Stronger demand in the rest of the in the rest of the world boosting world boosting US exportsUS exports

Reduced Reduced pressure on the pressure on the global oil marketglobal oil market

No recession, but No recession, but domestic domestic spending would spending would slow downslow down

-8%

-6%

-4%

-2%

0%

2%

1990 2000 2010

Agr & raw mats

Manufactures

Energy

Tradebalance

US trade balance as % of GNP


Growth generalizedGrowth generalized

Former USSRFormer USSR 7.1%7.1%

AfricaAfrica 6.1%6.1%

Eastern EuropeEastern Europe 5.5%5.5%

Middle EastMiddle East 5.1%5.1%

Other AmericaOther America 4.5%4.5%

Other Other DevelopedDeveloped

3.0%3.0%

Western EuropeWestern Europe 2.7%2.7%

USAUSA 2.2%2.2%

ChinaChina 7.6%7.6%

Rest of Rest of AsiaAsia

7.3%7.3%

JapanJapan 4.6%4.6%

Per capita income, 2005 - 2015

Global Imbalances and Policy Co-ordination: CERF – University of CambridgeAlphametrics Ltd. Advancing an Analytical Framework University of Campinas, October.

Documents

alphametrics findings

world economy cerf

global imbalances

global policies

world income slide

rio slide

global linkages

cambridge heritage cerf