Global Economic Watch


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  • IMF's Blanchard: Focus of Global Recovery Should Now Be On Supply Side

    The global economy has a supply side problem. That is, the global marketplace needs more buyers. IMF director of research Olivier Blanchard notes that while he and his team are projecting 3.6 percent growth this year, and 3.9 percent growth next year, it all depends on a "broader" recovery. First, potential growth in many advanced economies is very low. This is bad on its own, but it also makes fiscal adjustment more difficult. In this context, measures to increase potential growth are becoming more important—from rethinking the shape of some labor market institutions, to increasing competition and productivity in a number of non-tradable sectors, to rethinking the size of the government, to reexamining the role of public investment. Second, although the evidence is not yet clear, potential growth in many emerging market economies also appears to have decreased. In some countries, such as China, lower growth may be in part a desirable byproduct of more balanced growth. In others, there is clearly scope for some structural reforms to improve the outcome. Finally, as the effects of the financial crisis slowly diminish, another trend may come to dominate the scene, namely rising inequality. Though inequality has always been perceived to be a central issue, until recently it was not seen as having major implications for macroeconomic developments. This belief is increasingly called into question. How inequality affects both the macroeconomy, and the design of macroeconomic policy, will likely be increasingly important items on our agenda for a long time to come. Read the full post here . And watch Blanchard discuss the global recovery below:
  • Benefits of EU Membership for Poorer Nations

    Yesterday, European economists Nauro Campos , Fabrizio Coricelli , and Luigi Moretti posted some of their findings on the benefits of EU membership to rich nations. Today, they share some of their findings--again at Vox --on the benefits to poorer nations. They focus on two periods of enlargement: the 1980s and 2004. And they find that there are clear benefits to every nation except one. This column presents new estimates of the economic (monetary) benefits from EU membership. The main finding is that of substantial and positive pay-offs, with approximately 12% gain in per capita GDP. Despite substantial differences across countries, there are clear indications that the benefits of EU membership have significantly outweighed the costs (except for Greece). An important question is to identify factors that allow countries to better exploit EU entry. Campos et al. (2014) began investigating this issue and their preliminary findings highlight the role of financial development (i.e., more financially developed countries growing significantly faster after EU membership) and, somewhat less surprisingly, trade openness. Read How much do countries benefit from membership in the European Union? here .
  • Benefits of EU Membership for Rich Nations

    With the relatively healthy EU member states on the hook for helping lift the economies of less healthy member states, many Finns and Germans, for example, are asking, "what's in EU membership for us?" European economists Nauro Campos , Fabrizio Coricelli , and Luigi Moretti have been looking at the benefits of EU membership, and they find that joining the club came with many economic benefits. But interestingly, those benefits varied based on when a nation joined. From Vox : Figures 1 and 2 show SCM results for the 1973 and 1995 EU enlargements.2 The dark line is for actual per capita GDP (or labour productivity), and the red line for the estimated synthetic counterfactual. A measure of the magnitude of the economic benefits from EU membership is given by the difference between the actual per capita GDP for each country (or labour productivity) and that of its SCM artificial control group. We find substantial benefits for the 1973, and modest benefits for the 1995 enlargement. For the first ten years post-accession, per capita incomes for the former would be approximately 12% lower, while that for the latter would be about 4% lower (without EU membership). Alternatively, if we consider all years since accession, the respective figures would be about 34% for the former, and 5% for the latter. We find that per capita incomes in the UK and Denmark would have been 25% lower (if they had not joined the EU in 1973), but that the benefits for Ireland are even larger. Our estimates suggest that per capita income in Ireland would have been about 50% lower if it had not joined the EU in 1973. This column presents new estimates of the economic benefits from EU membership focusing on the 1973 and 1995 enlargements. The main conclusion is that of substantial and positive pay-offs with benefits from EU membership clearly above direct costs, and with larger gains for the 1973 than for the 1995 enlargement.6 Moreover, the difference between the estimated benefits for 1973 and 1995 enlargements is considerable and, thus, should not be attributed solely to differences in per capita incomes at the time of joining. We conjecture that institutions may provide a more promising explanation of these differences if one believes that Austrian, Finnish, and Swedish institutions were better developed or aligned with the EU when these countries joined the European Union. Read The eye, the needle and the camel: Rich countries can benefit from EU membership here .
  • OECD 2013 'Education at a Glance' Report

    In case any doubt lingers in you about the correlation between education and employment, the latest OECD annual report, Education at a Glance , affirms previous data on how much better people with higher ed degrees are faring during this jobless recovery. From the report: Unemployment rates are nearly three times higher among people without an upper secondary education (13% on average across OECD countries) than among those who have a tertiary education (5%). Between 2008 and 2011, the unemployment rate for the poorly-educated rose by around 4 percentage points, while it increased by only 1.5 percentage points for the highly educated. “Leaving school with good qualifications is more essential than ever,” said OECD Secretary-General Angel Gurría. “Countries must focus efforts on helping young people, especially the less well-educated who are most at risk of being trapped in a low skills, low wage future. Priorities include reducing school dropout rates and investing in skills-oriented education that integrates the worlds of learning and work. Though the focus should remain on quality of spending, Governments must ensure that investment in education does not fall as a result of the crisis.” This year’s report finds new evidence of the value of vocational qualifications as a pathway to employment: countries with a higher than average (32%) share of vocational graduates, such as Austria, Germany, Luxembourg and Switzerland, saw unemployment rise much less or even fall among 25-34 year-olds than their peers with general upper secondary qualifications. The crisis has also widened the earnings gap: the average difference in earnings from employment between the low educated and the highly educated has risen from 75 percentage points across OECD countries in 2008 to 90 percentage points in 2011. On average, the relative earnings of tertiary-educated adults are over 1.5 times that of adults with upper secondary education. People with upper secondary education earn 25% more than their peers who left school early. But a strange thing happened during the Great Recession and the following recovery. As education became more valuable to developed economies, the overall investment in education dropped. Read the full report here . And watch Angel Gurria discuss the report:
  • Germany's Weakening Infrastructure May Be a Sign of Larger Economic Vulnerability

    Germany continues to be hailed as the model developed economy--the one that has braved the storm while others have paid the price for careless economic policies. But talk to any of your German friends this summer and you are likely to hear them complain--if not about the overall strength of the economy, then about potholes and slipping train reliability. Der Spiegel does a bit of an ego-check in this week's issue. Apparently, the German Institute of Economic Research has come out with a report that "paints the picture of an ailing economy that has been seriously out of balance for years." The diagnosis is alarming. Although Germany has weathered the financial and economic crisis better than all other large industrialized nations and created over a million new jobs, this comes largely thanks to years of wage restraint by the country's trade unions. To make matters worse, the productivity of these jobs -- a decisive aspect of long-term growth and prosperity -- has contributed just as little to the current upswing as consumer demand, which has been an important growth driver in other countries. The Berlin institute points to a chronic lack of investments as the main cause for this low productivity. Both the state and the private sector spend too little money on infrastructure, education, plants and machinery. "Despite all the successes of the past few years, Germany has not created an investment basis to ensure robust growth," the researchers conclude. In other words, Germany is living off its reserves. Bridges are crumbling, factories and universities are deteriorating, and not enough is being spent to maintain phone networks. This has resulted in a massive impoverishment of the country, according to DIW calculations. Nearly 15 years ago, the state's net assets still corresponded to 20 percent of gross domestic product (GDP). When adjusted for inflation, this amounts to nearly €500 billion ($650 billion). By 2011, this had dwindled to 0.5 percent of GDP, or a mere €13 billion, primarily due to systematic neglect. All of Germany's political parties have pledged to spend more money on highways, transportation and education during the upcoming legislative period -- but they have often made such promises in the past. In the end, however, the already meager budgets for investment were slashed and the money was distributed to preferential groups of voters. It could be a similar story this time around. As for the infrastructure investment problem, take a look at where Germany stacks up: Read Ailing Infrastructure: Scrimping Threatens Germany's Future here .
  • IMF's World Economic Outlook: Three Speed Global Recovery

    What was once a "two speed recovery" is now looking like a "three speed recovery" to IMF researchers. It had been the case that advanced economies were recovering at a slower rate than emerging and developing economies. Now, there is a split among advanced economies. Overall, the IMF is projecting 3.25% growth in global gdp for 2013 and 4% growth in 2014. That is up from 2.75% growth over the second half of last year. Here are some regional specific projections from the World Economic Outlook : In advanced economies, the recovery will continue to proceed at different speeds. The main revision relates to the U.S. budget sequester, which lowers the U.S. growth forecast for 2013. Following a disappointing end to 2012, easier financial conditions, accommodative monetary policies, recovering confidence, and special factors will support a reacceleration of activity, notwithstanding still-tight fiscal policy in the United States and the euro area. The reacceleration, which assumes that policymakers avoid new setbacks and deliver on their commitments, will become apparent in the second half of 2013, when real GDP growth is forecast to again surpass 2 percent. • Thanks to increasingly robust private demand, real GDP growth in the United States is forecast to reach about 2 percent in 2013, despite a major fiscal tightening, and accelerate to 3 percent in 2014. Weak growth in the United States in the fourth quarter of 2012 reflected the unwinding of a spurt of inventory investment and defense spending during the third quarter (Figure 1.8, panel 1). Preliminary indicators suggest that private demand remained resilient this year, but across-the-board public spending cuts are expected to take a toll on the recovery going forward. • Activity in the euro area will pick up very gradually, helped by appreciably less fiscal drag and some easing of lending conditions. However, output will remain subdued––contracting by about ¼ percent in 2013––because of continued fiscal adjustment, financial fragmentation, and ongoing balance sheet adjustments in the periphery economies (Figure 1.8, panel 2). The projection assumes that policy uncertainty does not escalate and further progress is made toward advancing national adjustment and building a strong economic and monetary union. • Activity in Japan is expected to accelerate sharply during the first quarter of 2013, as the economy receives a lift from the recent fiscal stimulus, a weaker yen, and stronger external demand. Growth will reach 1½ percent in 2013, according to WEO projections, and will soften only slightly in 2014 as private demand continues to garner speed, helped by aggressive new monetary easing offset by the winding down of the stimulus and the consumption tax increase. In emerging market and developing economies, the expansion of output is expected to become broad based and to accelerate steadily, from 5 percent in the first half of 2012 to close to 6 percent by 2014. The drivers are easy macroeconomic conditions and recovering demand from the advanced economies. Download the full report here .
  • McKinsey Global Institute: "Financial Globalization: Retreat or Reset"

    The McKinsey Global Institute has put out a new report on the global slowdown of financial assets. The report says that the value of financial assets, globally, has grown 1.9 percent annually since the global economic crisis. That's a big drop from the decade prior to the crisis: From the report: One-quarter of financial deepening before the crisis was due to equity market valuations rising above long-term norms—gains that were erased in the crisis. Initial public offerings and new equity raising have fallen significantly since the crisis. Another factor adding to financial deepening during this period was a steady rise in government debt—a trend that is sustainable only up to a certain point. Financing for households and non-financial corporations accounted for just over one-fourth of the rise in global financial depth from 1995 to 2007—an astonishingly small share, given that this is the fundamental purpose of finance. Since then, financing for this sector has stalled in the United States, as households and companies have deleveraged. Despite the lingering euro crisis, however, financing to households and corporations in Europe has continued to grow in most countries, as banks have stepped up domestic lending while reducing foreign activities. The risk now is that continued slow growth in global financial assets may hinder the economic recovery, stifling business investment, homeownership, and investment in innovation and infrastructure. Our analysis suggests a link between financing and growth, showing a positive correlation between financing for the household and corporate sectors and subsequent GDP growth. A continuation of current trends could therefore slow the economic recovery. Cross-border capital flows—including lending, foreign direct investment, and purchases of equities and bonds—reflect the degree of integration in the global financial system. While some of these flows connect lenders and investors with real-economy borrowers, interbank lending makes up a significant share. In recent decades, financial globalization took a quantum leap forward as cross- border capital flows rose from $0.5 trillion in 1980 to a peak of $11.8 trillion in 2007. But they collapsed during the crisis, and as of 2012, they remain more than 60 percent below their former peak (Exhibit E2). Access the full report (free download) here .
  • Bill Gates the Optimist: Economic Development Will Come as We Innovate New Means of Delivering and Measuring Support

    Bill Gates calls himself an optimist. And he expects to see significant progress in developing economies and in "the lives of the world's poorest people," in the next 15 years. The tools for healthier, better lives are there. Now Gates feels there is a need to be more forward-thinking in connecting the right tools and resources to the economies where they are needed. At Project Syndicate , Gates writes: Skeptics point out that we have a hard time delivering new tools to the people who need them. This is where innovation in the measurement of governmental and philanthropic performance is making a big difference. That process – setting clear goals, picking the right approach, and then measuring results to get feedback and refine the approach continually –helps us to deliver tools and services to everybody who will benefit. Innovation to reduce the delivery bottleneck is critical. Following the path of the steam engine long ago, progress is not “doomed to be rare and erratic.” We can, in fact, make it commonplace. Though I am an optimist, I am not blind to the problems that we face, or to the challenges that we must overcome to accelerate progress in the next 15 years. The two that worry me the most are the possibility that we will be unable to raise the funds needed to pay for health and development projects, and that we will fail to align around clear goals to help the poorest. The good news is that many developing countries have growing economies that allow them to devote more resources to helping their poorest people. India, for example, is becoming less dependent on aid, and eventually will not need it. Some countries, like the United Kingdom, Norway, Sweden, South Korea, and Australia, are increasing their foreign-aid budgets; others, even traditionally generous donors like Japan and the Netherlands, have reduced theirs. The direction of many countries, including the United States, France, Germany, and Canada, is unclear. Read The Measurement of Hope here .
  • Marketplace Roundtable: Is Miami the city of the future?

    Marketplace 's Jeremy Hobson spent this week hosting the Marketplace Morning Report from Miami. He interviewed a list of important Miamians, including Mayor Tomás Regalado and the head of Univision , but the most thought provoking of his work down there is the below roundtable in which Hobson's guests make the case for looking at Miami as "the city of the future."
  • Dani Rodrik on the Lasting Appeal of Mercantilism

    At Project Syndicate , Dani Rodrik writes that the "intellectual victory" of economic liberalism over mercantilism has "blinded us" to recent successes of mercantilist practices. While these successes are often not labeled as mercantilism by practitioners--because of the negative associations with the term--they have become more appealing to developing economies. And we should be prepared to see more tension between these economies and developed economies over trade policy. Although China phased out many of its explicit export subsidies as a condition of membership in the World Trade Organization (which it joined in 2001), mercantilism’s support system remains largely in place. In particular, the government has managed the exchange rate to maintain manufacturers’ profitability, resulting in a sizable trade surplus (which has come down recently, but largely as a result of an economic slowdown). Moreover, export-oriented firms continue to benefit from a range of tax incentives. From the liberal perspective, these export subsidies impoverish Chinese consumers while benefiting consumers in the rest of the world. A recent study by the economists Fabrice Defever and Alejandro Riaño of the University of Nottingham puts the “losses” to China at around 3% of Chinese income, and gains to the rest of the world at around 1% of global income. From the mercantilist perspective, however, these are simply the costs of building a modern economy and setting the stage for long-term prosperity. As the example of export subsidies shows, the two models can co-exist happily in the world economy. Liberals should be happy to have their consumption subsidized by mercantilists. Indeed, that, in a nutshell, is the story of the last six decades: a succession of Asian countries managed to grow by leaps and bounds by applying different variants of mercantilism. Governments in rich countries for the most part looked the other way while Japan, South Korea, Taiwan, and China protected their home markets, appropriated “intellectual property,” subsidized their producers, and managed their currencies. We have now reached the end of this happy coexistence. The liberal model has become severely tarnished, owing to the rise in inequality and the plight of the middle class in the West, together with the financial crisis that deregulation spawned. Medium-term growth prospects for the American and European economies range from moderate to bleak. Unemployment will remain a major headache and preoccupation for policymakers. So mercantilist pressures will likely intensify in the advanced countries. Read The New Mercantilist Challenge here .
  • IMF Projects Lower Growth in World Economic Outlook

    IMF researchers seem to be adopting a more and more gloomy tone. And the latest World Economic Outlook reveals why. The IMF is now projecting 1.5 percent growth in advanced economies and 5.6 percent for emerging market and developing economies in 2013. That's down from six months ago, when the IMF projected 2.0 percent and 6.0 percent growth respectively. More generally, downside risks have increased and are considerable. The IMF staff’s fan chart, which uses financial and commodity market data and analyst forecasts to gauge risks––suggests that there is now a 1 in 6 chance of global growth falling below 2 percent, which would be consistent with a recession in advanced economies and low growth in emerging market and developing economies. Ultimately, however, the WEO forecast rests on critical policy action in the euro area and the United States, and it is very difficult to estimate the probability that this action will materialize. This juncture presents major difficulties for policymakers. In many advanced economies, injections of liquidity are having a positive impact on financial stability and output and employment, but the impact may be diminishing. Many governments have started in earnest to reduce excessive deficits, but because uncertainty is high, confidence is low, and financial sectors are weak, the significant fiscal achievements have been accompanied by disappointing growth or recessions. In emerging market and developing economies, policymakers are conscious of the need to rebuild fiscal and monetary policy space but are wondering how to calibrate policies in the face of major external downside risks. An effective policy response in the major advanced economies is the key to improving prospects and inspiring more confidence about the future. In the short term, the main tasks are to rule out the tail risk scenarios and adopt concrete plans to bring down public debt over the medium term. Here is a look at the IMF regional GDP growth trends: You can read the full report here . And watch a short video from the IMF explaining the growth projections of the October World Economic Outlook below:
  • Location, Location, Location: Competitive Advantages for Companies Based in Emerging Markets

    At McKinsey Quarterly , Yuval Atsmon , Michael Kloss , and Sven Smit lay out the case for multinational companies to "start thinking more like emerging-market companies." There is significant growth potential, they point out, in the emerging middle classes in the BRIC nations and elsewhere. At the moment, that is allowing companies based in emerging markets like Brazil and China to grow at twice the rate of competitors based in developed economies. And they are better equipped to serve rising consumer classes in emerging economies beyond their own, as Atsmon, Kloss, and Smit write: Emerging-market companies generally serve the needs of fast-growing emerging middle classes around the world with lower-cost products. Developed-economy companies tend to rely more on brand recognition while targeting higher-margin segments, which are relatively smaller and thus less likely to move the needle on the companies’ overall growth rates. We found that across a number of product segments—such as soft drinks, telecoms services, and mobile phones—emerging-market companies’ price points were 10 to 60 percent below those of developed-market counterparts. Even in business segments such as construction equipment, emerging-market players offered more products at lower prices. Consistent with that growth model has been the focus of many emerging-market players on R&D investments aimed at lower-cost products that fit developing-market conditions (and sometimes fuel “reverse innovation,” which can make a dent in developed markets). That’s still the case, and in aggregate, emerging-market companies still file significantly fewer patents than their developed-market counterparts. But they are starting to catch up (Exhibit 3), and a few innovation leaders are emerging, such as Chinese manufacturer Huawei, which was among the world’s top five companies in terms of international patents filed from 2008 to 2010. Huawei had 51,000 R&D employees in 2010, representing a stunning 46 percent of its total headcount, and placed them in 20 research institutes in countries such as Germany, India, Russia, Sweden, and the United States. Efforts such as these could boost the intensity of global competition. Before you make the mistake we initially did, and assume that the faster growth rate of companies headquartered in emerging in economies was due to those companies being smaller and having more room to grow, read Parsing the growth advantage of emerging-market companies here .
  • Vijay Govindarajan on Reverse Innovation

    It is easy for us to understand why people in developing countries would dream of having the goods that are prevalent in richer countries. So why develop products in poorer countries and not just bring in products from richer economies? Because that is not the best way to develop good products for mass markets where people have less money to spend. The advantage of developing products in places like India rather than the US is that the demand structure will foster more innovative products. Thats the argument that Vijay Govindarajan , Professor of International Business at Dartmouth's Tuck School of Business, makes. He calls this "reverse innovation," and he explains why it works in this short video from BigThink :
  • The Role of Startups in an Emerging Economy: Kenya

    In the latest issue of Technology Review , David Talbot takes a look at an emerging market in Kenya. A group of homegrown entrepreneurs are matching the utility of cellphones with the need for better delivery of health care. It is a reminder that technology used effectively can be an important bridge to better services--but it is the people with the ideas and ability to understand the marketplace that matter. And the technology need not be the latest and greatest. It isn't smartphones and iPads providing the network tools for Nairobi's tech startups, but more basic cell phones. Talbot profiles many members of Kenya's innovative startups, including those who are part of an incubator called iHub, which has pulled in support from the community and from major multinationals Nokia and Google: The incubator opened in 2010 and now counts more than 6,000 members, with an average of 1,000 new applications a year. Most members are merely part of iHub's online community, but more than 250 of them use the space. Some 40 companies have launched from iHub, and 10 have received seed funding from venture capitalists. The most successful so far is Kopo Kopo, which helps merchants manage payments from M-Pesa and similar services. One key to iHub's growth is that Kenya's IT infrastructure has improved significantly. The first Internet fiber connection landed at the Kenyan coast in 2009 (previous service had come through satellite dishes in the Rift Valley), and the country's first truly mass-market Android smart phone went on sale in 2010, for $80. Safaricom now counts 600,000 smart phones of all kinds on its network and expects them to make up 80 percent of the market by 2014. Inevitably, this petri dish produced a mobile health startup. Shimba Technologies, led by a couple of University of Nairobi graduates named Steve Mutinda Kyalo and Keziah Mumo, created a platform called MedAfrica with the simple goal of providing basic health information to Kenyans in the face of the national doctor shortage. So far, MedAfrica offers lists of doctors and dentists taken from government registries, plus menus for finding basic first-aid and diagnostic information. "What we want is for the common man to have the right information in his hand," says Kyalo, the company's CEO. "We can't replace the doctors, can't replace the hospitals, but we can improve access to relevant information. MedAfrica illustrates the power of local entrepreneurship. Though it has few connections with the medical community or the health ministry, its health-care app has been downloaded on 43,000 phones, and the company is still only halfway through $100,000 in seed funding. The service can be delivered through an app or through a mobile Web interface (nearly all Kenyans who access the Internet do so through mobile devices). Soon it will be available through SMS—an essential feature, because 85 percent of Kenyan mobile-phone owners don't yet have Web access. Kyalo hopes to aggregate other medical apps on the platform and ultimately sell sponsored messages from pharmaceutical companies, health-care providers, and others. Read Kenya's Startup Boom here . (hat tip: Melissa Acuna)
  • Looking to Poor and Emerging Economies to Lead Global Economic Recovery

    In sorting out the global economic crisis, we have naturally looked to the economic powerhouses of Europe, the US, and China to lead the recovery. But is it possible to reconsider this top-down approach? Jean-Michel Severino , Director of Research at the Fondation pour les Études et Recherches sur le Développement International ( FERDI ), suggests that a bottom-up approach might prove more effective. In a commentary at Project Syndicate , Severino says that focusing on the world's poor may provide the "best exit strategy." Severino: First, from a macroeconomic perspective, we can no longer count on declining prices for raw materials, one of the economic stabilizers in times of crisis. Given rising demand in emerging countries, the cost of natural resources is bound to be a growing constraint. Second, from a social perspective, after a doubling of the workforce in the global labor market during the twentieth century, another “industrial reserve army” has arisen in China, and among the three billion inhabitants of the world’s developing countries. A rapid rebalancing of global growth by reducing financial imbalances between OECD economies and their emerging-market creditors is risky, because it would cause a major recession for the former – and then for the latter. Moreover, it is unlikely, because it assumes that emerging countries will run trade deficits with OECD countries, and that their domestic markets will become drivers of global growth. If this analysis is correct, a new global rebalancing strategy will need to begin somewhere other than the wealthy OECD economies. The implementation of new growth models in the developing world – the parts of South Asia, Latin America, and Africa that have not adopted export-led strategies – can provide at least part of the missing demand that the world economy urgently needs. Read Can the Poor Save the World? here .