A Quest for Growth” – artigo de The Economist

It may depend on structural reforms as much as prudent macroeconomic policy

Oct 7th 2010

LOOK at the world economy as a whole, and you could be forgiven for thinking that the recovery is in pretty decent shape. This week the IMF predicted that global GDP should expand by 4.8% this year—slower than in the boom before the financial crisis, but well above the world’s underlying speed limit of around 4%. Growth above trend is exactly what you would expect in a rebound from recession.

Yet this respectable average hides a series of problems. Most obviously, there is the gap between the vitality of the big emerging economies, some of which have been sprinting along at close to 10%, and the sluggishness of many rich ones. Macroeconomic policy is also weirdly skewed: many emerging economies are loth to let their currencies rise to reflect their vigour, even as fragile rich ones are embarking on austerity programmes. And finally there is a crucial missing ingredient just about everywhere: “micro” structural reform, without which current growth rates are unlikely to last.

A world out of balance

In the emerging world the macroeconomic errors come from politicians behaving as if growth there were more fragile than it is. The pace has slowed a bit, but from breakneck speed to merely very fast. Most vital signs, from productivity to government debt, are healthy. Yet many policymakers are buying boatloads of dollars to stop their currencies rising as foreign capital pours in from Western investors seeking better returns. And emerging economies, as a group, still save more than they invest, which explains why global imbalances—notably the controversial surplus in China and deficit in America—remain so big. That makes little sense. Poor countries, especially young ones, ought in theory to invest more than they save, and so be a net source of demand for richer, older ones, all the more so when the latter are in bad shape.

In the rich world the danger is the reverse: politicians cutting back on the basis that growth is assured. Big asset busts are usually followed by years of weakness as the over-borrowed repair their balance-sheets. Experience suggests that several years of slow growth lie ahead. Rich countries are planning tax rises and spending cuts worth 1.25% of their collective GDP in 2011, the biggest synchronised fiscal tightening on record. In many places a budgetary squeeze is necessary, but not all; and, taken as a whole, cutting this much this early is a risk.

Even if demand remains strong enough to cope with this onslaught, the rich world’s longer-term growth prospects are darkening. Europe’s working-age population is about to start declining; Japan’s is already doing so. Even in America the ageing of the baby-boomers points to a slower-growing workforce. In theory, faster productivity growth could offset this, but in most rich economies that was waning before the crisis hit—and the crash has clobbered productive potential. A feeble recovery could make matters worse, as the unemployed lose their skills, public debt builds up and firms put off investment.

A gaping growth gap between the emerging and rich worlds will, of course, shift economic heft more quickly towards emerging economies. A fast-growing emerging world is fine, but a stagnating rich one serves nobody—especially if trade tensions start to rise. Western voters may find it intolerable that the likes of China still run big surpluses, thanks in part to those weak currencies. Protectionist rhetoric is already rising in the United States.

All policies great and small

The world would be better served by policies that both improve rich countries’ prospects and reorient growth in emerging economies. These should come in two parts. First, as this newspaper has often argued, macroeconomic policies must be recalibrated. Emerging economies need to allow their currencies to rise more. The rich should tread carefully with fiscal consolidation: sensible budget repairs should be less about short-term deficit-slashing and more about lasting fiscal reforms, from raising pension ages to trimming health-care costs.

Second, and just as important, is microeconomic reform. No matter what Congress threatens about the yuan, China’s trade surplus will not disappear until it boosts investment in services, removes distortions that depress workers’ share of income and encourages households to save less. From telecoms to insurance, China is full of service oligopolies that need to be broken up.

Similar growth tonics need to be applied in much of the rich world, both to boost domestic spending in surplus economies, such as Germany and Japan, and to raise productivity. America is more productive than the euro zone and Japan largely because the latter both have a lousy record in services (too many rules and not enough competition). Many labour markets also need an overhaul, especially in southern Europe, where it is still far too difficult to adjust wages or fire permanent workers. One advantage of the crisis for Spain and Greece is that they have been forced to make a start on this.

The United States also has its own microeconomic to-do list, albeit of a different sort. The most urgent item is the festering mass of underwater mortgages. Almost 25% of homeowners with mortgages owe more than their houses are worth. Faster, more thorough debt restructuring is needed, to make it easier for workers to move to where jobs are more plentiful and to hasten financial recovery. Schemes for unemployment insurance and training also need attention, so that high joblessness does not become entrenched.

None of these structural reforms is easy. Peer pressure could help. Rather than being fixated on harsher budget-deficit rules, the European Union’s members should pledge to complete the single market in services, to open up cosy national markets to greater competition. The members of the G20 big economies could commit themselves to specific structural goals, from raising retirement ages to deregulating things like transport. A bold microeconomic agenda will not yield instant rewards. Nor is it a substitute for getting the macroeconomics right. But without it global growth will eventually falter.

One Response to “A Quest for Growth” – artigo de The Economist”
  1. Manoel Giffoni disse:

    Flood barriers
    Despite the headlines China is not the most aggressive intervener in currency markets

    Oct 7th 2010

    MONSOON rains bring relief after the heat of summer but they can also cause flooding. A flood following a drought is a reasonable description of recent flows of private capital to emerging markets. During the worst of the crisis these flows collapsed, sending at least a few emerging economies into the arms of the IMF. Now, attracted by the developing world’s better growth prospects and exceptionally low interest rates in rich countries, money is surging back.

    It is hard to know just how much cash is flowing in: complete data on countries’ balance-of-payments positions are available only with a long lag. Robin Brooks, an economist at Goldman Sachs, has worked out a measure of net capital inflows from figures on countries’ foreign reserves and current-account balances. He reckons that flows into 20 big emerging countries are now running at a faster pace than before the crisis. According to his estimates, net capital inflows to these countries between April 2009 and June this year ran at an annualised pace of $575 billion, well in excess of average annual inflows of $481 billion in the two years prior to September 2008.

    As with monsoon rain, so with foreign capital. Policymakers in emerging economies welcome this money but not unreservedly. Many fret that the upward pressure on exchange rates from the surge in foreign capital will cause their currencies to appreciate too much. Critics point out that some appreciation is due: a rise against rich-world currencies is both a natural consequence of the faster growth of emerging economies and a way to correct global imbalances. Emerging-market policymakers would argue that their only concern is to prevent their exchange rates from overshooting. They could cut interest rates to make their economies less attractive to foreign money. But at the moment most are raising rates to curb inflation.

    If they do not want their currencies to rise, governments in this position can intervene to try and dampen (or even prevent) the appreciation. Some countries are trying to use capital controls to limit the inflows of foreign money, or at least to discourage the most fickle kinds of capital. China has long applied stringent controls. On October 4th Brazil doubled a tax it charges foreigners on investments in fixed-income securities to 4%. A day later South Korean regulators said that they would soon begin to audit lenders handling foreign-currency derivatives to curb volatility caused by capital inflows. More typically, countries intervene by selling their own currencies and accumulating foreign-exchange reserves. Because fast GDP growth and the capital flows it attracts will eventually spur higher inflation, the authorities’ ability to stop a real currency appreciation is limited. Still, analysis by Mr Brooks and his colleagues shows that many countries have been trying to prevent their currencies from rising in nominal terms and that some have dramatically ramped up their interventions from pre-crisis levels. Despite the headlines they find that China is not the only big intervener—and that others have been working much harder to hold their currencies down.

    The economists note that the currencies of emerging Asian countries face the strongest upward pressure because of changes in the destination of private capital. As flows to eastern Europe and Africa have shrivelled, Asia’s share of the total flow of capital to the emerging world has gone from 61.3% in 2007 to 78.6% in the first half of 2010. Latin America’s share has also increased, from 15.2% to 20.9% over the same period. These are rising shares of a growing total, meaning that both regions are now getting more private capital than they were before the crisis. This effect is particularly marked for emerging Asia (see left-hand chart).

    A sense of reserves

    Mr Brooks and Fiona Lake, one of his colleagues, have looked at annual foreign-exchange interventions by central banks in emerging Asian economies, tracking the pace at which they built up reserves by buying foreign currency. They argue that it is important to scale absolute amounts by the country’s base money supply, pointing out that the effect of a $1 billion intervention by Singapore has a much bigger effect on the domestic economy than similar action by China. Comparing 2010 with 2006, the year before the crisis, they find that South Korea and Taiwan have vastly increased their meddling in currency markets (see right-hand chart). Relative to the size of its economy, China’s intervention is small in both years, and smaller in 2010 than in 2006.

    Not every country’s currency is under the same kind of pressure. India, for example, seems not to have intervened much in the foreign-exchange market, but its currency has not moved much over the past year either. Part of the reason is that capital inflows have gone mainly to finance its persistent current-account deficit. By controlling for this kind of thing the analysts find that Malaysia and Thailand have had the most “appreciation-friendly” regimes in Asia. Malaysia has largely been content to let its currency float upwards. The ringgit has risen by over 10% against the dollar since the beginning of the year. Malaysia’s reserve accumulation has been much smaller in 2010 than in 2006. South Korea, by contrast, has been absorbing virtually all of the upward pressure on the won by accumulating additional reserves. For Latin America, Mr Brooks and his colleague, Alberto Ramos, conclude that Peru is the country that has been trying the hardest to prevent its currency from rising. Interventions by Brazil look relatively modest once its size is taken into account. Colombia has pretty much allowed its currency to rise.

    Currency pressures will be a big theme of the annual meetings of the IMF and World Bank this week and of November’s G20 summit in Seoul. The Sino-American spat over the value of the yuan tends to hog attention. But it is only one source of tension among many in the international monetary system.

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