WHAT’S AHEAD FOR THE WORLD ECONOMY ? LECTURE 17: AHEED COURSE “INTERNATIONAL AGRICULTURAL TRADE AND POLICY”. TAUGHT BY: ALEX F. MCCALLA, PROFESSOR EMERITUS, UC-DAVIS APRIL 8, UNIVERSITY OF TIRANA, ALBANIA Lecture Courtesy Professor Colin A. Carter UC -Davis 1

G-20 communiqué  “The new normal”  IMF forecasts global GDP will grow by 3.1% next year.  Global stockmarkets have rallied by 64% since their trough.  Corporate finance is thawing (TED spread is 0.25%) Our forceful response helped stop the dangerous, sharp decline in global activity & stabilize financial markets. - Industrial output is now rising in nearly all our economies. - International trade is starting to recover. - Our financial institutions are raising needed capital, financial markets are showing a willingness to invest & lend, & confidence has improved. G-20 Pittsburg, Sept

The Long Climb  But unemployment is rising & much manufacturing capacity remains idle.  Many of the sources of today’s growth are temporary - gov’t spending on fiscal stimulus.  Underlying problems remain. In US & elsewhere household debts are high & banks need to bolster their capital.  That suggests consumer spending will be lower and the cost of capital higher than before the crunch. 3

3 Possible Patterns of Recovery 1. Strong recovery 2. The world economy returns to its pre-crisis growth rate, without regaining lost ground - this is what happens after most financial crises. 3. Growth stays at a permanently lower rate, with investment, employment & productivity growth all lower than before. 7 years after a bust an economy’s level of output was 10% below the “but for” level. IMF Milton Friedman: in US deep recessions are typically followed by strong recoveries. 4

The Long Climb -2  Global spending must be rebalanced: indebted American consumers must cut back, while thrifty countries should spend more & save less.  In China this means a stronger currency, bigger social safety- nets & an overhaul of subsidies to increase the share of national income going to workers. Share of wages & other household income in GDP has fallen from 72% in ‘92 to 55% in ‘07 - so its no wonder that China’s consumption only accounts for 35% of GDP  Germany & Japan need structural reforms to boost spending, especially in services. 5

The path of productivity growth will determine the nature of the new normal. In the rich world, innovation sets the pace. Elsewhere, trade is often more important. Both are now under threat. Cash-strapped companies are skimping on R&D. Emerging economies are having to rethink their reliance on exports for growth. Both rich & poor governments will be tempted to intervene. The Long Climb - 3 6

The Long Climb- 4  In any country, expansion of output = growth in consumption + investment + net exports  GDP = C + I + G + (X - M)  Income (agg demand) = dom demand (C + I + G) + foreign demand (X-M)  Trade balance (X-M) = Output (GDP) - domestic demand 7

Before the Crisis Drivers of growth in China: consumption (Gov’t + Household) 39%; Investment 39%, net exports 22% Drivers of growth in US: household consumption 70%; private investment 15%; gov’t consumption + investment 20%; exports 12% & net exports - 5%  The amount borrowed from or lent to foreigners is called the current account surplus or deficit. If a country’s current account surplus has risen, it means that either savings has increased or investment has fallen, or both. The current account usually refers to the current account of the balance of payments (BOP) & contains the import & export items of goods and services as well as transfer payments including net investment income. 8

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Japan vs US stock market During “lost decade” Japan suffered a “balance-sheet- recession” 10

Shanghai vs US stock market 11

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US Savings Rate 13

GDP Growth Rates source: 14

Current Acct. Balance (% of GDP) source: The balance on goods, services, income, and current transfers is commonly referred to as the "current account balance". 15

Reserve Assets ($ Bil) source: 16

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US Debt Problem Government debt has been a relatively consistent % of GDP, but the debt of companies, consumers, & financial businesses has soared. The problem now is that the value of the assets that serve as collateral for that debt (houses, stocks, cars, etc.) is plummeting. The stock of debt that banks & households still carry will take years to pay off. 19

when growth declines by 2%, R&D spending drops by 3% Investment by venture capitalists is down 51% 20

Rich countries make progress by inventing new products & techniques whereas developing countries grow by assimilating know-how from elsewhere An emerging-market government can therefore promote this learning process by keeping its currency cheap, which raises the domestic price of traded goods relative to others. Thus productivity growth in the world is doubly endangered. In the rich world it is threatened by a lack of resources for innovation, & in the developing world it is threatened by the loss of tolerance for export-led growth. If developing countries are forced to abandon their cheap currencies, Dani Rodrik argues they could replace them with explicit industrial policies instead. Industrial Design 21