REVIEw OF POLICy OPTIONS
Chart 2.9 SOVEREIGN BOND yIELD SPREADS,
B. Economic policies for a sustained global recovery
2. Summing up: The need for policy consistency and macroeconomic
The global modelling exercise synthesized above offers an evaluation of the favourable out-comes that can be broadly expected from a break with current policy stances. Clearly, these results cannot be achieved by means of market-driven adjustments.
They reveal the need for explicit policy triggers that, estimated on a historical basis, are shown to yield more robust and stable growth patterns, particularly if policies worldwide are combined in a coordinated fashion. However, the use of this modelling tool does not mean that such policy choices will actually be undertaken. it requires a careful examination of what policy space is available, the possible constraints, and the political will of countries’ leaders to break with most of the current approaches, all of which is discussed more thoroughly in the chapters that follow.
Table 2.4 FINANCIAL VARIABLES FOR SELECTED REGIONS AND COUNTRIES, 1990–2024 (Average in per cent of GDP) Public sector balancePublic debt Private sector balanceCurrent account balance Scenario 1990– 2014 2015– 2019 2020– 2024 1990– 2014 2015– 2019 2020– 2024 1990– 2014 2015– 2019 2020– 2024 1990– 2014 2015– 2019 2020– 2024
Developed economiesBaseline-4.0-4.0-2.779.296.2220.127.116.11.2-0.5-1.2-2.1 Balanced growth.-3.3-18.104.22.16822.214.171.124.7.-0.7-0.8 of which: United StatesBaseline-4.3-4.5-126.96.36.199.71.40.3-3.1-2.9-4.2-6.2 Balanced growth.-3.6-188.8.131.52.184.108.40.206.-2.8-2.3 CISBaseline-0.61.93.057.722.7220.127.116.11.18.104.22.168 Balanced growth.22.214.171.124.6126.96.36.199.188.8.131.52 Developing AsiaBaseline-2.2-1.3-184.108.40.206220.127.116.11.32.02.83.5 Balanced growth.-1.2-18.104.22.16822.214.171.124.126.96.36.199 of which: ChinaBaseline-188.8.131.526.329.032.45.12.184.108.40.206.8 Balanced growth.-0.2-0.0.28.82220.127.116.11.18.104.22.168 IndiaBaseline-7.7-7.0-6.576.077.622.214.171.124.4-0.5-2.0-1.1 Balanced growth.-3.9-126.96.36.199188.8.131.52.9.-1.4-0.1 AfricaBaseline-2.1-3.8-4.059.159.66184.108.40.206.40.3-3.6-3.6 Balanced growth.-2.8-220.127.116.115.9.-0.00.4.-2.8-1.5 Latin America and the CaribbeanBaseline-3.0-4.3-3.551.454.518.104.22.168.9-1.9-2.6-1.6 Balanced growth.-3.0-2.4.51.048.22.214.171.124.-2.4-0.9 Source:UNCTAD secretariat calculations, based on GPM. Note:CIS includes Georgia.
in the realm of policymaking, what these model simulations underscore is the need to ensure policy consistency and macroeconomic coherence in order to obtain outcomes similar to those presented above.
Policy consistency refers to preventing policy instru-ments from operating at cross purposes. Current inconsistencies in the configuration of fiscal and monetary policies of many economies after 2010 has been colourfully described as “driving the economic car with one foot on the brake and one foot on the pedal” (White, 2013:1). instead, monetary expansion should be accompanied by fiscal expansion to prevent liquidity being hoarded or channelled to speculative uses; employment promotion programmes should be accompanied by income distribution policies so that aggregate demand is sustained by rising household incomes rather than debt; and policies targeting infla-tion should be accompanied by policies that address the causes of inflation, which in turn draws attention to incentives to domestic production and demand.
These are but a few examples of policy consistency.
Pro-growth and rebalancing policies need to ensure macroeconomic coherence by addressing primarily the root problems that impede a solid and sustained global recovery. Until very recently, and even now in many developed economies, policymak-ers have seemed to be excessively concerned with fighting the threat of inflation and have been ignoring the reality of deflation. likewise, policymakers in many countries have been advocating harsh adjust-ments in their governments’ fiscal balances but have been neglecting to consider the potential effects on households and enterprises which would find it more difficult to rebuild their balance sheets when aggre-gate demand and income are depressed.
if the main problems of the post-crisis period have to do with insufficient aggregate demand and financial instability, the appropriate policy response should be not to inject more liquidity per se, but to encourage credit flows that generate productive activ-ity, while boosting aggregate demand and designing
income policies to make use of such credit flows in a sustainable manner.
There is another aspect of macroeconomic coher-ence that may easily be overlooked by policymakers when considering their options. in an increasingly interconnected global economy, policies have to be consistent for the world as a whole. There are several examples of why this matters, but two are discussed here. First, after taking into account real and financial feedbacks, it should be clear that a sustained and stable demand-led growth path has to start domesti-cally, rather than each country individually pushing for competitive reductions of costs and imports in order to generate a net-export-led recovery. Robust domestic activity in a sufficient number of countries − a process in which, admittedly, surplus countries have much more to contribute − is the only truly sustainable basis for the recovery of global trade. Second, in the absence of a truly globally inclusive financial archi-tecture, unfettered global financial markets without adequate regulatory control can be pernicious, as the 2008 financial crisis has amply demonstrated. The continuing inadequacy of institutions and mecha-nisms for international coordination of policy actions affects the rules of the game in fundamental ways, forcing policymakers to adopt strategies that may appear to be convenient for the moment, but which are effectively self-defeating in the medium term. it is essential to continue with efforts to devise a more effective set of globally inclusive institutions to regulate markets, help correct unsustainable imbal-ances when they emerge, and better pursue the aims of global development and convergence. This may be an ambitious undertaking, for which a great degree of perseverance and vision is required. but as chap-ter iV highlights, history shows that deep reforms of global scope similar to the ones mentioned here were seriously contemplated in the past. Meanwhile, far more meaningful efforts are needed to coordinate national policy strategies, to consider the implications of their interactions in a global setting, and to manage international transactions and flows accordingly.
1 The trend is estimated from the mid-1990s onwards to avoid giving excessive weight to the boom years preceding the crisis, which were deemed unsustain-able, as well as to the immediate policy responses during the global crisis, which were clearly more expansionary than the norm.
2 At the time of writing, the United Kingdom’s office for National Statistics was in the process of revis-ing its annual GDP statistics (in United Kingdom National Accounts − The Blue Book, 2014 edition), and preliminary reports suggest that by 2013 the level of real GDP may be marginally above the pre-crisis level.
3 State and local governments in the United States are required by statutory law to balance their primary budgets, which in practice imposes expenditure adjustments relative to tax collection and other revenues.
4 This term, which was used by Keynes in his General Theory, refers to a burst of optimism that affects the mood of private investors.
5 This confirms earlier work on the United States (Piketty and Saez, 2003) and across a large pool of countries in both developed and developing regions (see, for example, Cornia, 2004; and Milanovic, 2005).
6 From a different methodological perspective, and using industry-level datasets, other empirical studies suggest that a greater proportion of capital accumula-tion vis-à-vis wage-earners and the self-employed implies, when properly estimated, a tendency towards a sharper deterioration of labour income (Arpaia et al., 2009).
7 While there is broad agreement on the importance of Piketty’s empirical findings about long-term trends of inequality, his theoretical explanation, which vali-dates neoclassical growth theory, has been subjected to rigorous critiques (Patnaik, 2014; Taylor, 2014).
8 Similar conclusions with variations, depending on underlying economic structures of different coun-tries, have been provided by analytical and empirical evaluations of the “wage-led” versus “profit-led”
debate (Storm and Naastepad, 2012; lavoie and Stockhammer, 2012).
9 See earlier Trade and Development Reports; also Turner, 2008.
10 These two cases together account for a significant share of global consumption, and could therefore have at least some influence in reigniting global imbalances. While other relatively large economies seem to show similar patterns, the investigation on these two countries is facilitated by the availability of detailed balance sheets and asset compositions of their household sectors.
11 This is an accounting term that refers to a positive shock to the net wealth of asset owners when asset prices rise. The shock can be estimated by imput-ing the price changes of the different assets to the underlying structure of the balance sheet. by further discounting consumer price inflation, a measure of real holding gains is obtained. See izurieta (2005) for a formal methodological justification and earlier empirical estimates. The Financial Accounts of the Federal Reserve of the United States publishes the series of holding gains in nominal terms (see table R.100) before discounted by inflation. The nominal series generated here show a very close match with those of the Federal Reserve, with only negligible errors due to the aggregative nature of the asset prices used. This allows checking against such existing data the estimation methodology applied further below to the case of the United Kingdom, which does not publish holding gains of the household sector.
it should be emphasized that these are accounting gains, rather than the gains actually realized through asset transactions.
12 “Net financial savings”, attributed to Tobin (1982), is the equivalent of the more known concept of surplus or deficit, commonly used in reference to the public sector and the external sector (the current account).
its formal name in national accounts is “net lending”
(or “net borrowing” when negative), but this term is not used in the text to avoid confusion with the also commonly used “lending” or “borrowing” in relation to the banking sector.
13 The series, which only run up to 2012, were compiled by combining national accounts statistics with survey data and imputed trends from the evolution of wage
or agricultural incomes when available. However, a large margin of error is possible, particularly for countries where the proportion of informal/mixed incomes is large.
14 Mixed income in the national accounts comprises incomes earned from the self-employed as well as all incomes earned by unincorporated enterprises and those classified as “non-market output”.
15 See also TDR 2001; Akyüz, 2002; D’Arista, 2007;
Ghosh and Chandrasekhar, 2001; Singh, 2003;
16 See also Akyüz, 2013 and 2014; Ghosh, 2014; TDR 2013; UNCTAD, 2011.
17 See lawson (2011), and also obstfeld (2012) for a more general appraisal of similar views.
18 Ukraine, where capital inflows rose only marginally after 2009, is an example of how a shock like the financial crisis can hit vulnerable sectors causing systemic threats that require more lasting adjust-ments, often exacerbated by social tensions.
19 See, for example Chandrasekhar and Ghosh, 2013 and 2014; lee, 2013; McKenzie and Pons-Vignon, 2012; Chang, 2013; Kang et al., 2011; Ffrench-Davis, 2012.
20 This index is available at: http://unctadstat.unctad.org/
wds/TableViewer/tableView.aspx?Reportid=30953. also specifies categories by the degree of labour skills within the manufacturing sector.
21 The GPM is a fully endogenous modelling frame-work based on water-tight accounting without
“black-holes” and without unexplained residuals. public, private and financial institutions; employ-ment; international trade (five main categories) and finance; and fiscal, monetary and industrial/
trade policy (see TDR 2013, annex to chapter i).
For a more technical discussion, see website: http://
22 As stated by Keynes (1936: 149), “The state of confidence is relevant because it is one of the major
Keynes further made a crucial observation to stress how much more difficult it is to know, a priori, about
23 in this particular case there are only small differences of degree with the baseline. in its construction, in order to avoid crisis conditions, as explained above, the baseline imposes ceilings and floors on exchange rates and commodity prices which would have resulted from the imbalances discussed in section A.
24 in the GPM, these preferences apply to countries with a per capita income lower than $2,000 dollars in 2012.
25 The historic period runs up to 2014, but the latest verifiable figures for the share of labour income are not available beyond 2012 for most countries.
26 incomes policies are assumed to be comparatively stronger in the United States, bringing its labour share closer to pre-1990 levels and closer to the lev-els of other developed economies. More importantly, households in the United States have accumulated serious financial imbalances over time, and the assumed improvement in the functional distribution of income is required in order to generate a sustained growth of private consumption without increasing households’ financial vulnerabilities.
27 TDR 2013 proposed an alternative simulation that assumed that all developing and emerging economies would engage in proactive incomes policies while developed countries would continue to seek net export advantages by compressing wage shares. The
28 in the United States, and to a lesser degree in india, growth of government spending is assumed to be relatively stronger than in the historic period, and it also turns out to be marginally stronger than the growth of GDP in the first five years of the projec-tions. This is because, as discussed earlier, debt-driven spending of the private sector was growing at a fast rate, and to achieve a financially stable path
of fast GDP growth the public sector had to make a larger contribution than the private sector.
29 An exception is China, where the policy shift away from investment growth towards faster growth of household incomes and consumption is assumed to be strengthened during the first few years of the simulation. Under these assumptions private invest-ment in China would tend to stabilize at around 25 per cent of GDP towards the end of the simulation period.
30 An exception is China, where a deceleration of growth is expected by policy design, and for many of the periphery countries of europe which continue to be under pressure by deflationary policies, as well as for many of the oil-exporting countries which will not benefit from a continuing rise in oil prices of the magnitude experienced over the past two decades.
31 The balanced-growth scenario has a pro-develop-ment bias (without disregarding growth in developed countries), and it is also known that the growth
potential of developing and emerging economies is greater than that of developed economies. Regarding measurement, the PPP weights (base 2005 in these simulations) are not re-scaled each year, resulting in a greater weight of developing economies in global GDP along the entire period of the projection.
32 exceptions include members of the Commonwealth of independent States (CiS) and China. The CiS economies, instead of accumulating larger fiscal surpluses over time, would benefit from reducing surpluses in order to enhance the process of struc-tural transformation. And in China, more emphasis is placed on strengthening social protection in order to promote the growth of household consumption.
33 Not all developed countries encourage debt-driven private sector spending. For example Germany and Japan significantly increase their external surpluses in the baseline. Thus, the group of developed coun-tries as a whole does not show a strong pattern in one direction.
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The discussions now under way on a post-2015
The discussions now under way on a post-2015