Global Imbalances and Policy Co-ordination: CERF – University of CambridgeAlphametrics Ltd. Advancing an Analytical Framework University of Campinas, October 2006 UNDP: International Poverty Center

CERF and Alphametrics Outline The project The project  How it started …  Why is this necessary … Is this any different? Some findings Some findings  Why macro-financial imbalances cannot continue  An US-led recession is not good for anyone  Developing 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.  Open geometry in a trade & income model: scenarios  Analysis of financial stocks & flows: model & scenarios  Income distribution in a co-ordinated policy response

CERF and Alphametrics The project ’ s background NN.AA. & SAM tradition: Stone, Pyatt, Roe, etc. NN.AA. & SAM tradition: Stone, Pyatt, Roe, etc. ‘ Central planning ’ : Tinbergen, Kalecki, Eclac, etc. ‘ Central planning ’ : Tinbergen, Kalecki, Eclac, etc. ‘ Modelling and planning ’ : pioneering work of the CEPG (Francis Cripps, Wynne Godley, etc.) ‘ Modelling and planning ’ : pioneering work of the CEPG (Francis Cripps, Wynne Godley, etc.) Alphametrics model of the world economy Alphametrics model of the world economy CERF and the Cambridge heritage CERF and the Cambridge heritage A network: IPC (UNDP), G24, FERE, IDEAs, JNU (IN), Unicamp, IPEA (BR), Shangai ’ IPC & Univ., others (CEFID-AR; Fed.Uni.Rio; … ) A network: IPC (UNDP), G24, FERE, IDEAs, JNU (IN), Unicamp, IPEA (BR), Shangai ’ IPC & Univ., others (CEFID-AR; Fed.Uni.Rio; … )

CERF and Alphametrics What we want to know about the world economy Trade, finance, growth and distribution: Trade, finance, growth and distribution:  History and new factors  Structure and dynamics of adjustment What outcomes can we expect if we do not do anything ? What outcomes can we expect if we do not do anything ? Can policies make a difference ? Can policies make a difference ?  Global policies require coalitions  Coalitions require common understanding

CERF and Alphametrics How we can understand such a huge and complex system ? Central preconceptions: Central preconceptions:  global development is a historical process  discard ‘ sh.term noise ’ & avoid ‘ forecasting ’  coping with limitations and learning to interpret Data: incomplete/imperfect but improving Data: incomplete/imperfect but improving Model: stylised patterns, structural relations, dynamics of adjustment, global linkages. Model: stylised patterns, structural relations, dynamics of adjustment, global linkages. Scenarios: consistent baseline, plausible developments and shocks, co-ordinated policy action: target-instruments Scenarios: consistent baseline, plausible developments and shocks, co-ordinated policy action: target-instruments

CERF and Alphametrics Findings: history & sustainability The past 30 years The past 30 years  Growth ... integration ... imbalances Will this pattern continue ? Will this pattern continue ? What do we mean by sustainable growth ? What do we mean by sustainable growth ? by 2015 trade would exceed 50% of world income

CERF and Alphametrics Who succeeds in the global market today ? Global markets are dominated by large companies and production is concentrated in specific regions Global markets are dominated by large companies and production is concentrated in specific regions 5% of the market is shared by countries with almost half the world's population ** 5% of the market is shared by countries with almost half the world's population ** % of world exports % of world population remaining 5% **remaining 44% ** Nigeria, Indonesia, Pakistan, India, Bangladesh and many other countries in Asia, Africa and America

CERF and Alphametrics Industrial exports The market has been dominated by Western Europe, the USA, Japan and the rest of Asia The market has been dominated by Western Europe, the USA, Japan and the rest of Asia China is attracting attention as a new entrant China is attracting attention as a new entrant Exports of manufactures, billion US$ at 2004 prices excluding intra-bloc trade

CERF and Alphametrics The world market for manufactures The USA and Western Europe provide the main markets although Asian imports are growing The USA and Western Europe provide the main markets although Asian imports are growing The rest of the world exchanges energy and raw material exports for manufactures The rest of the world exchanges energy and raw material exports for manufactures Imports of manufactures, billion US$ at 2004 prices excluding intra-bloc trade

CERF and Alphametrics Hard times ahead ? The US has a massive deficit The US has a massive deficit US economic growth relies heavily on internal demand US economic growth relies heavily on internal demand Growth in the rest of the world relies on growth in the US Growth in the rest of the world relies on growth in the US With rising interest rates and the high price of oil, will US growth continue ? With rising interest rates and the high price of oil, will US growth continue ?

CERF and Alphametrics The view in Washington International institutions and the CBO forecast continuing growth at historical rates International institutions and the CBO forecast continuing growth at historical rates The US will continue to be the main driver of world trade and financial flows The US will continue to be the main driver of world trade and financial flows Average growth of the U.S. economy ( ) = 2.8% Growth Rate of U.S. (% p.a.)

CERF and Alphametrics Trade Balance Current Account Balance If the historical pattern continues If the historical pattern continues the trade deficit will reach 8 per cent of GNP the trade deficit will reach 8 per cent of GNP payments on external debt will cost nearly 2 per cent of GNP payments on external debt will cost nearly 2 per cent of GNP The U.S. deficit (% of GNP)

CERF and Alphametrics Net Position of the US vis à vis the Rest of the World U.S. external debt Net external liabilities of the USA are about 30 per cent of GNP and growing fast Net external liabilities of the USA are about 30 per cent of GNP and growing fast Net liabilities could reach 80 per cent of GNP within the next 10 years Net liabilities could reach 80 per cent of GNP within the next 10 years (% of GNP)

CERF and Alphametrics Debt of the personal sector as % of disposable income The stock of personal debt Debt of the personal sector is now one- and-a-half times income Debt of the personal sector is now one- and-a-half times income With continued deficits, personal debt would reach about two-and-a- half times income in ten years from now With continued deficits, personal debt would reach about two-and-a- half times income in ten years from now

CERF and Alphametrics House price index S&P 500 index Asset prices in real terms Asset appreciation Accumulating debt has been backed by ever-rising asset prices Accumulating debt has been backed by ever-rising asset prices If this continues, equities and houses should be priced at one-and-a-half times their (already high) value ten years from now? If this continues, equities and houses should be priced at one-and-a-half times their (already high) value ten years from now?

CERF and Alphametrics Consensus forecast for U.S growth Slowdown Average growth of the U.S. ( ) = 2.8% When household spending reaches a plateau relative to income, growth will slow down When household spending reaches a plateau relative to income, growth will slow down If the U.S. economy starts to slow down (% p.a.)

CERF and Alphametrics Slowdown Consensus U.S. Trade Balance [ % of GNP ] A moderate slowdown (about 0.5 per cent per annum) may stabilize the U.S. trade deficit at 6% of GNP A moderate slowdown (about 0.5 per cent per annum) may stabilize the U.S. trade deficit at 6% of GNP But this is not sufficient to bring financial flows back into balance But this is not sufficient to bring financial flows back into balance With a slowdown the U.S. deficit flattens

CERF and Alphametrics Could the slowdown result in a recession ? Average growth of the U.S. ( ) = 2.8% Recession Slowdown Weakening sentiment may affect Weakening sentiment may affect - asset prices - asset prices - credit expansion - credit expansion - household spending - household spending - jobs - jobs - tax revenue - tax revenue How will governments and monetary authorities respond ? How will governments and monetary authorities respond ? (% p.a.)

CERF and Alphametrics Recession would be generalized Recession Slowdown The rest of the world would pay a price through The rest of the world would pay a price through - reduced growth of exports to the US - reduced growth of exports to the US - knock-on impact on confidence and spending elsewhere - knock-on impact on confidence and spending elsewhere Deficit as % of GNP

CERF and Alphametrics What can the rest of the world do to reduce the risk ? A more balanced and sustainable growth process in each world region A more balanced and sustainable growth process in each world region Less dependence on the USA Less dependence on the USA Less reliance on high-cost imported energy Less reliance on high-cost imported energy Closer regional integration Closer regional integration Growth sustained by domestic spending as well as exports Growth sustained by domestic spending as well as exports

CERF and Alphametrics Sustainable domestic reflation Asian countries can bring about a reduction of the US trade deficit by relying more on domestic spending and cutting their trade surpluses Asian countries can bring about a reduction of the US trade deficit by relying more on domestic spending and cutting their trade surpluses Rest of Asia Rest of world China Japan Trade surplus ($billion)

CERF and Alphametrics Reduce dependence on other regions With strong domestic spending, Asian countries will be less dependent on growth of exports to the US and other global markets With strong domestic spending, Asian countries will be less dependent on growth of exports to the US and other global markets Rest of Asia China Japan Share of US import market for manufactures

CERF and Alphametrics Increased energy efficiency Energy saving will reduce damage to the environment and facilitate a more balanced pattern of trade Energy saving will reduce damage to the environment and facilitate a more balanced pattern of trade Rest of Asia China Japan Energy consumption (tons of oil per million $ income)

CERF and Alphametrics GNP targets (% p.a.) Developing America Middle East Africa FDI & ODA to support investment and income growth in Africa, the Middle East and developing America FDI & ODA to support investment and income growth in Africa, the Middle East and developing America Structural policy * Industrial development

CERF and Alphametrics FDI and ODA * Africa African exporters have less than 5% of the regional market (although this is starting to grow) African exporters have less than 5% of the regional market (although this is starting to grow) To achieve a significant catch-up in per capita income they need larger shares of regional industrial markets To achieve a significant catch-up in per capita income they need larger shares of regional industrial markets Market share of exports of manufactures from Africa (%) Addition to achieve 10% GNP growth Actual (2004) Africa D’ing America Middle East Other D’ed Western Europe US

CERF and Alphametrics FDI and ODA * Developing America Regional integration is proceeding in America Regional integration is proceeding in America Lower-income countries still need a significant boost for per capita income to start to catch up Lower-income countries still need a significant boost for per capita income to start to catch up Market share of exports of manufactures from developing America (%) Africa Developing America Middle East Other D’ed Western Europe US Addition to achieve 10% GNP growth Actual (2004)

CERF and Alphametrics Reduced US deficit Stronger demand in the rest of the world boosting US exports Stronger demand in the rest of the world boosting US exports Reduced pressure on the global oil market Reduced pressure on the global oil market No recession, but domestic spending would slow down No recession, but domestic spending would slow down Agr & raw mats Manufactures Energy Trade balance US trade balance as % of GNP

CERF and Alphametrics Growth generalized Former USSR 7.1% Africa6.1% Eastern Europe 5.5% Middle East 5.1% Other America 4.5% Other Developed 3.0% Western Europe 2.7% USA2.2% China7.6% Rest of Asia 7.3% Japan4.6% Per capita income,