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Key Changes in Economic Policy in the Global economy since 1980 and future outlook

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Key Changes in Economic Policy in the Global economy since 1980 and future outlook Professor Dermot McAleese MSc EPS Hilary Term 2013 (S1) * * Cited in Eric Parrado ... – PowerPoint PPT presentation

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Title: Key Changes in Economic Policy in the Global economy since 1980 and future outlook


1
Key Changes in Economic Policy in the Global
economy since 1980 and future outlook
  • Professor Dermot McAleese
  • MSc EPS Hilary Term 2013 (S1)

2
OUTLINE
  • ? The new policy consensus
  • ? Implications of model
  • ? Will the consensus last?
  • ? New directions for policy

3
THE NEW CONSENSUS
  • ? Competition and the market system
  • ? Macroeconomic stability
  • ? Globalisation

4
A Successful Strategy for Growth Requires
  • ? openness towards international trade
  • ? limited government intervention in the economy,
    and
  • ? macroeconomic stability
  • IMF, World Economic Outlook, May 1997, p 92

5
How to avoid a double dip Policy makers should
adopt a co-ordinated strategy to boost
growth. Two priorities First a recalibration
of fiscal and monetary policy Second, a big push
on supply-side reforms, from freeing trade to
slashing red tape. Remove structural rigidities
(OECD) open up cosseted professions, relax
planning rules, overhaul worker training
programmes (US). The Economist August 27th
2011
6
COMPETITION AND THE MARKET SYSTEM
  • ? Pro-competition policies
  • ? Labour market flexibility
  • ? Privatisation
  • ? Deregulation
  • ? Enterprise-friendly environment

7
What Portugal needs ..
  • To improve its economic performance, Portugal
    needs
  • more flexible labour laws, less bureaucracy, a
    better educated workforce, more competition and a
    smaller state.
  • Portugals problems are domestic, not global,
    in nature
  • Economist 2 May 2009 p.29

8
IZA Appeal to German Policymakers May 2003 signed
by 300 German economists
  • Germany needs to relax the regulations for
    layoffs, reduce sharply the maximum duration of
    unemployment benefits, abolish incentives to
    retire early, increase competition in the health
    sector to lower the cost of medical coverage, and
    reduce expenditure so that taxes become less
    onerous. Nothing less than the future prospects
    of this nation will depend on the successful
    outcome of the current reform process.
  • Source Gary Becker A Little German Reform would
    go a long way BusinessWeek, 1 Dec 2003

9
India needs more reforms (Economic Survey
of India OECD 2007)
  • Indias success over the past two decades is
    largely the result of market based reforms that
    gave a greater role to the private sector by
    reducing the presence of the State in economic
    affairs
  • Angel Gurria, Sec-General OECD Oct 2007

10
The OECD on Greece Nov 2009
Increasing labour and product market
flexibility will be important to achieve high
rates of growth. (P 178) The Economist
Greeces sovereign-debt crunch Feb 6 2010
need for deep reform in Greece. Successful firms
overtaxed Greeces higher inflation is partly
explained by a lack of competition in parts of
the economy. As in Italy and Spain, wages are
set centrally with too little regard for
differences in productivity across industries and
companies.
11
Brazil one of the most dynamic economies in
the world The key to success in Brazil
still among the worlds most unequal societies
has been long-overdue reform to give a rising
share of the population a chance to own property
and make money. After more than a century of
over-reliance on protectionism and import
substitution and other forms of state
intervention, most of Latin America with the
sorry exception of Venezuela has achieved
higher growth rates since the 1980s with a
combination of privatisation, foreign investment
and export orientation. The days when the
regions economies veered between debt default
and hyperinflation appear to be receding into the
past. Niall Ferguson Civilisation The Six
Killer Apps of Western Power Penquin 2012
p.139
12
MACRO-STABILITY
  • ? Price stability (independent central bank,
  • hard exchange rate)
  • ? Budget balance
  • ? Control of government spending

FINANCIAL STABILITY!!
13
Consensus brings low inflation
IMF WEO Oct 2012
14
Peoples Bank of China
  • The objective of monetary policy is
  • to maintain the stability of the renminbi and
    thereby promote economic growth
  • Art 3 of the Law of the PBC

15
ARGENTINA 1991-2011 Primary and fundamental
mission of the Central Bank is to preserve the
value of the currency March 2012--
present to promote, to the extent of its
ability and in the framework of policies
established by the national government, monetary
stability, financial stability, jobs and
economic growth with social fairness The
Economist March 31st 2012 Argentinas economy
16
Monetary Authority of Singapore
  • The primary objective of monetary policy is to
    ensure low inflation as a sound basis for
    sustained economic growth. In Singapore, monetary
    policy is centred on the management of the
    exchange rate, rather than money supply or
    interest rates. This reflects the fact that, in
    a small and open Singapore economy, the exchange
    rate is the most effective tool in maintaining
    price stability. (Statement of policy Dec 2001)

17
The OECD on Greece November 2009
A credible commitment to reducing fiscal
imbalances on a sustainable basis is essential
for restoring market confidence, creating room
for future budgetary manoeuvre and meeting the
rising costs of an ageing population. To achieve
this, strict control of spending and curbing
widespread tax evasion are vital. Long-term
fiscal viability also calls for further pension
and health care reform. P 278
18
Consensus turns Keynesian
( of GDP)
IMF Oct 2009 ch 1
19
GLOBALISATION
? Free trade ? Foreign investment ?
Liberalisation of capital ? Labour mobility
20
WTO Members and Observers August 2009
(August 2009)





























Members Observers Others
21
(No Transcript)
22
Globalisation means .
? Open door policies ? Extending the scope
of international trade ? Emphasis on export
promotion ? Multilateral and regional
trade agreements
23
Adam Smith (1776) on China
A country which neglects or despises foreign
commerce, and which admits the vessels of
foreign nations into one or two of its ports
only, cannot transact the same quantity of
business which it might do with different laws
and institutions A more extensive foreign trade
.. could scarce fail to increase very much
the manufactures of China, and to improve very
much the productive powers of its manufacturing
industry. By a more extensive navigation, the
Chinese could naturally learn the art of using
and constructing themselves all the different
machines made use of in other countries, as well
as the other improvements of art and industry
which are practiced in all the different parts of
the world.
The Wealth of Nations 1776 Book 1 ch 8, Book IV
ch9
24
Three pillars are interdependent .
Flexible labour markets are needed if a country
is to move workers from import substitution to
export industries and benefit from
globalisation Globalisation creates pressure on
macroeconomic policy to maintain price stability
Keeping the economy competitive a key priority
for small open economy in 21st century
25
IMPLICATIONS FOR BUSINESS
  • lower taxes
  • weaker trade unions
  • rewards for managers, skilled workers
  • supportive government
  • But .
  • more competition

26
OECD Economic Outlook May 2007 p. 18
27
IMPLICATIONS FOR WORK ENVIRONMENT
  • labour market flexibility
  • less job security
  • more jobs (many of them temporary, contract)
  • structural adjustment

28
IMPLICATIONS FOR GLOBAL ECONOMY
  • More trade in goods and services
  • More foreign investment and the multinationals
  • More capital mobility and the shifting balance of
  • economic power
  • World Trade Organisation (WTO) more important

29
IMPLICATIONS OF NEW CONSENSUS
  • ? Business climate
  • ? lower taxes
  • ? weaker trade unions
  • ? rewards for managers, skilled workers
  • ? less government
  • ? but, more competition
  • ? Work environment
  • ? labour market flexibility
  • ? less job security
  • ? more jobs
  • ? structural adjustment
  • ? International economy
  • ? World Trade Organisation (WTO) a key
    institution
  • ? foreign investment and multinationals in
    ascendant
  • ? capital mobility and the shifting balance of
    economic power
  • ? mutuality of benefits

30
Questions for group
  • Q1. Outline the three pillars of the new
    economic consensus. Show how policy changes
    along new consensus lines can lead to better
    economic performance.
  • E1. Outline the contemporary economic policy
    stance in a country of your choice and indicate
    how closely it approximates the new policy
    consensus.
  • Q3. Is the new economic consensus likely to
    last? Will the present world economic downturn
    undermine it?

31
Questions for groups
  • Q3. Is the new economic consensus likely to
    last? Will the present world economic downturn
    undermine it?
  • Reading Economists Rethink Free Trade
  • Explain the authors claim that something
    momentous is happening in the debate about the
    merits of free trade. How well founded are these
    doubts? What can be done to reassure people
    about the advantages of trade?

31
32
FAULTLINES IN NEW CONSENSUS
  • UNEQUAL INCOME DISTRIBUTION
  • GLOBALISATION AND VULNERABILITY
  • PRIVATE DEBT AND PUBLIC DEBT
  • FINANCIAL INSTABILITY

33
Faultlines Income distribution in the US
1949-79
34
Income distribution in the US before tax
1979-2003
Source Robert Frank Are Positional
Externalities different from Other Externalities?
Happiness and Public Economics Conference,
Centre for Economic Performance London 23-24
Sept 2006
35
US Income Distribution after tax 1979-2000
Frank 2006
36
CBO Congressional Budget Office, Washington DC
Congressional Budget Office, Washington DC
37
Real US after-tax income By percentile,
increase, 1979-2007
Source Congressional Budget office Report
November 2011
38
Real US after-tax income By percentile,
increase, 1979-2007 Average income increase
1979-2007 62 Median income increase
1979-2007 35 Martin Wolf Romney would be a
backward step FT Wed Oct 31st 2012
39
(No Transcript)
40
(No Transcript)
41
CBO Report Oct 2011 Ref to OECD study 2008
42
  • Top 1 of households owns around 40 of
    Americas wealth the highest proportion since
    1929. In the 1970s they accounted for just 20.
  • (The Economist May 12th 2007 p.75)
  • Top 1 of income earners in the US account for
    25 of total US consumption (McKinsey Global
    Institute, Sept 2009)

43
Faultline 2 Vulnerability
  • The gains from trade liberalization should not
    only be seen through a narrow economic lens.
    Trade has also been a vehicle for promoting
    broader political objectives, especially peace
    and stability. Trade establishes mutually
    beneficial links among nations, creating interest
    in cooperation. It cements relationships among
    disparate peoples and societies, lessening the
    risk of conflict, and it strengthens the
    commitment of governments to rules in the place
    of realpolitik
  • World Trade Organization, Annual Report,
    1998

44
Some think that the WTO view is too optimistic ..
  • Globalisations most fundamental limitation is
    that , although trade increases the mutual
    economic dependence of the countries that engage
    in it, it does not make the peoples of those
    nations any fonder of each other. Thus, when
    relations deteriorate because of issues that have
    nothing to do with commerce, each side starts to
    resent the dependence on the other, and goodwill
    can rapidly unravel.
  • James Kinge China Shakes the World The Rise
    of a Hungry Nation London 2006

45
Faultline 3 The problem of private sector debt

Public (government) debt a problem .
but also private debt (Discussed in S4)
46
( GDP)
Public Debt Central Govt all govt agencies
47
UK Household Debt as of Income 1977 2008
80 160 UK Average Size of
Mortgage 1999 2008 40,000 160,000 Source
V Cable The Storm The World Economic Crisis
and What it means London 2009
48
The New Consensus lives on ..
  • To improve its economic performance, Portugal
    needs
  • more flexible labour laws, less bureaucracy, a
    better educated workforce, more competition and a
    smaller state. As the IMF states in a recent
    report, Portugals problems are domestic, not
    global, in nature
  • Economist 2 May 2009 p.29

48
49
WILL THE CONSENSUS LAST?
  • Yes, as long as it delivers faster growth and
    acceptable income
  • distribution
  • Lessons from Recession
  • Competition must be regulated ,
    especially the financial sector
  • Asset prices a key element in macroeconomic
    stability
  • Income distribution must be monitored
  • Closer international cooperation needed
  • ? State intervention an essential complement
    to private sector

50
Where do we go from here?
  • The outcome of the current economic collapse
    will be nothing less than a regime change in
    which the next stage in globalisation and
    integration is characterised by
  • More diversified engines of global growth
  • Reduction in global trade and payments
    imbalances
  • More pronounced inflationary pressures
  • More diversified allocation of investible funds
    around the world.

Mohamed El-Erian When Markets Collide Investment
strateg9es for the age of Global Economic Change
McGraw Hill 2008
51
WILL THE CONSENSUS LAST?
  • Only as long as it delivers, in terms of faster
    growth and acceptable income
  • distribution
  • is the Consensus delivering? a
    2013 assessment
  • ? Convincing outcome requires
  • ? correct sequencing of the new policies
  • consistent application of reforms
  • strong regulation of the financial sector
  • ? attention to income distribution
  • ? international cooperation
  • ? State intervention at macro and micro level an
    essential complement to private sector

52
14th Sep 2007 Northern Rock
THINGS FALL APART, THE CENTRE CANNOT HOLD .
24th Sep 2008 Bank of East Asia
52
53
Where do we go from here?
  • The outcome of the current economic collapse
    will be nothing less than a regime change in
    which the next stage in globalisation and
    integration is characterised by
  • More diversified engines of global growth
  • Reduction in global trade and payments
    imbalances
  • More pronounced inflationary pressures
  • More diversified allocation of investible funds
    around the world.

Mohamed El-Erian When Markets Collide Investment
strateg9es for the age of Global Economic Change
McGraw Hill 2008
54
Pressures on New Consensus
Who cares about competition policy? Nationalisatio
n of banks Labour market flexibility -- all that
good? Unemployment ------------------------------
-------------- Budget deficits, escalating public
debt Deflation Household debt and
consumption --------------------------------------
------------- Protectionism and
Competitiveness Competitive devaluations (e.g.
Switzerland Mar09) FDI, Buy our goods
campaigns
55
Stiglitz on the Post-Washington Consensus
  • There are important advantages to the Washington
    consensus approach to policy advice. It focuses
    on issues of first-order importance, it sets up
    an easily reproducible framework and it is frank
    about limiting itself only to establishing
    prerequisites for development.
  • but ..
  • Policies advanced by the Washington consensus
    are not complete and they are sometimes
    misguided.
  • Professor Joseph Stiglitz 1998, Nobel prize
    winner, former Chief Economist The World Bank

56
DMcA (2004) p 10
  • Threats to the new consensus have come and gone
    during the past decade. A succession of
    financial crises in Mexico, East Asia, Russia,
    Brazil and Argentina cast doubt on one element in
    the packages free capital mobility as well as
    underlining the vulnerability of open,
    competitive economies to changes in market
    sentiment. To date most economies have managed
    to survive these traumas. The advent of a
    financial crisis occurring at the heart of the
    Western economy, following a stock market
    collapse, would be more serious. Were it to be
    combined with simultaneous problems in the form
    of oil price increases and a general economic
    downturn the attractions of globalisation,
    competition and price stability could easily
    pall. ..

57
Search for a second-generation policy consensus
How to find effective ways to deal with 21st
century MEDIUM-TERM problems Poverty in midst
of plenty Nutrition, obesity and health
Pensions and ageing Environment and climate
change Competitiveness
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