global economic prospects: restoring global balances abn-amro global conference singapore september...
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GLOBAL ECONOMIC PROSPECTS: RESTORING GLOBAL BALANCES
ABN-AMRO GLOBAL CONFERENCESingapore
September 8, 2005
Joseph E. StiglitzColumbia University
New York
GROWTH BUT NO EUPHORIA
In 2004, global economic performance was the strongest in two decades
• Yet there was no global euphoria
Why?
Global anxiety• Will the growth sustain?• Will there be a resurgence in inflation?
In the midst of:• High level of exchange rate instability?• High levels of economic tensions between the United
States and China• Soaring oil prices, accompanying Middle East turmoil?• Fragile housing market bubbles in many countries• Major economic imbalances
ANXIETY WELL JUSTIFIED
Growth in 2005 has been weaker than in 2004
And prospects for 2006 remain uncertain
MAJOR IMBALANCES, UNCERTAINTIES PERSIST AND ARE INTERLINKED
” …that which is unsustainable will not be sustained”
U.S. trade deficit unsustainable Source of instability in global
exchange rates Linked to huge U.S. fiscal deficit
PROSPECTS FOR TWIN U.S. DEFICITS
Prospects are that deficits will persist– Medicare drug benefit likely to cost US$ 2.5-3.0
trillion more over next 20 years– Making tax cuts permanent would add US$ 1.8
trillions in next 10 years– Social security privatization would add US$ 1.5
trillion in next ten years, US$ 6 trillion in 20 years
– Iraq war costs not even included– AMT (Alternative Minimum Tax) reform could
easily add .5 trillion Hard to see significant reduction in deficit
HOUSING BUBBLES AND ECONOMIC FRAGILITY
Growth in the U.S. economy (and some others) is largely sustained by housing sector
Home building increased from 4.25% GDP 1980-2000 to 5.98%– Difference equals $200 billion year– Generating approximately 2 million jobs
Increase in housing prices added $7 trillion ($3 trillion if re-mortgage and inflation is taken into account) in wealth during the past five years– Adding $150 billion in spending– Generating 1.5 million jobs
HOUSING BUBBLES AND ECONOMIC FRAGILITY
Economy sustained both by investment in real estate, people taking money out of house (second mortgage), and capital gains
But higher interest rates and, at the very least, moderate increase in housing prices– Will dampen the ability to increase
consumption at same rate, and– may even be lead to a decrease in
consumption level
HIGHER INTEREST RATES
Fed has raised short term interest rates during the past two years, but long term interest rates have fallen– “Conundrum”– At some time in the not too distant future
medium and long term interest rates will rise• With rising risk premium• Real interest rates returning to more normal levels• Declining savings relative to investment• Inflationary expectations
RISING OIL PRICES
Beginning to have inflationary effects Which may dampen overall level of
economic activity Especially if central banks raise
interest rates Which they are especially prone to
do with inflation targeting
RISING OIL PRICES
Normally, such high prices would elicit more production– Long lags in production– And uncertainty about whether prices will be
sustained• Middle East still competitive producer• At current prices, it would pay to bring on alternative
sources, technologies• But if stability got restored, prices would fall, and
Middle East would dominate again• Means that supply response will be slow
RISING OIL PRICES
A strong reason why it makes sense to focus attention on conservation
And broader policies aimed at sustainable development
Development at current rates of energy and resource utilization is not sustainable
It is important that the business community show commitment to sustainable development
RISING OIL PRICES Rising oil prices is leading many investors and countries to
want to manage risk of energy prices Limitations in “futures” markets—only go limited distance
into the future Necessity of buying “energy” assets—those whose prices
move with oil Makes sense for energy importing countries, like China, to
buy energy assets to stabilize economy and insulate against risk
U.S. made a major mistake in dealing with the Chinese bid for Unocal– Even if some of the arguments about lack of full
symmetry are correct– U.S. cannot stop China from buying energy assets
elsewhere– U.S. has shown that it believes ownership/control matters
CHINA-U.S. INTER-DEPENDENCE
China-U.S. relations is of critical importance for global stability Mutually beneficial Both countries gain from the economic relationship
– Americans consumer benefit from lost cost goods– Important for maintaining standards of living– Keeping inflation low– America benefits from low cost loans from China—major
supplier of savings Argument that China needs the U.S. to buy its goods and the
U.S. needs China to buy its treasuries is not fully persuasive– China could expand domestic consumption, investment— it
has great needs– Would other countries be as willing to hold U.S. dollars as
China has been? – What are consequences of shift of deficit from China to
others?– Easier to increase consumption than to decrease it
RMB REVALUATION
Current level of revaluation is not likely to have much effect– On trade– On speculation over further revaluation
But even much larger revaluation will not have much effect on bilateral trade deficits (with the U.S.) or global imbalances– U.S.- not China – is the underlying source of
problem The recent revaluation is not likely to
provide China with respite from political pressure from the U.S. for very long
RMB REVALUATION
Much larger revaluation would put China in a difficult position– Lower prices in rural sectors– Rural-urban income inequality will grow–
already major source of concern– Will require costly use of government revenues
to offset impact on farmers
Move to peg RMB to a basket of currencies and the increased flexibility in exchange rate management make sense for China
INCREASING ROLE OF ASIA IN GLOBAL ECONOMY
As source of savings As source of manufactured goods Asia, especially the East Asian Miracle
countries and India, likely to continue to be the bright stars in the global economy
Weak economic performance in the U.S., Europe however, is likely to lead to rise in protectionist sentiment – Though, as in Europe, protectionism will meet
resistance– As retailers and consumers are hurt– And net, even jobs
But the WTO will provide some protection from protectionism
Both China and India will need to face the problems posed by high energy prices
• Low gasoline prices in China• Need for public transport system will exacerbate the
problem• Increased domestic expenditures as China weans
itself away from export lead growth strategy• Needs to strengthen efforts for conservation
INCREASING ROLE OF ASIA IN GLOBAL ECONOMY
GLOBAL ECONOMIC PROSPECTS: A PESSIMISTIC VIEW
Huge global imbalances Growing global economic uncertainties Many potential disaster scenarios And few potential boom scenarios In between — economic malaise is
perhaps more likely No recession, but no boom either The worst is over – will do better than
2001-2003, but weaker than the roaring 1990s or even 2004
Naysayers have been predicting a burst for years – those who listened to their advice missed enormous gains
New economy – so talked about only few years ago – may have been exaggerated, but technological revolution is real, opening up new vistas of productivity improvements
Growth in Asia is ushering a new era and it’s just the beginning The vast domestic markets of China and India, representing
more than one-third of world population and growing over 8% annually, will fuel growth for other countries of the region
Adjustments to these new realities, and the shift in the balance, may not be easy – fueling anxiety in the “old world”
But from the perspective of Asia, with its huge savings, its growingstrength in science and technology, never have prospects looked better
GLOBAL ECONOMIC PROSPECTS: AN OMPTIMISTIC NOTE