StrivingforGrowthinaPerilousEnvironment:AnEconomicoutlook

JosephE.StiglitzHongKongMay2016

Whereweare:abriefoverview• Slowgrowth—GreatMalaise,NewMediocre

• Notacrisisyet

• Butpersistentmoderatelyhighunemployment inmanycountries (insomecasesdisguised), higherunemploymentamongyouthandmarginalizedgroups

• Disproportionate shareofslowgrowthgoingtoafewatthetop—growinginequality,wagestagnation

• Evenincountrieswithlow“official”unemployment, raisingquestions ofqualityofjobgrowthanddisguised unemployment

Immediateprospects• 2015worstglobalgrowthsinceGlobalFinancialCrisis

• AndapartfromGFC,oneofweakestyearsinalongtime

• Hopeisthat2016willbebetter

• Butlittlereasontoexpectsignificantimprovement

• IMFhasbeendowngradingitsforecasts—asitdoesalmosteveryyear

Weaknesseseverywhere• Slowdown inChina

• Withknock-on effectsespeciallyinthosecountriesdependent onexporting naturalresources

• Mostofwhichfailedtotakeadvantageofcommodity priceboomtoadequatelydiversify theireconomies

• OngoingdebateinChinaabouthowtorespond—mix of supply sideanddemandsidemeasures

• Reflectingdebateabout sourceofgrowthslowdown• Difficultiesmakingthestructuraltransformationtonextstage

• Causeandconsequenceofglobalslowdown

• Politicaldimensions

(Cont’donnextslide)

Weaknesseseverywhere• Continuingweakness inEurope

• TheEurozonecrisis isnotover• Fundamental structuralflawsinthedesignoftheeuro• Economicintegrationoutpacedpolitical integration• Reforms toolittle,tooslow• Anddisagreements aboutwhatreformsareneeded• Reform inthestructure oftheEurozone itself—more thanthestructureoftheindividualcountries

• Continuingausterityishavingitstoll• Ideologyhasovercome economic analysis

(Cont’donnextslide)

Weaknesseseverywhere

• ContinuingslowgrowthinUS

• Mildausterity

• Politicalgridlock

GDPGrowthofDevelopingEconomies

Source:AsianDevelopmentBank,AsianDevelopmentOutlook2016

Outputpermemberofworking-agepopulationislowerthanbeforethecrisisformostcountries

8

Source:EconomicReportofthePresident2016

Note:EasternAsiaincludesChina,HongKong,Japan,RepublicofKorea,Macau,Mongolia,andTaiwan.

Source:ILO,WorldEmploymentandSocialOutlook:Trends2016.

EasternAsia:EmploymentOutlook

Cont’donnextslide

Source:ILO,WorldEmploymentandSocialOutlook:Trends2016.

EasternAsia:EmploymentOutlook

InequalityinAsia:ontherisesinceearly1990s

Growthcontinuestobefarbelowthetrendbeforethecrisis:U.S.

Europeisevenworse

Stagnation:U.S.medianhouseholdincome(constant2014US$)

Source:U.S.CensusBureau

20,000

25,000

30,000

35,000

40,000

45,000

50,000

55,000

60,000

1975 1980 1985 1990 1995 2000 2005 2010

2014:$53,657

Declineinmedianincomeoffull-timemaleworkerintheU.S.

30,000

35,000

40,000

45,000

50,000

55,000

60,000

1965 1970 1975 1980 1985 1990 1995 2000 2005 2010

RealMedianIncomeofFull-TimeMaleWorker,1965-2014

U.S.minimumwage,1938-2012

Source:U.S.DepartmentofLabor.http://www.dol.gov/minwage/minwage-gdp-history.htm

Centralprobleminglobaleconomy:lackofglobalaggregatedemand• Growing inequality inmostcountries

• Enormous increase especiallyinUS• Withbottom90%havingclosetostagnantincomesforathirdofacentury

• Decreases inlifeexpectancyamongimportant segmentsofpopulation

• Important issuesofintergenerational justice• Withdeeppoliticalimplications• Perceptioneconomicsystemunfairandpoliticalleaderscannotbetrusted

• Stronganti-globalizationandanti-finance sentiments(Cont’donnextslide)

Lackofaggregatedemand• Growing inequality inmostcountries (cont’d)

• Macro-economic consequences: Thoseatthetopconsumeasmallerfractionoftheirincomethanthoseatthebottom• SomeLatinAmericancountries represent importantexception

• Partofnewview:lowerinequalityisassociatedwithbettereconomicperformance

• Widespread austerity—government cutbacksorlimitedgrowth

• Importanceoffiscaldisciplinenowwellaccepted

• Butsomecountrieshavegonetoofar:failuretoundertake highreturninvestmentswhenthereareunemployedresources andaccess tolowcostfunds

Lackofaggregatedemand• Structuraltransformation

• Inadvancedcountries,inresponsetotechnologyandglobalization• Frommanufacturingtoservicesector• Decreaseinglobalemploymentinmanufacturing• Andbecauseofshiftingcomparativeadvantage,theywillhaveasmallershareofthisshrinkingnumber

• InChina,fromexportledgrowthtodomesticdemanddrivengrowth• Fromquantitytoquality• Fromruraltourban• Frommanufacturingtoservice• Demographictransition

• Marketsontheirowndon’tmanagethesetransformationswell

• Global imbalances

• Eurozonehasexacerbated problem

• Nowmoreimportantassourceofimbalances thanChina

• Asymmetricaladjustment

• Countries (firms, households) facingadeclineinincomehavetoreduceconsumption

• Thosewithincreased incomedonotexpandspendingsymmetrically

• Response tochanges inoilpriceillustrates• Manyhadexpected decrease inoilprices tostimulateglobaleconomy

• Butcutbacksininvestment, spending inoilproducersmorethanoffsettingconsumerbenefits

Asynchronousmonetarypoliciesintroducingnewelementofuncertainty

UStalkingaboutraisinginterest rates,EuropeandJapanmovingintonegative interest rates• Largeimplicationsforexchangerates• Newglobaluncertainties

• Reversal ofcapitalflows

• Paceofoutflows fromChinashowsthateven largereserves maynotprovideadequate protection

• Puttingstressoncountriesandcompanies inemergingmarketsthatareoverindebted

(Cont’donnextslide)

Asynchronousmonetarypoliciesintroducingnewelementofuncertainty

• Periodofultra-lowinterestrateshasnothaddesiredbenefitintermsofincreasedinvestment

• Hasledtoassetpricebubbles,mispricingofrisk,increasedwealthinequality

• Lowerinterestratesmayevenloweraggregatedemand

Dysfunctionalglobalfinancialmarket• Standingbetween longterm investmentprojects (infrastructure)andlongterminvestors (pension funds, sovereignwealth funds)areshortsighted financialmarkets

• Haven’tbeenabletorecyclesurpluses

• Mostofattention infinancialsector reformhasbeencenteredonpreventing financialmarkets fromimposingharm

• Realneed tomakesurethatfinancialsectorperforms itscriticalsocietalrolesallocatingcapital,managingrisk,andrunningpaymentssystem• Allofthisshouldbedoneatlowcost

(Cont’donnextslide)

Dysfunctionalglobalfinancialmarket

• Traditionalrolefocusedonintermediationandlendingtobusinesses

• Today,inUS,financialsectorengagedindisintermediation• Leadingtolowerlevelsofinvestment(lowerlevelsofaggregatedemand)

• LeveloflendingtoSMEsveryconstrained

AgendaforachievingsustainableandsharedgrowthFocusesonaddressingunderlyingsourcesofweakness

1.BeyondausterityRethinking budgetaryrulesandframeworks

• CapitalBudgeting

• Balance sheetperspective especially importantwhencostoffundsislowandreturnstoinvestments arehigh

• Stabilization Funds,especially fornaturalresourceeconomies

• Tomanagerealexchangerate,smoothconsumption andinvestment

• Usingdevelopment bankstopromote investment

• Iffiscalconstraintsstill binding,useprinciple ofbalanced budgetmultiplier

• Ifexpenditures andtaxeswellchosen,canbehigh

2.IndustrialPolicies• Centraltoeconomic/structural transformation

• Justified intermsofstandardtheories ofmarketfailures

• Affecting thestructureofproductionandthechoiceoftechnology

• Broadofobjectives (notjustGDP:environment, equality,employment,economicdiversification)

• Especiallyimportant increatingalearningsociety/knowledgeeconomy—

• Realsourceofwealthofeconomy

• Especiallyimportant in21st century

(Cont’donnextslide)

IndustrialPolicies• Focusonknowledge spillovers/learning-by-doing effects

• Manyinstruments

• Competitive andStableRealExchangeRates

• Inmanycountries,development bankshaveplayedanimportantrole

• Needadevelopment oriented intellectual property regime

• Agendaentailsstrengthening thepublicsectorandenhancing itscapabilities

(Cont’donnextslide)

IndustrialPolicies• Every countryhasanindustrial policy

• Embedded inexpenditure andtaxpolicies, andbasiclegalframework

• Somecountriesdonotrealize thattheyhaveanindustrialpolicy• USpolicy:promotedysfunctional financial sector• Worked: sectorgrewenormously

Basicideas: J.E.StiglitzandBruceGreenwald,CreatingaLearningSociety:ANewApproachtoGrowth,Development,andSocialProgress,NewYork:ColumbiaUniversity Press,2014(abridgedversion,2015).

3.Inequality

Increasingequalitywould increase consumptiondemand

• Moreprogressive taxandexpenditure policies

• Rewritingtherulesofthemarketeconomytomake theeconomymorebalanced, fairerwould resultinbetterdistributionofmarket income, andfastergrowth

Stiglitz,J.E.,N.Abernathy,A.Hersh,S.Holmberg, andM.Konczal (2015).Rewriting theRulesoftheAmericanEconomy,NewYork:W.W.Norton,2015.

4.“Fixing”financialmarketwouldprovidefinance

• Notjustpreventingharm

• Butinducingfinancialmarketstoperformsocietalrolethattheyaresupposedtoperform

Globalcoordinationneeded

• Torespondtodeficiencyinglobalaggregatedemand—largespillovers

• Topreventasynchronousmonetarypolicies

• HopewasthatG-20wouldprovidethat

• Hasn’thappened

ConcludingRemarks:TherewillbepoliticalandsocialconsequencesofWeakGlobalEconomy

• Highyouthunemployment isespecially troublesome—hysteresiseffect

• InEurope,growthinextremistpartiesandseparatistmovements

• InUS,angerevident insupportofanti-establishment candidates

• Everywhere, underinvestment inpeople, infrastructure,andtechnologywill lower growth

• Inemergingmarkets, thewaythelessbenignconditions aremanagedwilldetermine distributional effects

• Whichinturnwillaffectgrowthanddevelopment prospectsgoingforward

TheWorldEconomy:TheWayForward

• TheNewMediocre,theGreatMalaise,SecularStagnationarenotinevitable

• Theyaretheresultoffailedpolicies

• Reversingthosepoliciescouldhelprestoreeconomicgrowth