1
Ralph Miliband Series on the Restructuring of World Power
Grasshoppers, Ants and Locusts: the future of the world economy
Martin WolfAssociate editor and chief economics commentator, Financial Times
Professor David HeldChair, LSE
Ants, grasshoppers and locusts: prospects for the world economyMartin Wolf, Associate Editor & Chief Economics Commentator, Financial Times
Ralph Miliband Lecture
16th March 2011
London School of Economics
3
Ants, grasshoppers and locusts
4
Ants, grasshoppers and locusts
1. Who are our dramatis personae?
2. What lay behind the crisis?
3. Where are advanced countries now?
4. Why do emerging economies matter?
5. Why does rebalancing matter?
6. Why is the eurozone the world in miniature?
7. Conclusion
5
1. Who are our dramatis personae?
• I explain where we are in terms of ants and grasshoppers and locusts:– Ants save:
• Surplus countries; and
• Western non-financial companies;
– Grasshoppers spend:
• Deficit countries; and
• Households in these countries.
– Locusts intermediate.
– These relationships need to change if we are to have a healthy world economy.
6
2. What lay behind the crisis?
• What we have seen is a “developing country” crisis at the core of the world economy. Why?
1. Undue belief in the “great moderation”;
2. Emergence of global imbalances and extraordinary reserve accumulations in the late 1990s and early 2000s;
3. Accommodative monetary policy aimed at targeting inflation;
4. Low real and nominal interest rates and a “reach for yield”;
5. Innovation in the financial sector, to provide notionally safe, high-yielding assets – 64,000 triple-A rated securities; and
6. Failures of commission (risk-weighted capital ratios and reliance on ratings) and omission (deregulation of securities and housingmarkets) in financial regulation.
7
2. What lay behind the crisis? Imbalances
THE RISE OF THE IMBALANCESGLOBAL CURRENT ACCOUNT IMBALANCES - PAST
AND PROSPECT(share of world GDP)
-3
-2
-1
0
1
2
3
4
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
US OIL DEU+JPN OCADCCHN+EMA ROW Discrepancy
Source: IMF, WEO October 2010
8
2. What lay behind the crisis? Imbalances
FOREIGN CURRENCY INTERVENTION
GLOBAL CURRENCY RESERVES
$0
$1,000,000
$2,000,000
$3,000,000
$4,000,000
$5,000,000
$6,000,000
$7,000,000
$8,000,000
$9,000,000
$10,000,000Ja
n-9
9
Jul-9
9
Jan
-00
Jul-0
0
Jan
-01
Jul-0
1
Jan
-02
Jul-0
2
Jan
-03
Jul-0
3
Jan
-04
Jul-0
4
Jan
-05
Jul-0
5
Jan
-06
Jul-0
6
Jan
-07
Jul-0
7
Jan
-08
Jul-0
8
Jan
-09
Jul-0
9
Jan
-10
Jul-1
0
China Japan Other Asia Other developing Other industrial
9
2. What lay behind the crisis? Imbalances
US FINANCIAL BALANCES FROM 1990(per cent of GDP)
-12.0%-10.0%
-8.0%-6.0%-4.0%-2.0%0.0%2.0%4.0%6.0%8.0%
199
0-I
199
0-IV
199
1-III
199
2-II
199
3-I
199
3-IV
199
4-III
199
5-II
199
6-I
199
6-IV
199
7-III
199
8-II
199
9-I
199
9-IV
200
0-III
200
1-II
200
2-I
200
2-IV
200
3-III
200
4-II
200
5-I
200
5-IV
200
6-III
200
7-II
200
8-I
2008
-IV
2009
-III
2010
-II
Government Financial Balance Household Financial BalanceBusiness Financial Balance Foreign Financial Balance
HOW THE US IMBALANCES EMERGED
10
2. What lay behind the crisis? Imbalances
NET CORPORATE SAVINGS
-2.00%
-1.00%
0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
6.00%
7.00%
8.00%
9.00%
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Germany Japan UK USA
HOW NON-FINANCIAL CORPORATES SAVED
11
2. What lay behind the crisis? Leverage
HOW NON-FINANCIAL CORPORATES SAVED
US PRIVATE SECTOR DEBT OVER GDP
0.0%
50.0%
100.0%
150.0%
200.0%
250.0%
300.0%
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
Households Non-financial Business Financial Sectors
12
2. What caused the crisis? Leverage
HOW NON-FINANCIAL CORPORATES SAVED
PRIVATE SECTOR DEBT(relative to GDP)
0.0%
20.0%
40.0%
60.0%
80.0%
100.0%
120.0%
140.0%
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
III
Households Non-financial Business Financial Sectors
13
3. Where are the advanced countries now?
• The economic collapse was large.
• The rescue has been dramatic:
– Implicitly, the entire liabilities of the core financial system were nationalised;
– Monetary policy has been unprecedented; and
– Fiscal policy has been on a war-time footing.
• This has worked. But we are not back to normal.
14
3. Where are the advanced countries now?
• Carmen Reinhart and Kenneth Rogoff, in their masterpiece, This Time is Different, argue that the consequences of previous financial crises in advanced countries includes:
– Profound declines in output and employment: the unemployment rate rises an average of 7 percentage points over the down phaseof the cycle, which lasts on average over four years, while output falls (from peak to trough) average over 9 percent
– Exploding public debt: debt rises by an average of 86 percent of GDP. The main cause of debt explosions is not the widely cited costs of bailing out and recapitalizing the banking system, but the recessions.
– By these standards, we have done quite well. Nevertheless,…..
15
3. Where are the advanced countries now?
THE DECLINE IN HIGH-INCOME COUNTRIES
GDP AFTER THE CRISIS
88.0
90.0
92.0
94.0
96.0
98.0
100.0
102.0
Q12008
Q22008
Q32008
Q42008
Q12009
Q22009
Q32009
Q42009
Q12010
Q22010
Q32010
Q42010
France Germany Italy Japan UK US
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3. Where are the advanced countries now?
A WEAK RECOVERY IN 2011?
SUCCESSIVE CONSENSUS FORECASTS FOR 2011
0
0.5
1
1.5
2
2.5
3
3.5
US UK
Japa
n
Euroz
one
German
y
Franc
e
Italy
Spain
Jan-10 Jun-10 Nov-10 Jan-11
17
3. Where are the advanced countries now?
TOTAL US PRIVATE BORROWING(as per cent of GDP)
-20.0%-15.0%-10.0%
-5.0%0.0%5.0%
10.0%15.0%20.0%25.0%30.0%
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2010
2
Households Non-financial Business Domestic Financial Sectors Total Domestic Private
THE US LEVERAGE CYCLE
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3. Where are the advanced countries now?
EXPLOSION OF FISCAL DEFICITS(as per cent of GDP)
-14
-12
-10
-8
-6
-4
-2
0
2
4
Canada France Germany Italy Japan United Kingdom United States
2006 2007 2008 2009 2010 2011
FISCAL FIREPOWER USED
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3. Where are the advanced countries now?
NET PUBLIC SECTOR DEBT OVER GDP
0
20
40
60
80
100
120
140
160
180
Canada France Germany Italy Japan United Kingdom United States
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Source: IMF
THE SOVEREIGN DEBT CRISIS
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4. Why do emerging economies matter?
• The rapid rise of emerging countries, above all China has played a crucial role in this story
• Three aspects may be particularly important:
– Dis-inflationary shock;
– Real wages and the credit cycle;
– Global imbalances
• It is particularly remarkable that China has emerged as the fastest growing country in the world and the largest capital exporter. Thus it combines the twin roles of the UK and US in the late 19th century.
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4. Why do emerging economies matter?
GDP IN THE CRISIS
100.0
105.0
110.0
115.0
120.0
125.0
130.0
135.0
140.0
145.0
2005
120
05 2
2005
320
05 4
2006
120
06 2
2006
320
06 4
2007
120
07 2
2007
320
07 4
2008
120
08 2
2008
320
08 4
2009
120
09 2
2009
320
09 4
2010
120
10 2
Emerging Economies Advanced Economies
Source: Federal Reserve
CRISIS – WHAT CRISIS?
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4. Why do emerging economies matter?
MORE STRONG GROWTH IN 2011?SUCCESSIVE CONSENSUS FORECASTS
FOR 2011
0.01.02.03.04.05.06.07.08.09.0
10.0
China India AsiaPacific
(NBExcluding
Japan)
Russia EasternEurope
Brazil LatinAmerica
World
Jan-10 Jun-10 Nov-10 Jan-11
23
4. Why do emerging economies matter?
CHINA RISES TO THE TOP OF THE SURPLUS LIST
CURRENT ACCOUNT BALANCES ($bn)
-$100.0
$0.0
$100.0
$200.0
$300.0
$400.0
$500.0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
China Germany Japan
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4. Why do emerging economies matter?
COMPOSITION OF CHINA'S FINAL DEMAND
-10.0
0.0
10.0
20.0
30.0
40.0
50.0
60.0
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
Private consumption Government consumption GFCF Net exports
HOW INVESTMENT SOARED
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5. Why does rebalancing matter?
• The crisis has left important high-income countries with damaged financial systems, overleveraged household sectors and large fiscal deficits
• These advanced countries are no longer in a position to absorb net exports of capital from emerging economies and the chronic surplus advanced countries will not take up the slack
• If damaged advanced countries are to recover, while de-leveraging their private sectors and reducing fiscal deficits, they will need higher corporate investment or a large shift in net exports, or both
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5. Why does rebalancing matter?
HOW PRIVATE DEFICITS COLLAPSED
CHANGE IN SECTORAL BALANCES (per cent of GDP)
-15
-10
-5
0
5
10
15
Germany Japan France Italy UK US
2006-10 General Government 2006-10 Net Capital Inflow 2006-10 Private
Source:IMF, WEO October 2010
27
5. Why does rebalancing matter?
HOW PRIVATE DEFICITS COLLAPSED
FINANCIAL BALANCES IN 2010
-15
-10
-5
0
5
10
15
Germany Japan France Italy UK US
2010 General Government 2010 Net Capital Inflow 2010 Private
28
5. Why does rebalancing matter?
CURRENT ACCOUNT BALANCES 2010 ($bn)
-$467
-$58 -$52 -$50 -$46 -$44 -$44 -$38 -$30 -$15 -$12 -$11
$6 $6 $26 $29$70
$166$200
$270
-$600
-$500
-$400
-$300
-$200
-$100
$0
$100
$200
$300
$400
United
Sta
tes
Italy
Brazil
United
Kingd
omFra
nce
Canad
aIn
diaTur
key
Austra
liaSou
th A
frica
Mex
ico EUArg
entin
aIn
dones
iaKor
eaSau
di Ara
biaRus
siaJa
panGer
many
China
Source: IMF. WEO database October 2010
THE CHALLENGE OF ADJUSTMENT
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5. Why does rebalancing matter?
BALANCE OF PAYMENTS OF EMERGING ECONOMIES ($bn)
-800
-600
-400
-200
0
200
400
600
800
1000
2008 2009 2010f 2011f
Current Account Balance Private Inflows
Official Inflows Equity Investment abroad by residents
Resident Lending Reserves (-=increase)
Source: IIF
THE GLIMMERINGS OF ADJUSTMENT
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6. Why is the eurozone the world in miniature?
• The eurozone is the world in miniature
• The eurozone is facing a long-running crisis
• It needs to restructure debt
• But it also needs to rebalance
• Can it do so?
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6. Why is the eurozone the world in miniature?
THE GOOD, THE BAD AND THE UGLY
CURRENT ACCOUNT IMBALANCES IN THE EUROZONE(as a share of eurozone GDP)
-4.0%
-3.0%
-2.0%
-1.0%
0.0%
1.0%
2.0%
3.0%
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Germany Netherlands Spain France Italy Portugal and Greece Eurozone
Source: IMF, WEO, April 2010.
32
6. Why is the eurozone the world in miniature?
ROAD TO THE FISCAL DEFICITS
GENERAL GOVERNMENT BALANCE(as per cent of GDP)
-14
-12
-10
-8
-6
-4
-2
0
2
4
2005 2006 2007 2008 2009 2010 2011
Portugal Ireland Spain Greece
Source: IMF, WEO, April 2010
33
6. Why is the eurozone the world in miniature?
ROAD TO THE FISCAL DEFICITSNET PUBLIC DEBT
(ratio to GDP)
-20.0
0.0
20.0
40.0
60.0
80.0
100.0
120.0
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Greece Ireland Portugal Spain
Source: OECD
34
6. Why is the eurozone the world in miniature?
NUMBER OF BREACHES OF THE 3 PER CENT DEFICIT RULE
0 1 2 3 4 5 6 7 8 9 10
Greece
Italy
France
Germany
Portugal
Austria
Ireland
Netherlands
Spain
Belgium
Finland
Luxembourg
Source: Unicredit
THE GOOD, THE BAD AND THE UGLY
35 6. Why is the eurozone
the world in m
iniature?
TH
E G
OO
D, T
HE
BA
D A
ND
TH
E U
GLY
SP
RE
AD
S O
VE
R B
UN
DS
-200 0
200
400
600
800
1000
120001/01/1999
01/07/1999
01/01/2000
01/07/2000
01/01/2001
01/07/2001
01/01/2002
01/07/2002
01/01/2003
01/07/2003
01/01/2004
01/07/2004
01/01/2005
01/07/2005
01/01/2006
01/07/2006
01/01/2007
01/07/2007
01/01/2008
01/07/2008
01/01/2009
01/07/2009
01/01/2010
01/07/2010
Portugal
ItalyIre
landG
reece
Spain
36
6. Why is the eurozone the world in miniature?
LOST COMPETITIVENESS IN THE PERIPHERY
UNIT LABOUR COSTS(Total economy relative to Germany (Q1 2000 = 100))
95
100
105
110
115
120
125
130
135
140
Feb
-99
Jun-
99
Oct
-99
Feb
-00
Jun-
00
Oct
-00
Feb
-01
Jun-
01
Oct
-01
Feb
-02
Jun-
02
Oct
-02
Feb
-03
Jun-
03
Oct
-03
Feb
-04
Jun-
04
Oct
-04
Feb
-05
Jun-
05
Oct
-05
Feb
-06
Jun-
06
Oct
-06
Feb
-07
Jun-
07
Oct
-07
Feb
-08
Jun-
08
Oct
-08
Feb
-09
Jun-
09
Oct
-09
Feb
-10
Eurozone Spain France Ireland Italy
37
7. Conclusion
• The world economy has changed in big ways:
– End of private leverage cycle in high-income countries;
– End of reliance on US as borrower and spender of last resort;
– Emergence of huge developed country sovereign debt problems;
– Big challenge of global rebalancing and returning to stable global growth.
– Grasshoppers become antlike and ants become grasshopperlike – and locusts behave themselves!
– Is this too much to hope for? Perhaps
38
Ralph Miliband Series on the Restructuring of World Power
Grasshoppers, Ants and Locusts: the future of the world economy
Martin WolfAssociate editor and chief economics commentator, Financial Times
Professor David HeldChair, LSE