Download Rebalancing the World Economy

Rebalancing the World Economy
World Wide GDP
•
Gross domestic product (GDP) is
fundamental measure of production
Expenditure Approach
• GDP = private consumption + gross
investment + government spending +
(exports − imports)
• GDP = C + I + G + (X − M)
Income Approach
• GDP = compensation of employees + gross
operating surplus + gross mixed income +
taxes, less subsidies on production and
imports
•
2008 WW GDP ($63b)
- USA($14.5b)
-Japan($4.8b)
-China($4.2b)
-Germany ($3.8b)
USA
•WW II spending, and then increased productivity with Europe/Japan growth
•1946-1980 balance growth
•Rising asset prices and ever easier access to credit (ex – GE)
•Americans spent more than they produced and foreign borrowing increased
•Financial Crisis, destruction of $13trillion consumer wealth, no credit
• Collapse of consumption, increased saving but big fiscal stimulus package
•America’s decreased demand will decrease world growth
•Where the growth will come from? Govt stimulus/Consumer recover/Exports
USA … contd
•
Govt Stimulus cannot go on for ever
– Will increase foreign debt
– Consumer demand decreases for longer time period
• Productivity Increase might help increasing income
but, existing debts will not allow America to consume more
•
Export is rising, but not to extend as to compensate for reduced Consumption
–
–
–
–
–
–
Weaker dollar would help, but China should also appreciate yuan
Resource shifting is difficult (Chart 2)
Emerging Market consumers cannot create that demand
Investments has also decreased
Low Growth and unemployment
Political risks such as Protectionism comes in
China
• $400 billion Current Account Surplus or 10% of GDP
•Trade surplus shrinking, growth mainly because of domestic demand growth(10%)
•Exports will decrease from 35% to 24.5 % of its GDP
•Shift due Biggest fiscal stimulus and loosening of credit (as % of GDP)
•Net Exports only one-tenth of its growth in last 10 years
•So what is the problem? – INVESTMENT has risen from 35% to 45% while PRIVATE
CONSUMPTION decreased from 49% to 35% from 1990.
•So What?
China … contd
•
•
•
Excess investment would make excess capacity leading to default in bank loans
Hence, more growth from consumption than investment (total is domestic
demand)
Why Private Consumption is less?
– Poor social safety net, education, health
(spending vis 6% of GDP vs 25% in OECD countries) -- MYTH
– Greater income inequality makes rich people save more
– Company savings are increasing
– Capital Intensive production encouraged by low interest
rate and no dividends
•
Why can be done?
– Easy Credit, More Private Participation, Land reforms
– Exchange Rate to rise, increasing real purchasing power
•
•
Structural Reforms would require harder political requirements
Final Word: Half hearted effort to increase domestic demand is bad for china and
the world, since long term growth not sustainable
Germany
•In 2007, Spain has largest current account deficit outside America
•In 2007, Germany has $263b surplus, next to China’s $372b
•Germany benefitted from sales to Spain, France, Greece, Italy and UK/US
•Euro was stable with no foreign exchange currency crisis
•With Crisis, Germany’s(shock absorber) surplus decreased - 6.6% to 3.4% GDP
•Germany specializes in machinery and durable goods (ex - cars)
•Consumer spending flat - short-time working, Govt cash incentives(car)
• Prevents a broader necessary economic restructuring (as Spain Construction)
•Export dependency – trim manufacturing costs, wages (ex - 1990 unification)
Germany …contd
• Excess of domestic saving over investment
• Mature export industry, capital not finding way
to new ventures
• Equality of pay, welfare policy, wage floors
– less service sector, savings and skill workers going abroad
• 102nd in 181 countries in Doing Business survey
• After crisis, foreign demand not increasing much, short-time working
schemes will expire
• Excess savings to recycle – toxic assets, and poor acquisitions (Diamler and
Chrysler, BMW)
• Danger of taking wrong lesson (folly on relying on finance, services)
• Root reason – wrong use of savings
• Germany should use savings for itself (ex - ageing economy)
Japan
•
•
•
•
•
•
•
•
Japanese have 7days annual holiday on average
Govt. slashed cost of toll roads
1986 -> raise yen value -> dollar slid -> reverse course -> cut interest rate -> land bubble
Exports growth increased from 4% in 1992 to 10% annually in 2002-2007
Consistent Current account surplus means a non-cyclic issue
House-holds were the greatest hoarders
Country kept spending less than it earned
Less Domestic Demand
–
–
–
•
Shrinking working age population and growing oldies
Small firms recruit 70% of working population
Disparity in wages “unionized” and non-regular worker
5 yrs to 2007, GDP growth resulted only 1.1% private consumption increase
Japan .. Contd
•
Why Japan is serial exporter?
•
– Government support
– Sense of shared mission among
employees
– Obsession with details
•
Why is spending less?
– Respect for hard-work
– Save money to rebuild home every 15
years
– Reluctance to borrow
•
•
–
–
–
–
•
Eventually tax to increase, but better
to built the services industry
R&D one-quarter the American Level
Competition is stifled
IT Services poor !!!
Investment Restrictions in telecom and
travel
To Do List
– Industry Restructuring that would
require job losses initially
– Slash regulations in service industries
– Energy, transport, health care, farming
should be liberalised
– Encourage domestic and foreign
investment
Japan’s path out of crisis
– Short Term: Govt stimulus to increase
exports to China and America
– Long Term: Rebalancing the economy as
public-debt-GDP ratio is 180%
Why service industry is poor?
•
At present only exports and
regularizing contract labor are main
focus
So, what is the future of world?