"Europe's position in the emerging new global

economy”

ISEO Summer school

Daniel Gros

• 2030 horizon forward, 1960s (where

possible) backwards.

• Main global trends, growth model

• Drivers of (Hyper-)globalisation and

welfare analysis.

• Implications for Europe

Scope of talk

• Slowdown in population growth could

result in stabilization by 2030

= > perspective of demographic challenge

and resource scarcity changes

• Catch up of emerging economies is a

robust trend

= > only speed and quality are uncertain

Two major trends

Population: The changing perspective

of the demographic challenge Bias in past projections means that population may stop growing by 2030

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12000

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16000

18000

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2000

4000

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UN Population forecast

Medium fertility

Low fertility

Past

High fertility

8.5 billion under

the medium variant

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500

2015 2020 2025 2030 2035 2040 2045 2050 2055 2060 2065 2070 2075 2080 2085 2090 2095 2100

High population growth Low population growth

Global resource use:

stabilization in sight?

Per capita resource use with the current growth rate (approximately), thereafter constant

resource use, combined with UN population forecasts

1. As resource use stabilization gets at least in sight Malthusian view less dominant.

2. Some resources might be too abundant known reserves of (hydro)carbon >> amount that can be burned while keeping global climate in check.

Natural resources: too tight or

too abundant?

• Reserves are stock, emissions flow. But still:

• Assume want to stick to less than 2°C warming (80% probability).

global carbon budget for 2000-2050 is 900 GtCO2, minus emissions until now => budget 2015 to 2050 = 500 GtCO2.

But known reserves = 3 000 GtCO2

(ca. 600 oil, 450 gas, rest coal).

=> Must leave most of coal and substantial part of oil and gas underground (until 2050).

A longer-term perspective

on convergence/catch up

What drives economic growth?

AK model: Y = A Kα L(1-α)

With A = technology, know how

• K = capital,

• α = share of capital in income

• L = effective labor = lh, with l raw labor and h human capital.

• N.b. Y/l = A (K/L)α h(1-α) = A (k)α h(1-α)

Three pillars sustain convergence (today?)

1. Openness / FDI (convergence in A)

2. High savings (increase in k)

3. Human capital (increase in h)

Will concentrate later on 1

Catch up of emerging economies: Recent,

but this time is really different

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5%

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30%

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45%

50%

1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030

Relative US real GDP per capita, chained PPP

IND/USA CHN/USA

The spread of education:

basic skill assured everywhere

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1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030

Share of population with at least secondary

education

USA

China

India

Innovation capacity: some uncertainty (quantity and quality)

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Graduates population, East and West compared

West: US, Europe and Japan

East: China and India

Capital stocks ($ billion, 2005 dollars) Capital Intensity (thousands of

2005 US dollars per capita)

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US CHN IND

JPN EU SSA

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1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030

US CHN IND

JPN EU SSA

Capital accumulation around the world

• Rapidly increasing level of education

facilitates further convergence in A

(TFP) + capacity for autonomous

advance, national and global (ideas

non rival).

• Role of quality of education plus social

environment crucial for growth, but

difficult to measure.

Technology & innovation

Who will be driving global

growth? 2000-2010 2010-2020 2020-2030

PPP Current

USD

PPP Current

USD

PPP Current

USD

CHN 29% 20% 33% 33% 34% 39%

IND 10% 5% 12% 6% 13% 8%

JPN 2% -1% 2% 7% 2% 7%

USA 11% 11% 9% 8% 7% 7%

EU 10% 23% 8% 11% 7% 9%

SSA 3% 3% 4% 3% 5% 3%

ROW 35% 38% 33% 32% 32% 28%

Smaller EU: Bilateral trade flows and

GDP share of the power triangle

Based on MIRAGE, MaGE and IMF

2030

EU

15.5

%

USA

14.3%

CHN

25.1%

GDP

world

shares

Trade flow

892bn€

670bn€

841bn€

2012

EU

23.1%

USA

21.9%

CHN

11.5%

GDP

world

share

s

Trade flow

498bn€ 478bn€

466bn€

2010 2030

28

37

EU

2010 2030

43

53

USA

2010 2030

10

17 SAM

2010 2030

31

47

JPN

2010 2030

7

24

CHN

2010 2030

2 4

SSA

2010 2030

3

8

IND 2010 2030

5 10

NAF

2010 2030

35

49

CAN

2010 2030

34

50

AUS

2010 2030

14

35

RUS

GDP growth in 2030

GDP growth PPP in 2030 (blue shading) and GDP per capita PPP in thousands of USD (green bar charts)

Bilateral FDI

Based on MIRAGE, MaGE, BEA and OECD data

FDI assets (stock

) FDI flow

EU

€6.8tr

USA

3.4tr €

CHN 0.3tr €

273bn€ 36bn€

4bn€

• Extra-EU trade likely to increase in relative importance (gravity).

• Main trading blocks still EU-US-China

• Some re-shoring possible unless India replaces China.

• Trade liberalization potential with EMEs.

• => BRICS strategy rather than TTIP?

The Position of the EU in the

Global Trading System?

• The importance of Intra-EU trade

relative to extra EU-trade will fall.

Centrifugal forces undermining

EU integration

60,45

39,55

Intra-EU

Extra-EU

2010

53,50

46,50

Intra-EU

Extra-EU

2030

• Brexit will re-inforce this trend.

Trade and Globalisation

• Should not extrapolate trend of last

two decades

• Trade: might slow down for EMEs.

• Financial: might slow down among

advanced, but accelerate among EMEs

(especially FDI into OECD).

Globalisation:

Trade & financial flows

Longer term trend

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1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

World trade (exports) as percent GDP

Avant propos: why do we care?

• Globalisation often defined as increase in volume of trade (relative to GDP), but welfare gains from trade arise from elimination of trade barriers.

• More trade is good if it is the result of lowering barriers.

• Gains from standard trade liberalization largely exhausted among advanced economies (not yet among EMEs).

• => recent slowdown in trade not due to increased tariffs. Other barriers (NTBs) also increased little.

Centre for European Policy Studies • www.ceps.eu

26

Transport costs no longer falling

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World transport costs: Imports (CIF)/ Exports (FoB)

Trade (% GDP) and transport costs (= cif/fob factor)

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Trade and transport costs

Trade, tariffs and transport costs

Over the last two decades.

How to explain ‘hyper globalization’?

Cannot appeal to lower transport costs

Cannot appeal to lower tariffs (at least among advanced economies).

‘Recent development’

• Expansion of trade (in goods) relative to GDP has been driven by temporary special factors (oil prices and dispersion of growth) over the last two decades. No need to appeal to lower transport costs, or policy, or something else.

• => recent slowdown in trade mostly due to reversal of these factors. No need to become alarmist or impute it to populism, protectionism etc.

• The impression of globalization arises because a shrinking part of the economy (manufacturing) has become more open.

• Problem is juxtaposition of small very ‘globalized’ manufacturing (15 % of economy) and the remainder 85 %, which remains largely closed.

• Globalisation = welfare gain?

– Trade liberalization by and among advanced economies close to complete already in 1999 (tariffs < 2-3 %).

– But not for emerging market economies (EMEs) with tariffs around 8-10 % (plus more peaks).

– => EMEs tariffs 4 times higher => welfare loss 16 times higher.

The challenge: Explain globalization when trade barriers and transport costs do not fall any more.

Technical point on welfare

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Demand and supply, partial equilibrium, static

Supply Demand

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Titolo del grafico

Supply Demand World price Price plus costs Price plus higher costs

Key takeaways from standard, static approach

• Welfare loss from (small) tariff is second order.

• Loss from (small) transport costs is first order.

• Dynamic considerations, externalities, etc. can overturn, but also reinforce conclusions, but many different ways to model them.

The evidence on globalisation

• Exhibit 1 is often the ratio of trade to GDP.

• Driven by oil and raw material prices over last 20 years.

• Higher oil prices boost immediately value of global trade even at constant volumes.

• Higher oil prices means importers have to export more manufactures to pay for their fuel bill.

• => increase in trade/GDP ratio largely (not totally) driven by raw materials.

• Trade net of raw materials and exports to pay for them increased much less.

Trade without (effect of) raw materials much less dynamic

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1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

World trade (exports) as % of GDP

Total Manufacturing Net Manufacturing

Increase 3 %

points

Increase 9 % points

For manufacturing globalization is not a mirage

Trade (in manufacturing) has not increased much relative to GDP.

But trade in manufacturing has increased in relation to the output of the sector.

Impression of CEOs of manufacturing firms that they are globalizing is correct.

But the share of manufacturing in the overall economy is declining.

Difference between manufacturing and rest of economy increases, voters at large care less about the needs of this shrinking sector.

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1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Trade: an expanding part of a declining sector

Trade in manufaturing as % of output of sector Manufacturing value addes as % of GDP

Fall 6 %

Points of GDP

More than

doubled

Where globalization is real II: Global (regional) value chains

Increase in manufacturing trade driven partly by growing importance of ‘Global Value Added Chains’. In reality these are mostly regional chains. Value added chains across border key in three regions: 1. ‘Factory Europe’ (around Germany) 2. ‘Factory North America’ (NAFTA: low wage Mexico-US,

automotive CAN-US). 3. ‘Factory Asia’ (around low wage coastal China) Outside these regional ‘factories’ domestic value added in exports > 85-90 % (and little changed since 1995). + Role of China changing rapidly

China in the global value added chain

China switching from globalization to de-globalization factor

(without new protectionism) • When China was small relative to US and EU its growth

increased ratio of traded to GDP.

• Now China is as big as US or EU.

• => further growth of China reduces trade! (Because more components will be available in China, no need to import them anymore. This happens naturally, without any intervention of authorities.)

• General point for the academics: trade/GDP ratio reaches maximum when all country of equal size => trade a function of Gini coefficient of global GDP.

Factory Europe and its elements

• Apple case not representative: 70% of

value-added in Chinese export is local!

• In the EU

– As a whole: proportion of foreign inputs

in EU export low (12%).

– Part of intermediate goods import are

simply raw materials.

The Global or Regional Value

Chain?

Why Europe remains relatively pro? It is doing well in manufacturing exports

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6,00%

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18,00%

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Shares in global manufacturing exports

China Japan US EU

US: fall by 4 %

Points of GDP

EU: constant

Who takes care of the global system

• US was ‘benevolent hegemon’ in 1960s, large and trade not crucial for growth at home

• => can affort concessions on market access.

• No longer today?

• Today ‘Triad’ (US, EU (de facto now euro area) China).

• Worst possible constellation (Krugman 1995 ‘Is bilateralism bad?’).

47 Centre for European Policy Studies • www.ceps.eu

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Leaders and followers in global trade 1960

Leader(s)

Nash (small open)

Passive (small closed)

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Leaders and followers in global trade 1960

49 Centre for European Policy Studies • www.ceps.eu

US 1960

US today

China today,

China 2006

EA today

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Size

= t

rad

e /w

orl

d t

rad

e

Openness = trade/GDP

Leaders

Followers

Nash (small open)

• Some factors exhausted:

– Opening of China plus FSU.

– Growth of BRICS

– Earl stage of growth cycle favors manufacturing/trade.

– Increase in commodity prices

– Transport costs no longer decreasing (at least for goods).

Globalisation of trade unlikely

to continue

Trade and development

China (2030)

China (2013) India (2013)

India (2030)

Exports

GDP

capita

SSA (2013) EU, US (2013)

SSA (2030)

Exports/GDP

• Services about 40% of value added in goods trade.

• + services directly traded (10%)

=> About one half of all value added in trade is services.

=> Productivity in services key element of competitiveness!

– business services key

Services in the Global Value

Chain

• OECD used to be dominant, but possible retrenchment as global credit boom ends.

• Non-OECD accounts for most savings.

• EMEs grow more than proportionally as source countries (especially FDI).

=> Sharp shift from North-> ‘South’

to (former) ‘South’ -> ‘South’ &

(former) South’ -> ‘North’.

Financial globalisation

Financial flows grow more than

proportional to GDP growth

China (2030)

China (2013) India (2013)

India (2030)

Financial Outflows

GDP

capita

SSA (2013) EU, US (2013)

SSA (2030)

Fin. Flows (FDI

out) /GDP

Trade and financial flows across

economic development

China (2030)

China (2013) India (2013)

India (2030)

Exports

Financial Outflows

GDP capita

SSA (2013) EU, US (2013)

SSA (2030)

Exports/GDP Fin. flows/GDP

• Key moment in the demographic

transition, when demographic dividend

turn into burden

• How Japan managed it

• …why this option is not available for

everybody (EU, US and China) together

Population and Savings

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2000

2005

2010

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CHN IND JPN

USA Europe SSA

Japan Crisis EU & US crisis

• An increasing share of world GDP is produced by non-democratic countries

• Large share of EU exports go to corrupt countries with questionable rule of law

And aside on values ….

*1 = highest standard of Political Rights, 7 = lowest

Share of EU in global economy will shrink, but remain part of G-3 until 2030, but relative position in science, innovation etc. down.

• So far held position in global trade (manufacturing), but gravity implies extra-trade increasing.

• Global value chains within Europe (East-West).

Some conclusions

Thank you for the attention!

• Overinvestment cycle may lead soon to excess capital accumulation (K-overhang Japanese style)

=> investment may fall drastically

• If savings do not adjust accordingly, China’s current account may display a large surplus which will need to be absorbed by the RoW, including Europe.

=> This may represent a huge challenge for Europe

Falling investment in China

without rebalancing

Migration

• Migration: pressure on EU might

diminish as income differential with

sending countries (MENA) diminishes.

Youth Bulge over

in the Mediterranean

reduced potential for political strive and upheavals

Need to focus policies on

higher employment and education standards

energy

Youth as % of total population

Sub Saharan Africa

Europe