Structural Transformation and Sustainable Growth of the Global Economy Beyond the Crisis and Lessons...

Structural Transformation and Sustainable Growth of

the Global Economy

Beyond the Crisis and Lessons for Global Governance

Amar BhattacharyaG-24 Secretariat

Lecce, May 31, 2013

Overview

1. Structural transformation in the global economy

2. Impact and legacy of the crisis3. Sustainable growth beyond the crisis4. Implications for global governance

2

Overview



3

Structural Transformation

World Economy at a point of structural transformation in the relationship and position between developed and developing countries

Change has been highlighted and accentuated by the crisis but had started well before

For almost 60 years developing country growth tracked that of developed countries and with depreciating countries led to growing divergence

During the past decade there has been a structural decoupling even though there are strong cyclical links

4

Growth in EMDCs has consistently outpaced AEs for decades

5Source: G-24 calculations based on data from World Economic Outlook, IMF and World Development Indicators, World Bank

This trend is evident in G-24 countries, especially when GDP is weighted

6

-6.0

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

10.0

1960

1963

1966

1969

1972

1975

1978

1981

1984

1987

1990

1993

1996

1999

2002

2005

2008

2011

G-24 Simple AverageHigh Inc. OECD - GDP WeightedG-24 GDP Weighted

Per-Capita GDP Growth 1960-2012

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

1960

1963

1966

1969

1972

1975

1978

1981

1984

1987

1990

1993

1996

1999

2002

2005

2008

2011

G-24 Simple AverageHigh Inc. OECD -GDP WeightedG-24 GDP Weighted

Per-Capita GDP Growth Trend 1960-2012(Hodrick-Prescott Filter)

Source: Canuto (2013), World Bank Poverty Reduction and Economic Management Department


Not a story of China and India or of a few emerging markets and developing countries

Prior to crisis, 94 EMDCs recorded growth in excess of 5 percent per annum and 90 percent of EMDCs grew faster than the average of AEs

Trend will be continued; although average growth of both AEs and EMDCs lower than before the crisis, differential will be sustained

Particularly striking that low income countries and SSA are part of this trend

Underpinning this impressive growth has been a virtuous cycle of rising savings and investment, growing trade and macroeconomic resilience

7

8

Num

ber

of

coun

trie

s

Advanced Economies EMDCs

Increasing Number of EMDCs are on path to Convergence

Dispersion of Average Growth

<2.5% 2.5-5% >5%

Source: G-24 calculations based on data from World Economic Outlook Database April 2013, IMF.

Income groups are gradually converging

0

20

40

60

80

100

120

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

Number of HIC countries Number of MICs Number of LICs

9

Long-term savings in EMDCs have been on a rising trend

10

0

10

20

30

40

50

60

1974-84 1985-94 1994-02 2003-05 2006-08 2009-10 2011-15

Advanced Countries East Asia and Pacific Latin America and the Caribbean

Middle East and North Africa South Asia Sub-Saharan Africa

Source: G-24 calculations based on Loayza et al. (2000) World Economic Outlook, IMF and World Development Indicators , World Bank databases

Investment and Savings Trends in Developing Countries, 1994-2015

(Percent)

Source: G-24 calculations based on data from World Economic Outlook Database, IMF


Sustained growth differential between AEs and EMDCs leading to a profound change in the global economic landscape with the share of EMDCs in the global economy measured in PPP terms greater than that of AEs

Similar trend between the G7 and the BRICS reflecting a new rebalancing of power

Convergence between GDP at market prices and GDP PPP in contrast to the pre-2000 an important element of the new story of convergence

12

Share of GDP (Market Prices) Share of GDP (PPP)

13Source: G-24 calculations based on data from World Economic Outlook Database, IMF


EMDCs account for increasingly large shares of global GDP

Share of GDP (Market Prices) Share of GDP (PPP)

14Source: G-24 calculations based on data from World Economic Outlook Database, IMF

G7 BRICS

EMDCs account for increasingly large shares of global GDP

Growing Convergence Between GDP at Market Prices and GDP PPP

(Share of EMDCs in Global GDP)

0.00

10.00

20.00

30.00

40.00

50.00

60.00

GDP PPP GDP at Market Price GDP MP w PPP Convergence

15Source: World Economic Outlook, IMF

Overview



16

The crisis has been deeper and more prolonged than anticipated

17

GD

P (

% c

hang

e)

Europe Has Been At the Center of the Crisis

Europe has been principal factor behind the deepening and prolongation of the crisis

Delayed response in setting up effective firewall to bolster confidence

Excessive emphasis on austerity has not led to expected improvements in debt sustainability or necessary internal devaluations

Euro area deleveraging has been a major constraint There has been demand rotation but not adequate demand

support in AEs Reliance on prolonged unconventional monetary policies have

had negative spillover effects

18

Euro-area deleveraging has been a major constraint

19Source: World Bank, Global Economic Prospects, 2012 (based on European Central Bank Datastream)

Annualized increase in lending, Euro Area 3m/3m saar

Impact of Crisis on EMDCs

Large and immediate impact through trade channel but recovery faster and more sustained in EMDCs

Financial flows were also affected but differentially Long-term commodity prices have continued to increase

with high food prices still a cause of concern; trends have had large differential impacts across countries

Overall growth rates in EMDCs have withstood the crisis better than AEs because of improved resilience and use of counter cyclical policies

However reduced fiscal space has increased vulnerability to future shocks and constrains needed long-term investments

20

Exports sharply dropped during the crisis

21Source: IMF, World Economic Outlook, 2013 (based on Markit Economics and IMF Staff calculations)

And recovery in international trade has been uneven

22

World exports, Jan 2006-Nov 2012(Jan 2006 = 100)

Source: United Nations, World Economic Situation and Prospects, 2013

Financial flows have been affected, but differentially

23

Remittances and other resource flows to developing countries

Source: World Bank, Migration and Development Brief, April 19, 2013 (based on data from WDI and World Bank Global Development Prospects Group

Long-term commodity prices have increased since the 1960s, reaching an all-time high in 2011…

24Source: World Bank, PINK data. NOTE: Annual price Indices, 2005=100

Nominal commodity prices

Real commodity prices

And steady food prices are forecast for 2013

25Source: IMF, World Economic Outlook 2013 (based on IMF Primary Commodity Price System and IMF Staff calculations)

Net-exporters and net-importers of primary commodities have been affected differently

26

Product Category Income groupingNumber of Net-

ExportersNumber of Net-Importers

Primary commodities

High-income countriesMiddle-income countriesLow-income countries

134316

355424

Basic food (excl. beverages)


14322

346538

Agricultural raw materials


163528

326112

Metals


267133

22237

Fuels


11305

376535

Note: The sample consists of 48 high-income countries, 97 middle-income countries and 40 low-income countries.Source: G-24 calculations based on UNCTAD data

27

Growth rates in EMDCs have withstood the crisis better than those in AEs


Source: G-24 calculations based on data from World Economic Outlook, IMF and World Development Indicator, World Bank

GD

P G

row

th

But reduced fiscal space increases the vulnerability of EMDCs to future shocks

28Source: World Bank Global Economic Prospects, 2013 (based on World Bank data)

2007: - 25% of developing countries had a deficit of >3% of GDP- 49% were running a surplus

2012: - 53% of developing countries had a deficit of >3% of GDP- 23% had a surplus

Overview


2. Impact and legacy of the crisis

3. Sustainable growth beyond the crisis4. Implications for global governance

29

Prospects for Sustained Growth Beyond Crisis

Differential growth prospects between AEs and EMDCs expected to be sustained

But significant heterogeneity across regions and countries

EMDCs are still a long way from the global productivity frontier with significant potential for catch-up gains

Potential output growth has been downgraded in many leading EMDCs because of country specific structural factors

30

Differential growth prospects between EMDCs and AEs are forecast

31

Other high-income countries

Euro-area

Real GDP, index 1980=100

Amongst EMDCs, there is also heterogeneity across regions

32

Ave

rage

GD

P G

row

th

2003-2008 2009-2012 2013-2015

Source: G-24 calculations based on data from World Economic Outlook, IMF and World Development Indicator, World Bank

EMDCs are a still long way from the productivity frontier

33

0.000

0.050

0.100

0.150

0.200

0.250

0.300

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

Simple Averages

GDP-Weighted Averages

Ratio of G-24 to High Income OECD Per- Capita GDP(1960 - 2012; PPP GDP)

Source: Canuto (2013), World Bank Poverty Reduction and Economic Management Department

Prospects for potential output growth in some EMDCs have been downgraded

34

Reductions in Medium-Term Output (percent; relative to the September 2011 WEO)

Output Relative to Precrisis Trends in WEO Estimates in 2013(percent of precrisis trend GDP)

Source: Helbling (2013), based on World Economic Outlook and IMF staff estimates.Note: AE= advanced economies; EM = emerging market and developing economies; CEE = central and eastern Europe; CIS = Commonwealth of Independent States; DA = developing Asia; LAC = Latin America and the Carribean; SSA = sub-Saharan Africa

Major Challenges to Sustained and Sustainable Growth

Infrastructure development and financing The jobs crisis and prospects for long-term

employment creation Growing income inequality with lagging countries

and growing inequality in both AEs and EMDCs Sustainability including climate impact and

resilience also a source of enormous concern

35

Infrastructure is of critical importance to sustainable growth for EMDCs

36

Driver of Need Description

Growth • Emerging and developing countries (EMDCs) have high growth potential (~5-7% in non-OECD compared to 2% in OECD between 2010 and 2030)

• Even adjusting for higher productivity, this period of rapid growth will have strong capital intensity, and hence infrastructure needs

• Strong evidence shows that lack of infrastructure can be a significant constraint to economic growth

Structural change

• An increasing percentage of growth in EMDCs is coming from industry and services, requiring substantial new infrastructure

• With 2 billion people moving to urban centres in the coming three decades, there is a rapidly growing need to expand and upgrade urban infrastructure

Inclusion • Existing deficits are large: 1.4 billion have no access to electricity, 0.9 billion have no access to safe drinking water and 2.6 billion no access to basic sanitation

• Infrastructure is essential for expanding access to basic services and a more inclusive pattern of growth

Sustainability and resilience

• Ensuring the environmental sustainability and climate resilience is crucial for growth and development and requires new infrastructure and related networks

But, the existing long-term development financing architecture does not meet the need

37

Global infrastructure financing vs need

$US

D t

rill

ion

s

Source: Split of current sources of finance own assessment based on various estimates including Estache (2010); MDB working group paper on infrastructure (2011); Macquarie (2009)

The job crisis continues, especially in Europe, which has record unemployment

38Source: Hong (2013), based on United Nations, World Economic Situation and Prospects, 2013

Unemployment trends in EMDCs differ

39

Quarterly Unemployment Rates (%)

Source: Hong (2013), based on United Nations, World Economic Situation and Prospects, 2013

And inequality is increasing

40

• Increasing inequality in US—top 1 percent accounting for 23 percent of national income and top 0.01 percent for 12 percent

• Increasing global integration associated with growing income inequality in many EMDCs depending on starting points

• Growing inequality compromises equality of opportunity and long-term productivity growth (Stiglitz)

Sustainability is also an enormous concern

• The risks of climate change have likely been underestimated– Greenhouse gas concentrations or stocks have increased from

around 285ppm CO2e in the 1800s to around 445ppm today.– Could result in an eventual temperature increase (50-50 chance)

of more than 5deg Celsius compared with the pre-industrial era. – High probability of extreme weather events and a rising global

sea level– Potential cause of migration of hundreds of millions, perhaps

billions, of people around the world: likelihood of severe and sustained conflict

• Growth and stability in the medium and long-term are at risk if climate change is not addressed

41Source: Stern (2013), ‘Economic Growth, Poverty Reduction and Managing Climate Change’

Sustainable growth is crucial, but requires leadership and proactivity

• Ensuring the environmental sustainability and climate resilience is crucial for long-term growth and development

• Investing in low-carbon growth requires clear and credible public policy and institutional involvement to leverage finance (including excess global savings), manage risk (commercial and political), integrate approaches and lead by example

42Source: Stern (2013), ‘Economic Growth, Poverty Reduction and Managing Climate Change’

Overview


2. Impact and legacy of the crisis3. Sustainable growth beyond the crisis

4. Implications for global governance

43

Implications for Global Governance

44

• Growing interconnectedness poses new challenges in global coordination and governance arrangements

• Recent waves of financial crises has underscored importance of coordination in the economic and financial sphere but also the inherent challenges of such coordination

• The new wave of global challenges coincides with major shifts in relative positions and the role of old and new powers

Implications for Global Governance

45

Significant evolution in the institutional architecture:

G20 as premier forum for global economic and financial coordination with continued evolution in its role

Enhancement of role of Financial Stability BoardStrengthening in role of the IMF (resources,

instruments, surveillance)

The Institutional Architecture

46

•FSAPs/ROSCs

•Article IV Consultations

•WEO/GFSR

•Spillover Reports

•Early Warning Exercise (EWE) in

collaboration with FSB

•Plenary

•Standing Committee on

Assessment of Vulnerability

•AGV

•Standing Committee on

Standards Implementation and

Implementation Monitoring

Network

•Surveillance Discussion

•G20 MAP

The Overall Surveillance Framework• Complementary architecture between IMF and FSB including

on multilateral surveillance• IMF comparative strengths are integrating macro,

macrofinancial and financial perspectives as well as integrating bilateral and multilateral aspects in Article IV consultations; and well broad array of instruments to assess global systemic risks (WEO, GFSR, spillover reports and EWE in collaboration with FSB)

• FSB’s strengths are its network of financial stability experts through the AGV, access to national supervisors, interface with BIS and SSBs and synergy between the Plenary and all three standing committees and their working groups

47

The global rank of economies has shifted markedly in the last four decades

48

Rank 1980 1990 2000 2015

1United States 2788 United States 5801 United States 9951 United States 18012

2 Japan 997 Japan 2370 Japan 3256 China 16647

3 Germany 762 Germany 1447 China 3015 India 5930

4 France 537 France 1027 Germany 2144 Japan 5095

5 Italy 509 Italy 976 India 1571 Germany 3497

6United Kingdom 450

United Kingdom 922 France 1532 Russia 2957

7 Brazil 446 China 910United Kingdom 1486 Brazil 2780

8 Mexico 337 Brazil 786 Italy 1404United Kingdom 2572

9 India 286 India 745 Brazil 1234 France 2438

10 Canada 280 Mexico 612 Russia 1121 Mexico 2055

11 Spain 272 Canada 558 Mexico 1065 Italy 1943

12 China 248 Spain 551 Canada 911 Korea 1897

13 Netherlands 150 Korea 336 Spain 900 Canada 1676

14 Poland 150 Australia 306 Korea 776 Indonesia 1549

15 Australia 146 Turkey 291 Australia 525 Spain 1499

GDP (PPP), $Billions

Source: WEO Database, IMF

Contributions to World Growth(percent)

1981 to 1991 1991 to 2001 2001 to 2011 1981 to2011

United States 21.2 26.3 9.6 17.0

Euro Area+ UK 20.6 17.3 6.4 12.6

Japan 11.4 2.4 1.0 3.7

China 8.7 17.9 29.6 21.6

India 4.4 6.5 10.1 7.8

Rest of World 33.8 29.7 43.4 37.3

Source: A. Virmani based on IMF data

Contributions to Growth by DecadeRank Country 1980 to 1990* Country 1990 to 2000 Country 2000 to 2009

1 United States 26.8% United States 36.0% China 25.5%

2 Japan 21.1% China 9.6% United States 21.5%

3 Germany 4.4% Japan 6.6% India 6.1%

4 United Kingdom 3.8% Germany 4.5% Korea, Rep. 3.2%

5 China 3.6% United Kingdom 4.2% Brazil 3.1%

6 France 3.2% Korea, Rep. 3.0% United Kingdom 3.1%

7 Italy 2.8% France 3.0% Japan 3.0%

8 Korea, Rep. 2.3% India 2.4% France 2.1%

9 Canada 1.8% Canada 2.3% Russian Federation 2.0%

10 India 1.6% Mexico 2.1% Spain 2.0%

11 Spain 1.5% Italy 2.0% Australia 1.9%

12 Australia 1.2% Brazil 1.8% Canada 1.8%

13 Turkey 1.0% Spain 1.8% Argentina 1.7%

14 Brazil 1.0% Australia 1.5% Germany 1.4%

15 Mexico 0.9% Netherlands 1.3% Indonesia 1.4%

*Not included: Russian Federation nor FSU nor ECA former Communist states, for 1980 to 1990 period.

Source: J.Y. Lin (2011) calculations based on data from World Development Indicators, World Bank

Contribution to World Growth - Rank

Rank: Contribution to Global Growth

2006 2007 2008 2009 2010 2011 2012 2013

China 1 1 1 1 1 1 1 1

United States 2 4 2 3 3 3

Euro Area 3 2 6 4 4 4 4

India 4 3 2 2 3 2 2 2

Russia 5 5 3 7 5 6 5

Japan 6 7 5 5 7

Mexico 7 12 11 10 9 10 10

Brazil 8 6 4 6 6 7 6

Korea 9 9 9 8 8 10 9 9

United Kingdom 10 10 15 11

Turkey 11 11 8 13

Indonesia 12 11 5 3 12 7 8 8

Structural Transformation of Global Economy

51

Source: A. Virmani calculations based on data from World Economic Outlook, IMF (September 2011)

IFI governance arrangements have failed to account for changing economic realities

52

Evolution in Actual and Calculated IMF Quotas Relative to Weight in Global Economy

Source: G24 calculations based on IMF data

53

IFI governance arrangements have failed to account for changing economic realities

1 Defined as EMDCS whose GDP PPP share divided by the 14th General Review Quota share is greater than 1 and not over-represented by more than 25% based on the current quota formula. 2 PRGT-eligible countries including Zimbabwe. Source: G24 calculations based on IMF data

Why Europe Needs to Adjust Its Quota and Voting Share in the IMF

Post-2010 Quota Share

2011-2012 GDP Weight1 Calculated Quota2

United States 17.4 20.0 16.1

Japan 6.5 6.7 6.3

Europe excl CIS 32.8 23.7 34.7

Advanced Europe 29.4 21.1 30.8

EMDCs 42.3 48.0 42.3

Poor Countries 2.7 1.6 1.6

1GDP Blend of 40 percent GDP at market exchange rates and 60 percent at GDP PPP2 Based on current formula and 2007-2009 data

Thank you

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