ASCENT AFTER DECLINE
Regrowing Global Economies
After the Great Recession
Otaviano Canuto
Vice President and Head of Network
Poverty Reduction and Economic Management (PREM)
The World Bank
The XIII HSE International Academic Conference
on Economic and Social Development
Higher School of Economics, Moscow, April 3-5, 2012
1
Available for download at:
http://www.worldbank.org/
ascent-after-decline
2
Why this book and why now?
The great recession of 2007-09 has left
permanent scars and the global recovery has lost
steam (Eurozone’s debt crisis, damaged
households balance sheets, depressed
consumption and unemployment in the US).
 Growth in several major developing countries like
Brazil, China and India is significantly slower than
earlier in the recovery (tightening monetary
policy and low-growth path in advanced
economies).
 What can we do about it? What kind of policies
can put the world economy back on track?

3
Three take-away messages



Government’s role remains paramount as
“investor” in the knowledge economy, and as a
“guarantor” of the social contract.
Policies must be coordinated on a multilateral
basis as single-country interventions are
insufficient (reducing China-U.S. imbalances,
promoting domestic growth-led strategy, shifting
industrial policy, reactivating job creation).
Growth in emerging and developing economies
has exhibited strong resilience. But for its full
potential, advanced economies must also find
how to ascend after declining.
4
The Challenges of Growth
Ch. 1 - by Otaviano Canuto, Danny M. Leipziger, and
Brian Pinto
5
Obstacles to Global Recovery
Are many: financial markets uncertainty, sovereign
indebtedness, solvency concerns (Euro area periphery),
maturing bank debt, households and bank exposure to real
estate stagnation, damaged balance sheets in advanced
economies.
And in the medium-term:
Rising debt levels; Reduced trade prospects; Global
imbalances.
6
Rebalancing Global Demand

Internal rebalancing: fiscal consolidation vs. private
demand

External rebalancing: reduce CA deficits (US) and CA
surplus (China, emerging Asia)
But limited room for fiscal and monetary policy maneuvering
(QE2). Interaction between fiscal consolidation, growth and
debt dynamics.
Likely impact on emerging economies?
7
The Changing Landscape for Growth

Can domestic resource mobilization offset capital
shortage and volatility?

Are returns from export-oriented, outward-looking
strategies declining?

Can China relinquish its dominance of low end
manufactures?

Will importers push back trade openness, at the expense
of developing countries?
8
Forging the Link between
Medium- and Long-Term Growth

Scarcer risk capital, more self-financing for development

ICT and technological innovation as new opportunities?

Emerging markets and China: global growth drivers?

More-rapid convergence in the interest of both new and
old economic powers?
One goal: avoid suboptimal trajectory, below potential
output, political economy strains, and disorderly
convergence.
9
Policy Responses (1/7)
Rebalancing Global Growth
Insulate growth from the pernicious effects of slowly declining
current account imbalances, combined with capital flows
searching for yield:
• Financial regulation—regulatory reform, particularly crossboundary coordination.
• Central bank policy—consider imbalances and asset prices in
formulating monetary policy and minimizing threats to growth.
• Fiscal policy—tighten fiscal policy proactively.
• Cross-border coordination—countries must coordinate actions,
and countries with large deficits urged to consolidate.
• International financial architecture—access to emergency
financing through pooled reserve arrangements, bilateral lines,
or from a special facility at the IMF.
Ch. 2 - by Menzie Chinn, Barry Eichengreen, and Hiro Ito
10
Figure 2.1 Current Account Balances,
1996-2016
11
Figure 2.2 U.S. Saving, Investment,
and Current Account, 1968-2011
12
Figure 2.3 Current Account Balance as
a Percentage of Euro Area GDP, 19952010
13
Policy Responses (2/7)
Fiscal Policy and Growth
How to adjust fiscal policy while maximizing the positive benefits for
growth?
High public indebtedness in advanced economies -> merely stabilizing it
may have highly negative consequences for potential growth; lowering it to
“safe” thresholds, would take a Herculean effort.
To reduce public debt in advanced and emerging economies to 60 percent
and 40 percent of GDP, respectively, by 2030: cyclically adjusted primary
fiscal surpluses should increase by 8.25 percentage points of GDP for
advanced economies and by 3 percentage points for emerging economies
during 2011–20, and kept at this level until 2030.
Will an adjustment of this magnitude have adverse consequences for
growth because of the aggregate demand effects?
Ch. 3 - by Carlo Cottarelli and Michael Keen
14
Figure 3.3 Predicted Old-Age
Dependency Ratio, 2009-50
15
Figure 3.4 Projected Pension Spending
with and without Reforms, 2010-30
16
Figure 3.5 General Government Debt in
Emerging Economies, 1998-2007
17
Figure 3.6 General Government
Balances and Debt in Advanced vs.
Emerging Economies, 2007-2015
18
Figure 3.7 General Government Net
Debt Projections for Advanced
Economies, Projected to 2030
19
Figure 3.8 Precrisis and Postcrisis
Output in Advanced Economies,
Projected to 2014
20
Figure 3.9 Actual and Debt-Stabilizing
General Government Primary Balances,
by Debt Ratio, 2010
21
Policy Responses (3/7)
Infrastructure Policy
for Shared Growth Post-2008
Infrastructure as a quick fix during the global crisis?
Public infrastructure projects seen as silver bullet to create jobs and keep
up demand. Accounted for 20–30% of fiscal stimulus package in G20
countries.
But infrastructure (which accounts for 12–18% of GDP) warrants as much
scrutiny as the financial sector. Policy makers need pay more attention to
the rents extracted by construction firms, bankers, and operators.
Regulation must restore balance among key stakeholders (operators,
users, and taxpayers).
Ch. 4 - by Antonio Estache
22
Figure 4.1 PPI Commitments to
Infrastructure Projects in Developing
Countries, by Implementation Status,
1990-2009
23
Policy Responses (4/7)
Rethinking Growth and the State
Not so much how large, but how smart should government be? Knowledge
investment is fundamental for the State:
• Increased education funding—particularly in research.
• Worker retraining—subsidies likely needed to retrain workers as part of a
liberalization of trade or entry strategy.
• R&D spending—critical to firms’ long-run growth, and could be useful for
macroeconomic stabilization.
• Climate-related innovation—carbon pricing to discourage dirty
technology, combined with subsidies to simultaneously encourage clean
innovation.
• Industrial policy—target subsidies to several firms in a given sector,
spurring innovation as firms compete against each other, leading to higher
productivity and stimulating new product creation.
Ch. 5 - by Philippe Aghion and Julia Cagé
24
Figure 5.1 Relation between University
Output and Autonomy in Selected
European Countries
25
Figure 5.2 Relation between Changes
in Inherited Trust and Per Capita
Income, 1935-2000
26
Figure 5.3 Relation between Distrust
and Extent of Entry Regulation
27
Figure 5.6 Relation between Taxation
and Growth in High-Corruption OECD
Countries
28
Figure 5.7 Relation between Taxation
and Growth in Low-Corruption OECD
Countries
29
Policy Responses (5/7)
Financial Shocks and
the Labor Market
Save first financial institutions or jobs?
Despite vast sums spent to bail out and shore up the financial sector,
unemployment remains high.
Yet, financial institutions have systemic significance, State cannot easily
decide which sectors to pick for saving jobs, and firms might build up
leverage in anticipation of being helped (moral hazard).
Going forward, a strong focus needed on job-creating competition policies
and easing barriers to entry because the lion’s share of net job creation is
in start-up firms.
Ch. 6 - by Tito Boeri and Pietro Garibaldi
30
Figure 6.1 U.S. and Euro Area
Unemployment Rates, 2000-10
31
Figure 6.2 Stock Market Capitalization
and Unemployment, Euro Area and
U.S., 2000-10
32
Figure 6.3 Unemployment-to-Output
Response in G-7 Countries
33
Policy Responses (6/7)
Information Technology,
Globalization, and Growth
Can IT boost growth prospects?
Positive impact on total factor productivity growth as a result of innovation.
Economic welfare and growth influenced by terms of trade, economies of
scale, and variety.
Secular fall in quality-adjusted prices of IT products (potential decline in
the terms of trade) would favor consumers and importers.
Economies of scale combined with the ability to import inputs could benefit
exporting countries.
Incentive for businesses to do existing things better is where the real IT
benefits lie. A good strategy for a developing country might be to join a
global supply chain and eventually create better conditions for using IT at
home, which is where the growth potential of IT lies.
Ch. 7 - by Catherine L. Mann
34
Figure 7.1 Transformative Technology
and Social Surplus
35
Figure 7.2 Growth and International IT
Trade: The Hypotheses
36
Figure 7.3 Growth and International IT
Trade: The Calculations
37
Figure 7.4 Social Surplus and IT Trade
in Selected Economies, 2000-07
38
Figure 7.5 Variety vs. Concentration in
Product Trade, Selected Countries
average of 1999 and 2006 Herfindahl indexes
39
Policy Responses (7/7)
Innovation-Driven Growth
Radical change undergoing: open innovation process, global innovation
chains, and facilitating role of new technology platforms such as the
Internet.
A new growth strategy should seek:
• Increase in human capital operating through technology, which has a
bigger impact on GDP than deregulation.
• Harmonization has a bigger impact on services than deregulation, while
technology benefits more from deregulation.
• Technology accumulation, the ultimate growth driver, which is strongly
supported by human capital accumulation.
Delay in implementing policy change will be costly for productivity and
growth.
Ch. 8 - by Paolo Guerrieri and Pier Carlo Padoan
40
Figure 8.1 Real Income Sources in
Europe and Japan Compared with the
U.S., 2007
41
Figure 8.2 Effects of Deregulation and
Harmonization
42
Figure 8.3 Effect of a 5 Percent
Increase in Human Capital
43
Figure 8.4 Comparative Effects of
Policy Scenarios on Output
44
To continue with issues related to the global
economic crisis and growth:
http://blogs.worldbank.org/growth/
blogs/otaviano-canuto
Thanks!
Otaviano Canuto
Vice President and Head of Network
Poverty Reduction and Economic Management (PREM)
The World Bank
The XIII HSE International Academic Conference
on Economic and Social Development
Higher School of Economics, Moscow, April 3-5, 2012
45