Widespread recent reports have trumpeted: “China to overtake US as top economic power this year.” The claim is basically wrong. The US remains the world’s largest economic power by a substantial margin.
The story was based on the April 29 release of a report from the ICP project of the World Bank: “2011 International Comparison Program Summary Results Release Compares the Real Size of the World Economies.” The work of the International Comparison Program is extremely valuable. I await eagerly their latest estimates every six years or so and I use them, including to look at China. (Before 2005, the data collection exercise used to appear in the Penn World Tables.)
On October 14, the Mo Ibrahim Prize Committee announced, for the second year in a row, that it had not found anyone to whom to award its Prize for Achievement in African Leadership.
The Prize is given to a recently-retired Executive Head of State or Government in Africa who satisfies the criteria of having been democratically elected, having left at the end of his or her constitutionally mandated term, and having demonstrated exceptional leadership. The winner receives $5 million paid over ten years, followed by $200,000 annually for life, which makes it the world’s most valuable annually awarded prize
I recently visited Cuba for the first time, to participate in scholarly meetings. For an American citizen this short voyage requires a leap through hyperspace. It was my third attempt over ten years to get there. Obstacles had included both the US government and the Cuban government.
This was a trip back in time, to 1959. For one thing, a majority of the (few) autos on the street in Havana are large American cars from the 1950s. Most are beautiful. One hears about the cars, but I had thought the reports must be exaggerated.
Emerging markets have performed amazingly well over the last seven years. They have outperformed the advanced industrialized countries in terms of economic growth, debt-to-GDP ratios, and countercyclical fiscal policy. Many now receive better assessments by rating agencies and financial markets than some of the advanced economies.
As 2012 begins, however, emerging markets may be due for a correction, triggered by a new wave of “risk off” behavior among investors. Will China experience a hard landing? Will a decline in commodity prices hit Latin America? Will the sovereign-debt woes of the European periphery spread to neighbors such as Turkey in a new “Aegean crisis”?
Libyans have a new lease on life, a feeling that, at long last, they are the masters of their own fate. Perhaps Iraqis, after a decade of warfare, feel the same way. Both countries are oil producers, and there is widespread expectation among their citizens that that wealth will be a big advantage in rebuilding their societies.
Meanwhile, in Africa, Ghana has begun pumping oil for the first time, and Uganda is about to do so as well. Indeed, from West Africa to Mongolia, countries are experiencing windfalls from new sources of oil and mineral wealth. Adding to the euphoria are the historic highs that oil and mineral prices have reached on world markets over the last four years.
In 2008, the global financial system was grievously infected by so-called toxic assets originating in the United States. As a result of the crisis, many have asked what fundamental rethinking will be necessary to save macroeconomic theory. Some answers may lie with models that have in the past been applied to fit the realities of emerging markets — models that are at home with the financial market imperfections that have now unexpectedly turned up in industrialized countries.The imperfections include default risk, asymmetric information, incentive incompatibility, procyclicality of capital flows, procyclicality of fiscal policy, imperfect property rights, and other flawed institutions. To be sure, many of these theories had been first constructed in the context of industrialized economies, but they had not become mainstream there. Only in the context of less advanced economies were the imperfections undeniable. There the models thrived.
My last blog post listed some policies and institutions with which various small countries around the world have had success — innovations that might be worthy of emulation by others. Of course there are plenty of other examples of policies and institutions that have been tried and that are to be avoided. The area of agricultural policy is rife with them. Many start with a confused invoking of the need for “food security.”
The recent run-up in wheat prices is a good example. Robert Paarlberg wrote an excellent column in the Financial Times recently, titled “How grain markets sow the spikes they fear.” Grain producing countries point to the high volatility of prices on world markets and the need for food security when imposing taxes on exports of their own grain supplies, or outright bans, as Russia did in July. The motive, of course, is to keep grain affordable for domestic consumers. But the effect of such export controls is precisely to cause the price rise that is feared, because it removes some net supply from the world market. (The same could be said when grain importing countries react to high prices by enacting price controls, because that adds some net demand to the world market.)
Two decades ago, many thought the lesson of the 1980s had been that Japan’s variant of capitalism was the best model, that other countries around the world should and would follow it. The Japanese model quickly lost its luster in the 1990s.
One decade ago, many thought that the lesson of the 1990s had been that the US variant of capitalism was the best model, that other countries should and would follow. The American model in turn lost its attractiveness in the decade of the 2000s.
As Chile’s President Michelle Bachelet prepares to hand over power to her newly elected successor, she remains extraordinarily popular. It is worth reflecting on the fiscal aspects of her term in office, as Chile has important lessons for other countries struggling with fundamental long-term budget problems, which includes a lot of countries right now.
As recently as June 2008, President Bachelet and her Finance Minister, Andres Velasco, had the lowest approval ratings of any President or Finance Minister, respectively, since the return of democracy to Chile. (See graphs below.) There may have been multiple reasons for this, but perhaps the most important was popular resentment that the two had resisted intense pressure to spend the receipts from copper exports, which at the time were soaring along with world copper prices. One year later, in the summer of 2009, the pair had the highest approval ratings of any President and Finance Minister since the return of democracy. Why the change?
Most international summit meetings are long on photo-opportunities and short on substance. There was a great danger that last Thursday’s G-20 meeting in London would be merit comparison to the failed World Economic Conference of 1933, which was also held in London. This one, however, did have genuine substance.
Top of the list of accomplishments was expansion of IMF resources. The new SDR allocation was perhaps the most noteworthy and unexpected decision: those observers who have proposed such a step in the current international crisis, or in past international crises, have usually been dismissed as pipe-dreamers (John Williamson, Dani Rodrik, George Soros, Joe Stiglitz…). In addition, there seems to have been some forward movement on international regulation of the financial sector, as the Europeans wanted. Although President Obama acquitted himself well overall, the failure to achieve agreement for coordinated additional fiscal stimulus, as the Americans wanted, was probably the greatest shortcoming of the meeting.