Tag: structural reforms

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What to do about slowing global growth?

First the IMF in its World Economic Outlook, then the European Commission in its Economic Forecasts (see also) and now the OECD in its Economic Outlook (see also) – all three organisations in the latest issues of their 6-monthly publications are predicting slower global economic growth than they did 6 months previously. This applies both to the current year and to 2016. The OECD’s forecast for global growth this year is now 2.9%, down from the 3.7% it was forecasting a year ago. Its latest growth forecast for 2016 is 3.3%, down from the 3.9% it was forecasting a year ago.

Various reasons are given for the gloomier outlook. These include: a dramatic slowdown in global trade growth; slowing economic growth in China and fears over structural weaknesses in China; falling commodity prices (linked to slowing demand but also as a result of increased supply); austerity policies as governments attempt to deal with the hangover of debt from the financial crisis of 2007/8; low investment leading to low rates of productivity growth despite technological progress; and general fears about low growth leading to low spending as people become more cautious about their future incomes.

The slowdown in trade growth (forecast to be just 2% in 2015) is perhaps the most worrying for future global growth. As Angel Gurría, OECD Secretary-General, states in his remarks at the launch of the latest OECD Economic Outlook:

‘Global trade, which was already growing slowly over the past few years, appears to have stagnated and even declined since late 2014, with the weakness centering increasingly on emerging markets, particularly China. This is deeply concerning as robust trade and global growth go hand in hand. In 2015 global trade is expected to grow by a disappointing 2%. Over the past five decades there have been only five other years in which trade growth has been 2% or less, all of which coincided with a marked downturn of global growth.’

So what policies should governments pursue to stimulate economic growth? According to Angel Gurría:

‘Short-term demand needs to be supported and structural reforms to be pursued with greater ambition than is currently the case. Three specific actions are key:

•  First, we need to resist and turn back rising protectionism. Trade strengthens competition and investment and revs up the “diffusion machine” – the spread of new technologies throughout the economy – which will ultimately lift productivity.
•  Second, we need to step up structural reform efforts, which have weakened in recent years. And here, I mean the whole range of structural reforms – education, innovation, competition, labour and product market regulation, R&D, taxes, etc.
•  Third, there is scope to adjust public spending towards investment. If done collectively by all countries, if the sector and projects chosen have high multipliers, and if combined with serious structural reforms, stronger public investment can give a boost to growth and employment and not increase the relative debt burden.’

On this third point, the OECD Economic Outlook argues that ‘the rationale for such investments is that they could help to push economies onto a higher growth path than might otherwise be the case, at a time when private investment growth remains modest.’

‘Collective action to increase public investment can be expected to boost the initial domestic multiplier effects from the stimulus, since private investment and exports in each economy will benefit from stronger demand in other economies. …the multiplier effects from an investment-led stimulus are likely to be a little larger than from other forms of fiscal stimulus, since the former also has small, but positive, supply-side effects.

In other words, the OECD is calling for a relaxation of austerity policies, with public investment being used to provide a stimulus to growth. The higher growth will then lead to increased potential output, as well as actual output, and an increase in tax revenues.

These policy recommendations are very much in line with those of the IMF.

Videos and Webcasts
OECD warns of global trade slowdown, trims growth outlook again Reuters (9/11/15)
OECD returns to revisionism with growth downgrade Euronews, Robert Hackwill (9/11/15)
OECD: Weak China Import Growth Leads Trade Slowdown Bloomberg, Catherine L Mann, OECD Chief Economist (9/11/15)
OECD Economic Outlook: Moving forward in difficult times OECD PowerPoint presentation, Catherine L Mann, OECD Chief Economist (9/11/15)
Press Conference OECD, Angel Gurría and Álvaro Pereira (9/11/15)

Articles

OECD cuts world growth forecast Financial Times, Ferdinando Giugliano (9/11/15)
OECD rings alarm bell over threat of global growth recession thanks to China slowdown Independent, Ben Chu (10/11/15)
OECD cuts global growth forecasts amid ‘deep concern’ over slowdown BBC News (9/11/15)
OECD fears slowdown in global trade amid China woes The Guardian, Katie Allen (9/11/15)
The global economy is slowing down. But is it recession – or protectionism? The Observer, Heather Stewart and Fergus Ryan (14/11/15)
Global growth is struggling, but it is not all bad news The Telegraph, Andrew Sentance (13/11/15)

OECD Publications
Economic Outlook Annex Tables OCED (9/11/15)
Press Release: Emerging market slowdown and drop in trade clouding global outlook OCED (9/11/15)
Data handout for press OECD (9/11/15)
OECD Economic Outlook, Chapter 3: Lifting Investment for Higher Sustainable Growth OCED (9/11/15)
OECD Economic Outlook: Full Report OECD (9/11/15)

Questions

  1. Is a slowdown in international trade a cause of slower economic growth or simply an indicator of slower economic growth? Examine the causal connections between trade and growth.
  2. How worried should we be about disappointing growth in the global economy?
  3. What determines the size of the multiplier effects of an increase in public investment?
  4. Why are the multiplier effects of an increase in public-sector investment likely to be larger in the USA and Japan than in the UK, the eurozone and Canada?
  5. How can monetary policy be supportive of fiscal policy to stimulate economic growth?
  6. Under what circumstances would public-sector investment (a) stimulate and (b) crowd out private-sector investment?
  7. How would a Keynesian economist respond to the recommendations of the OECD?
  8. How would a neoclassical/neoliberal economist respond to the recommendations?
  9. Are the OECD’s recommendations in line with the Japanese government’s ‘three arrows‘?
  10. What structural reforms are recommended by the OECD? Are these ‘market orientated’ or ‘interventionist’ reforms, or both? Explain.
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The negotiation game

Yanis Varoufakis, the new Greek finance minister, is also an economist and an expert in game theory and co-author of Game Theory: a critical text. He is now putting theory into practice.

He wishes to renegotiate the terms of Greece’s debt repayments. He argues not that some of the debt should be written off, but that the terms of the repayment are far too tough.

Greece’s problem, he argues, was wrongly seen as one of a lack of liquidity and hence the Troika (of the EU, the ECB and the IMF) provided a large amount of loans to enable Greece to keep servicing its debts. These loans were conditional on Greece following austerity policies of higher taxes and reduced government expenditure. But this just compounded the problem as seen by Yanis Varoufakis. With a shrinking economy, it has been even more difficult to repay the loans granted by the Troika.

The problem, he argues, is essentially one of insolvency. The solution is to renegotiate the terms of the debt to make it possible to pay. This means reducing the size of the budget surplus that Greece is required to achieve. The Troika is currently demanding a surplus equal to 3% of GDP in 2015 and 4.5% of GDP in 2016.

The Syriza government is also seeking to link repayments to economic growth, by the issue of growth-linked bonds, whose interest rate depends on the rate of economic growth, with a zero rate if there is no growth in real GDP. He is also seeking emergency humanitarian aid

At the centre of the negotiations is a high stake game. On the one hand, Germany and other countries do not want to reduce Greece’s debts or soften their terms. The fear is that this could unleash demands from other highly indebted countries in the eurozone, such as Spain, Portugal and Ireland. Already, Podemos, Spain’s anti-austerity party is rapidly gaining support in Spain. On the other hand, the new Greek government cannot back down in its fundamental demands for easing the terms of its debt repayments.

And the threats on both sides are powerful. The Troika could demand that the original terms are met. If they are not, and Greece defaults, there could be capital flight from Greece (even more than now) and Greece could be forced from the euro. The Greeks would suffer from further falls in income, which would now be denominated in a weak drachma, high inflation and financial chaos. But that could unleash a wave of speculation against other weaker eurozone members and cause a break-up of the currency union. This could seriously harm all members and have large-scale repercussions for the global economy.

So neither side wants Greece to leave the euro. But is it a game of chicken, where if neither side backs down, ‘Grexit’ (Greek exit from the euro) will be the result? Yanis Varoufakis understands the dimensions of the ‘game’ very well. He is well aware of the quote from Keynes, ‘If you owe your bank a hundred pounds, you have a problem. But if you owe a million, it has.’ He will no doubt bring all his gaming skills to play in attempting to reach the best deal for Greece.

Greece’s last minute offer to Brussels changes absolutely nothing The Telegraph, Ambrose Evans-Pritchard (10/2/15)
The next card Yanis Varoufakis will play The Conversation, Partha Gangopadhyay (8/2/15)
Senior European official: ‘The Greeks are digging their own graves’ Business Insider, Mike Bird (10/2/15)
Greece: The Tie That Doesn’t Bind New York Times, Paul Krugman (9/2/15)
Greek finance minister says euro will collapse if Greece exits Reuters, Gavin Jones (8/2/15)
Greece is playing to lose the debt crisis poker game The Guardian, Project Syndicate and Anatole Kaletsky (9/2/15)
Greek markets find sliver of hope Financial Times, Elaine Moore, Kerin Hope and Daniel Dombey (10/2/15)
Greece: What are the options for its future? BBC News, Jamie Robertson (12/2/15)
‘If I weren’t scared, I’d be awfully dangerous’ The Guardian, Helena Smith (13/2/15)
Greek debt crisis: German MPs back bailout extension BBC News (27/2/15)

Questions

  1. Is a deal over the terms of repayment of Greek debt a zero sum game? Explain whether it is or not.
  2. What are Keynes Bisque bonds (or GDP-indexed bonds)? Do a Web search to find out whether they have been used and what their potential advantages and disadvantages are. Are they a good solution for both creditors and Greece in the current situation?
  3. What is meant by a ‘debt swap’? What forms can debt swaps take?
  4. Has Greece played its best cards too early?
  5. Should Greece insist on debt reduction and simply negotiate around the size and terms of that reduction?
  6. Are Greece’s new structural reform proposals likely to find favour with other EU countries and the Troika?