iSmartNetwork Magazine The online magazine for you…
By Homi Kharas
The global economy continues to baffle economists who produce clever their responses to puzzles but not ever in convincing manner. This is not new–Maurice Obstfeld and Ken Rogoff discussed six major perplexes in international macroeconomics almost two decades ago. Here are five issues where I feel the need to take a sentiment in 2019 because the implications are so large. But these are also areas where I have limited conviction either through my own work or through my reading of the literature.
1. Why is so little capital flowing to rising and developing countries?
The IMF is of the view that net public and private capital flows into emerging marketplace and developing economies( or the opposite, the aggregate current account deficit) will be around$ 4 billion in 2019, a tiny figure in the context of the world economy. This is surprising because developing countries are expected to have great would be required for big-hearted ticket investments that advance economic growing, such as ports, urban infrastructure, education, health system improvements, or nationwide renewable energy networks. These are investments which they cannot–or should not have to–simply self-finance as they are relatively poor. Considering that the size of developing country economies will amount to about $35 trillion in nominal terms, the$ 4 billion deficit prediction by the IMF is basically equivalent to a rounding lapse. The most rapidly growing part, Asia, actually is projected to have a small net capital outflow; removing China would leave an inflow for the rest of the region of about $50 billion, still less than 1 percent of the Asia-Pacific region’s( non-China) regional GDP. The Asian Development Bank’s Strategy 2030 estimates that $1.7 trillion per year( 10 percentage of GDP) will be required for infrastructure investments in Asia. If capital doesn’t pour to a fast-growing field like Asia, then is it realistic to expect it to flow to other regions? There is considerable political debate about multilateral development banking and constructing the global fiscal structure work for all, with high-level gathers on financing for development and multiple studies on mixed investment( here, here, and here ). The micro proof suggests aggregate merged investment deals of over $100 billion. But the macro numbers on capital pours do not show a major upsurge of capital into developing countries as a result of these new different forms of financial engineering. So is this just relabeling the churn of inflows and outflows–like much “green” or “sustainable” finance–or is it a genuine taken forward?
2. What gone on with global productivity growth?
Ultimately, most economists believe that living standards be decided by productivity growth and they lament its slowdown across the world. The question is whether this is because today’s innovations are not that impactful or whether it is just a matter of time before potential impacts kicks in because technology diffusion inevitably takes time. There are other possible explanations. One is that productivity growth is actually more rapid than is commonly belief, but we mismeasure it. While there is some validity to this, the size seems small-minded compared to the aggregate slowdown. Another alternative is that the best firms are blithely expanding productivity growth, but laggard firms are preventing the economy-wide median down. The policy implications of each position differ significantly, so it is important to take a belief, even though the evidence is not conclusive. To further complicate matters, it is not even clear what the direction of the impact might be. For example, a slowdown in productivity growth in rich countries might hurt developing countries because is asking for their exports will be lower, but receive benefits developing countries if it causes an exodus of capital towards them. Some simulations recommend the latter impact could even predominate in the short to medium term. So, it is not obvious if developing countries should cheer or fear a slowdown in productivity growth in advanced countries. They should also worry about what is happening in their own economies. If most productivity growth in developing countries is catching up to the global frontier, as we commonly assume, why have they been bitten by the same productivity slowdown bug as advanced countries?
3. Why is it so hard to fix externalities?
Most politicians in most countries want to increase employment and reduce carbon emissions. So why do we have systems that tax labour and subsidize fossil fuels? The G-7 countries continue to provide at least $ 100 billion a year substantiating fossil fuel and have failed to put in place mechanisms to meet their pledge to period these out by 2025. Meanwhile, the average OECD country had a tax wedge on labor of 35.9 percentage in 2017( the tax wedge is defined as the difference between the employer’s costs of hiring a worker and the net take-home pay of the worker, expressed as a share of labor rate ). In most developing countries, high levels of informality and flexible labour markets reduce the impact of labor tax wedges, but there are exceptions including in several European and central Asian countries. Is there any realistic hope to overcome the political economy constraints that have blocked reform? How can we move this needle?
4. What constitutes progress in the world?
This is a two-part puzzle. One has to do specifically with the relationship between the U.S. and China. All agree that this is perhaps the most consequential relation in the world. The question is whether the interests of the two countries concur or crash. In other words, if China grows economically, is this good for the U.S. because it magnifies a potential market for its exports and perhaps allows it to import additional goods even more cheaply from China? Or is it bad for the U.S. because, relatively speaking, China will gain ability( soft or hard) relative to the U.S .? During a debate at Brookings last October, more than half the audience was indicated that U.S. and Chinese concerns are essentially incompatible, while the other half took the resisting sentiment. Is there a way of ensuring that China and the U.S. can cooperate more on economic issues to the benefit of the whole world?
The second the members of the perplex is similar in flavor. If one person gains, while others do not, is societal welfare higher? Most economists would say unequivocally “yes”–the famous Pareto-optimality principle. But scholarly experiment on subjective well-being calls this into question. The relative income hypothesis, introduced by Duesenberry in 1949, is back in vogue as an explanation for why people care about inequality, in addition to their own absolute the living standards. Among other examples, in both India and China, two of the great economic success stories of this century in terms of growth and poverty reduction, life satisfaction has declined on average among the population and suicides have increased. Are our measures of progress simply wrong, or incomplete, or needing time before people realize how luck they are to enjoy a better substance standard of living?
5. Why don’t we invest much more on nutrition and education?
The cost-effectiveness of nutrition interventions is well known. According to the Copenhagen Consensus, each dollar spent on nutrition in the first 1,000 periods of a child’s life returns $45 in productivity over a working life span through age 50. Investing in preschool in sub-Saharan Africa similarly would return $33 for each dollar invested. Surely, returns like these are high enough that, even if one accept inefficiencies in service delivery, the importance proposition remains undisputable. Interestingly, returns of a similar order of magnitude for cutting tuberculosis ($ 43 return ), malaria ($ 36 return) and HIV/ AIDS( returns of $28 to $10) have led to major international efforts to expand development aid. But aid for nutrition and education continues to slowdown far behind what is needed to achieve the Sustainable Development Goals. Why isn’t there a significant scale up of aid to education and nutrition, as was the case with aid for health interventions?
The answers to each of these questions will prescribe outcomes that will affect many millions of lives in 2019. Let’s hope we figure out the answers relatively quickly.
Read more: webfeeds.brookings.edu
