Typical street scene in Santa Ana, El Salvador. (Photo: iStock)
IMF Survey: World Economy Can Bounce Back Strongly, Says Dervis
October 5, 2009
- World has potential to grow at 4 percent a year, according to scenario
- Technical innovation, surplus labor can drive growth
- Damage from crisis to potential output should not be overestimated
Despite worries that the global economy has been scarred by the financial crisis for many years, it is more likely to bounce back strongly and grow rapidly over the next 10 years because of strong productive capacity and technical innovation, said former Turkish Economy Minister Kemal Dervis during a lecture at the IMF-World Bank Meetings in Istanbul.
Dervis gives the Per Jacobsson Lecture at the IMF-World Bank Annual Meetings in Istanbul (photo: Thomas Dooley/IMF)
PER JACOBSSON LECTURE
“Whether this growth can be realized does, however, depend on demand side management both at the national level, and through improved global macroeconomic policy coordination,” said Dervis, who is a former head of the United Nations Development Program.
Delivering to a packed crowd the Per Jacobsson Lecture, titled “Growth After the Storm,” Dervis said that whereas a year ago, the world was on the edge of a financial and economic abyss, a vigorous policy response by major economies and concerted action by central banks forestalled a much worse disaster.
“What happened on Wall Street in September of 2008 was the financial equivalent of the Cuban missile crisis of 1962. We came very close to a complete meltdown … as the world had come very close to nuclear war in 1962. But the meltdown did not take place,” he said.
Need to stay alert
Dervis, currently Vice-President, Global Economy and Development at the Brookings Institution in Washington and Member of the Board of Overseers of Sabanci University in Istanbul and formerly head of UNDP, said it was important not to make the mistake of thinking that because output indicators are now improving, the policy response was unnecessary, or that, in the years to come, macroeconomic management can be on “some kind of auto-pilot, rather than being responsive to ever changing circumstances.” It may well be that a continued worsening of income distribution in countries such as the US and China could be as significant a demand-side threat to global growth, than the US and Chinese current accounts deficits and surpluses.
In his address, Dervis focused on the chances that the world could return to the growth levels of 2002-07, which averaged 3.2 percent globally. Some economists have suggested that the world will see below trend growth over the next few years because of longer term damage from the crisis.
But Dervis argued that that the world has the potential for very rapid growth, by historical standards, over the coming decade, because of strong supply side factors.
Supply side drivers
He identified the main drivers of growth in potential output as:
• Technical progress because of innovation and new knowledge, mostly taking place in the most advanced economies operating close to the knowledge frontier.
• The speed of diffusion of knowledge and technology.
• The rising trend in the aggregate world savings and investment rate. Despite the crisis, Dervis said most Asian countries as well as the oil exporters of the Gulf will continue to have high savings rates and their weight in the world economy will increase.
• Underutilized labor in the rural sectors of emerging and developing economies, constitute a fourth source of supply side growth.
“There are, therefore, powerful factors supportive of growth in potential output in the world economy, and there is no reason for any one of the main elements causing this trend to weaken in the medium term, if we define the medium terms to be about a decade or so,” Dervis said.
For the next decade at least, he said, there would be a large pool of “reserve labor” to be deployed in the higher productivity modern sectors in the developing economies, or indeed through migration, in the advanced economies.
Crisis caused massive output losses
Acknowledging that “macroeconomics is not just about aggregate supply. Supply still does not necessarily create its own demand,” he said the world had recently seen huge output losses because of the crisis. The massive decline in asset prices between the summer of 2008 and the spring of 2009, the huge rise in uncertainty, and the turmoil in the financial sector with accompanying declines in credit, “led to a worldwide fall in private consumption and investment demand and to the emergence of an output gap of a size the world had not experienced in decades.”
Nevertheless, the damage to the system from the crisis should not be overestimated. He described it as “somewhat of an exaggeration” to say that the American consumer has been the “driver” of world growth, in any long run sense.
“It may well be that a continued worsening of income distribution in countries such as the United States and China could be as significant a demand-side threat to global growth, than the U.S. and Chinese current accounts deficits and surpluses,” he added.
But growth promoted by a variety of factors
The real medium term drivers of world growth had been high rates of technical progress, rapid diffusion of technology, high Asian investment rates, the exploitation of economies of scale and the availability of labor and resources.
On the demand side, U.S. private consumption amounted to about 17 percent of total world demand in 2008. It grew at about 3 percent a year in the rapid growth period preceding the crisis.
“Suppose that it will only grow at about 2 percent over the coming five years. Such a 1 percentage point decline, compared to the pre-crisis years, by itself, and holding everything else constant, would mean a 0.17 percent point decline in the growth of aggregate world demand. If we instead project U.S. consumption to grow at only 1.5 percent a year over the next decade, the immediate decline in total world demand would be about a quarter of a percentage point. This would be significant, but hardly cataclysmic,” he added.
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