PowerPoint Aug 06 Shanghai IDEAs

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State of the World Economy : 

State of the World Economy Cambridge Endowment for Research in Finance (CERF) Alphametrics Ltd. A research programme IDEAs Shanghai August 2006

What we want to know about the world economy: 

What we want to know about the world economy Growth and distribution ... What outcomes can we expect ? Can policies make a difference ?

Changing the direction: 

Changing the direction Globalization makes countries and regions inter-dependent Global policies require coalitions Coalitions require common understanding

How we can understand such a huge and complex system ?: 

How we can understand such a huge and complex system ? Preconceptions - are they correct ? Data - does it tell us what we need to know ? Models - how complicated ? Scenarios - can they answer our questions ? Finally - some data and a scenario

Preconception: 

Preconception Global development is a historical process political power markets technology environment and resources social change

Can we measure the historical process with statistical data ?: 

Can we measure the historical process with statistical data ? The statistical data are incomplete and imperfect BUT ... we have much more data than ever before SO ... let's try

The best data ?: 

The best data ? Commodity trade Balance of payments National accounts Population and demography Energy Financial markets

Problem #1 So many countries: 

Problem #1 So many countries UN statistics cover over 200 territories but coverage is uneven and territories change over time (eg former USSR) Some are very huge (China, India) and others are tiny (island states) Solution A: world regions (blocs) Solution B: 80+ countries and groups Solution C: variable geometry ?

Problem #2 Gaps & inconsistencies: 

Problem #2 Gaps & inconsistencies Missing history Recent figures Errors ... Solution A: estimation Solution B: filtering and reconciliation

Problem #3 Specifying models: 

Problem #3 Specifying models How much detail ? How much regularity ? Structural relationships ... Things that are very difficult to model financial markets the price of oil politics and 'confidence' longer-term trends

Problem #4 How good is the model ?: 

Problem #4 How good is the model ? Is it relevant to the questions we want to answer ? Is it consistent with what we know about institutions ? Is it consistent with results of detailed studies ? Does it have plausible dynamics ? Are the residuals plausible in the light of the data generation process ? known structural changes and historical events ?

Problem #5 Defining scenarios: 

Problem #5 Defining scenarios Q1: what outcomes can we expect ? baseline projection alternatives Q2: can policies make a difference ? targets instruments

Work in progress: the data: 

Work in progress: the data

Work in progress: the model: 

Work in progress: the model

Terms of trade: primary products and energy: 

Terms of trade: primary products and energy

Income growth rates: 

Income growth rates

Trade balances as % of income: 

Trade balances as % of income

Energy supply: 

Energy supply

Now for your entertainment ...: 

Now for your entertainment ... Some facts (history) and a scenario

Who succeeds in the global market today ?: 

Who succeeds in the global market today ? Global markets are dominated by large companies and production is concentrated in specific regions 5% of the market is shared by countries with almost half the world's population ** ** Nigeria, Indonesia, Pakistan, India, Bangladesh and many other countries in Asia, Africa and America

Industrial exports: 

Industrial exports The market has been dominated by Western Europe, the USA, Japan and the rest of Asia China attracts attention as a new entrant Exports of manufactures, billion US$ at 2004 prices excluding intra-bloc trade

The world market for manufactures: 

The world market for manufactures The USA and Western Europe provide the main markets although Asian imports are growing The rest of the world exchanges energy and raw material exports for manufactures Imports of manufactures, billion US$ at 2004 prices excluding intra-bloc trade

Under construction: 

Under construction

Harder times ahead ?: 

Harder times ahead ? Growth of world trade relies on growth in the US With rising interest rates and the high price of oil, will US growth continue ? And, longer term, we have to consider energy use and climate change

The growth engine ...: 

Debt of the personal sector as % of disposable income The growth engine ... Debt of US households is now one-and-a-half times income To sustain the current growth pattern, debt may have to rise to about two-and-a-half times income ten years from now

Asset appreciation: 

House price index S&P 500 index Asset prices in real terms Asset appreciation Accumulating debt has been backed by ever-rising asset prices If this continues, equities and houses should be priced at one-and-a-half times their (already high) value ten years from now ?

If U.S. spending slows down: 

Continuing the pattern Slowdown Average growth of the U.S. (1970-2004) = 2.8% If household spending reaches a plateau relative to income, growth will slow down If U.S. spending slows down (% p.a.)

Could the slowdown result in a recession ?: 

Could the slowdown result in a recession ? Average growth of the U.S. (1970-2004) = 2.8% Recession Slowdown Weakening sentiment may affect - asset prices - credit expansion - household spending - jobs - tax revenue How will governments and monetary authorities respond ? (% p.a.)

What can the rest of the world do to reduce the risk ? : 

What can the rest of the world do to reduce the risk ? A more balanced and sustainable growth process in each world region Less dependence on the USA Less reliance on high-cost imported energy Closer regional integration Growth sustained by domestic spending as well as exports

A scenario ...: 

A scenario ... Can Asian countries bring about a reduction of the US trade deficit by relying more on domestic spending ? Rest of Asia Rest of world China Japan Trade surplus ($billion)

Increased energy efficiency: 

Increased energy efficiency Energy saving will reduce damage to the environment and facilitate a more balanced pattern of trade Rest of Asia China Japan Energy consumption (tons of oil equivalent per million $ income)

Growth generalized: 

Growth generalized Per capita income, 2005 - 2015