Hostname: page-component-78c5997874-g7gxr Total loading time: 0 Render date: 2024-11-15T21:33:39.617Z Has data issue: false hasContentIssue false
  • English
  • Français

Global stability: risks and remedies

Published online by Cambridge University Press:  26 March 2020

J.S. Flemming ,
M.V. Posner  and
J.R. Sargent
Get access Rights & Permissions [Opens in a new window]

Abstract

In the last few years the stability of the world economy has rested upon a prolonged boom in the USA offsetting recession in Japan and a slowdown in other East Asian ‘tiger’ economies. The risk now has to be faced that, if the ‘bubble’ in the US stock market should burst, recessionary influences would spread throughout the OECD area and beyond; and this could happen at a time when the conventional wisdom has lost faith in the effectiveness of ‘reflationary’ monetary and fiscal policies. After re-examining the case for deploying such policies as a positive response to recession, the authors first ask how the rules guiding monetary policy should be amended to reduce the probability of recession, and to counter it if it develops. They then consider the possibilities for fending off or mitigating recession by use of fiscal measures. They conclude by calling for public discussion of the policy issues involved as a basis for the formulation of contingency plans against the non-negligible risk that the balance of the world economy could before long be tilted in a recessionary direction.

Type
Articles
Information
National Institute Economic Review , Volume 169 , July 1999 , pp. 55 - 67
Copyright
Copyright © 1999 National Institute of Economic and Social Research

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Notes

1 World Bank Policy Research Report, ‘The East Asian Miracle’ (1993), pages 4 and 56.

2 See also Nigel Pain, ‘The World Economy’, National Institute Economic Review, April 1999.

3 This issue has been exhaustively studied by Sushil Wadhwani, ‘The US Stockmarket and the Global Economic Crisis’, National Institute Economic Review, January 1999.

4 See the World Bank Policy Research Report ‘The East Asian Miracle’ (1993), Figure 1.10, page 56. The measure of productivity referred to here is that of Total Factor Productivity, i.e. the growth of output after taking account of the growth of inputs of labour and of both human and physical capital.

5 Forecasts by the World Bank envisage that the five East Asian ‘crisis' economies (Indonesia, Malaysia, Thailand, South Korea and the Philippines), which achieved a growth of real output averaging 7 per cent per annum in the period 1991- 7, will recover from 0.1 per cent in 1999 to 5.2 per cent in 2001-7. For Japan, where the annual growth of real GDP declined from 9.7 per cent in 1966-73 to 3.9 per cent in 1974-90, and there was an absolute fall in output of 2.5 per cent in 1998, no forecast is given for the subsequent period. (Global Economic Prospects 1998/9, Tables 1-8 and A 2-1).

6 In 1996, GNP per capita (on a purchasing power parity basis) was reckoned to have reached 96 per cent of the US level in Singapore, 87 per cent in Hong Kong, 84 per cent in Japan, and 47 per cent in Korea, compared with 37 per cent in Malaysia, 24 per cent in Thailand and 12 per cent in Indonesia (and 12 per cent in China) (World Bank Atlas 1998).

7 According to World Bank figures, Hong Kong, Singapore, Indonesia and South Korea together accounted for not much more than 3 per cent of world GDP in 1996.

8 The figures for the capital-output ratio are from Bosworth and Collins, Economic Growth in East Asia, Brookings Papers on Economic Activity 2: 1996. Those for the profit share refer to the gross operating surplus in industry, transport and commerce taken together, and come from the OECD Economic Outlook. The rate of profit is calculated as the ratio of the net operating surplus to the net capital stock: see Glyn, ‘Does aggregate profitability really matter?’, Oxford Institute of Economics and Statistics Centre for Economic Performance, Discussion Paper 17 (March 1997). For Japanese manu facturing alone, Glyn's calculations show a fall in the gross profit share from 47 per cent in 1960-73 to 27½ per cent in 1994, and in the gross profit rate from 35 per cent in 1960-73 to 13 per cent in 1992. We are grateful to Mr Glyn for supplying us with updated figures.

9 The need might be avoided to the extent that the schemes' assets are invested abroad.

10 Preferably the action should be able to be relied on in advance. As in Japan, a delayed or ex-post reaction may be too late to be effective.

11 See Bank of England Monetary Policy Committee, ‘The transmission mechanism of monetary policy’ (April 1999).

12 See Orphanides and Wieland, ‘Price stability and monetary policy effectiveness when nominal interest rates are bounded at zero’, Board of Governors of the Federal Reserve System Finance and Economics Discussion Papers 1998-35.

13 Major Recessions: Britain and the World, 1920-95 (Oxford University Press, 1999).

14 ‘The US stockmarket and the global economic crisis’, National Institute Economic Review, January 1999.

15 If this objective were sacrificed, the redeployment of labour into the production of consumer goods would be inhibited to the extent that the lift in their prices encouraged the import of substitutes.

16 Against this view, it is argued that in these circumstances lenders may take gambles on ‘resurrection’ which, if successful, would return them to health and, if unsuccessful, would not add significantly to the size of their subsequent default and the certainty of their death. See M.H. Miller, ‘Financial crisis in East Asia: bank runs, asset bubbles and antidotes’, National Institute Economic Review, July 1998.

17 The impression given by published figures for Japan's public debt is that, measured net of government holdings of finan cial instruments, it is quite modest. It is probably less so when account is taken of future pension liabilities, and of other off-budget commitments and contingent liabilities; but a good deal of obscurity hangs over the true position.

18 Under EMU, however, this would not generate the instant punishment by balance-of-payments crisis familiar to British readers.

19 The opportunity could also be taken to correct any shortfall in public sector pay that may have developed (as it has a way of doing). This correction would not be reversible either, but it would be time-limited since, when pay levels in the public sector have fallen behind those in the private sector, a levelling-up cannot be put off indefinitely while maintaining public services.