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how do you do. The annual meetings of the World Bank and IMF, when the world's economic policymakers convene in Marrakech this week, won't generate much buzz. The tragedy in the Middle East will cast a shadow on whatever views they subscribe to. This was also the case with the recent earthquake in Marrakech, a sad illustration of how the global economy is being battered by external shocks that standard modeling has little hope of understanding. Today I would like to offer some thoughts on how we should think about the global economy in this changing world.
Of course, short-term efforts must continue, and multilateral financial institutions are issuing formal reports and forecasts. For example, the IMF's World Economic Outlook considers the world economy to be merely “slogging along.'' No wonder, interest rates are starting to rise in earnest, cost of living pressures remain high, and China still appears to be in a real estate crisis (see IMF chart below).
The news isn't all bad. The IMF shows that despite inflation, income equality has increased in many countries as they recover from the pandemic.
But when uncertainty is this high, paradoxically there is more to be gained by assessing the global economy over a more distant horizon. There is no doubt that we are undergoing profound structural changes and that there will be no return to the previous status quo. Of course, the final outcome is even more uncertain than short-term predictions. However, they are at best qualified quantitative guesses, but in the long run they can try to identify patterns in the forces of change, which may be more informative than short-term predictions.
I would like to focus on three overarching features of the direction of economic change. The first is fragmentation. That means the rise of new economic barriers between nations and the end of the globalizing impulse that has defined the world economy for almost 40 years. The second is increased volatility. Whether it's the intensification of climate change, the frequency of previously unthinkable geopolitical shocks, or the inherent instability in financial markets that we're discovering as interest rates rise.
The third characteristic is a rather comprehensive category. I think of this as the rise of the supply side. The increased volatility and shocks we face seem increasingly likely to impact the supply side and the structural makeup of the economy. The supply side is also the main site of the return of state activity in economic management. Governments, which have primarily focused on managing demand (through independent central banks) and redistributing the fruits of growth (through tax and benefit policies), are now responsible for shaping the economic structure and direction of growth. began to take on the role of This new activity will apply to huge policy areas, ranging from geopolitical resilience (building national microchip supply chains), decarbonizing energy systems, and managing the digital transition of our lives and livelihoods. .
If these are three sensible headings to organize your thoughts about what's going on, it's clear what the potential economic risks are. A potential cost of fragmentation is the cost of duplication. This is the cost of establishing and maintaining numerous “nearshore” value chains when a single global value chain is established and maintained. Increased volatility means increased insurance costs in the broader economic sense of resources that must be diverted from alternative uses to protect against or mitigate losses that may now occur more frequently. And the potential cost of supply-side advantage is inefficiency. The risk is that as governments become more involved in managing supply-side disruption and structural change, there will be more opportunities for bad policy choices.
However, these risks are conceptual. In reality, it's very difficult to know how things will actually play out. Consider fragmentation. As I have argued previously, what we are most likely to see is not 'deglobalisation' but an intensification of 'regional globalisation', meaning that ties between economic blocs are likely to weaken. Despite this, there is still greater and deeper integration within economic blocs.
The fact that this costs a lot of money tends to be seen as an object of faith. But it depends on what the optimal size of the supply chain is. He is probably the only company that can efficiently produce the world's most advanced microchips. (Or perhaps the number is zero, given that such factories are unlikely to have been established without sufficient public support.) If so, repatriating supplies There are financial costs to repatriation. However, this is unlikely to be the case in most areas, e.g. electric cars. Given the size of a typical car factory, it's hard to see what kind of economies of scale can be gained by producing, say, 50 million cars a year in China. Even if North America, Europe, and China each produce 10 million units, they have already reached their limit. 20 minutes each.
Therefore, estimates that fragmentation has particularly high costs (such as the IMF's model that suggests that trade collapse is equivalent to 7% of global gross domestic product) may not be large enough to exhaust economies of scale. must rely on ambitious assumptions. However, this is highly uncertain. While it is plausible that stronger regionalization is less efficient than “full” globalization, it is also plausible that it is not necessary.
(Of course, trade can also be driven by different countries' different resource endowments, but most modern trade is a question of making the most efficient use of technologies that become cheaper to use the larger the market.) And in response to the allure of full globalization, poor countries have been provided with cheap labor, which has served as a substitute for automation and other technological upgrades, leading to slower productivity growth. Please note that this is the cause of
Volatility is obviously more costly. In particular, real physical volatility caused by events such as more frequent extreme weather events and acts of war. A greater proportion of society's resources need to be devoted to physical investments to protect against shocks (think flood defenses and stockpiling food and medicine), and both financial insurance and countercyclical policies need to be expanded. there is.
However, keep in mind that fragmentation can reduce volatility. If you have three regional supply chains instead of a single global supply chain, there are alternatives even if one link in one chain breaks. New supply-side advantages could also help. The increased role of the state not only poses risks of inefficiency, but may also contribute to increased stability, predictability, and thus productivity. Policies can, for example, commit to long-term policies on carbon pricing (as in Norway) or firmly commit to creating markets for particular goods (as in the US Inflation Control Act). It can be designed to reduce volatility and uncertainty for a company. To do).
All of this is deeply incomprehensible. But in the face of uncertainty, it helps to systematize our ignorance. After all, knowing what we know now is a kind of wisdom.
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