Opinion

Two cheers for the new normal

The conventional wisdom about the state of the world economy goes something like this: Since the start of the 2007-2008 financial crisis, the developed world has struggled to recover, with only the United States able to adjust. Emerging countries have fared better, but they, too, have started to flounder lately. In a bleak economic climate, the argument goes, the only winners have been the wealthy, resulting in skyrocketing inequality. That scenario sounds entirely right – until, on closer examination, it turns out to be completely wrong.

By: Date: February 11, 2015 Topic: Digital economy and innovation

The conventional wisdom about the state of the world economy goes something like this: Since the start of the 2007-2008 financial crisis, the developed world has struggled to recover, with only the United States able to adjust. Emerging countries have fared better, but they, too, have started to flounder lately. In a bleak economic climate, the argument goes, the only winners have been the wealthy, resulting in skyrocketing inequality.

That scenario sounds entirely right – until, on closer examination, it turns out to be completely wrong.

Start with economic growth. According to the International Monetary Fund, during the first decade of this century, annual global growth averaged 3.7%, compared to 3.3% in the 1980s and 1990s. In the last four years, growth has averaged 3.4%. This is far lower than what many had hoped; in 2010, I predicted that in the coming decade, the world could grow at a 4.1% annual rate. But 3.4% is hardly disastrous by historical standards.

it is only the eurozone that has badly disappointed in recent years

To be sure, all of the large, developed economies are growing more slowly than they did when their economic engines were roaring. But it is only the eurozone that has badly disappointed in recent years. I had assumed, when I made my projections in 2010, that the region’s poor demographics and weak productivity would prevent it from growing at more than 1.5% a year. Instead, it has managed only a meager 0.3%.

For Japan, the US, and the United Kingdom, the prospects are brighter. It should be relatively straightforward for them to grow at an average rate that outpaces that of the last decade – a period that includes the peak of the financial crisis. In addition, the dramatic drop in the price of crude oil will serve as the equivalent of a large tax cut for consumers. Indeed, I am rather baffled by the IMF’s decision to downgrade its growth forecast for much of the world. If anything, with oil prices falling, an upward revision seems warranted.

Another factor supporting a more positive outlook is the rebalancing that has occurred between the US and China, the world’s two largest economies. Each entered the financial crisis with huge current-account imbalances. The US was running a deficit of more than 6.5% of its GDP, and China had a surplus of close to 10% of its GDP. Today, the US deficit has fallen to about 2%, and the Chinese surplus is less than 3%. Given that their intertwined imbalances were key drivers of the financial crisis, this is a welcome development.

It has recently become fashionable to disparage the economic performance of the large emerging countries, particularly China and the other BRIC economies (Brazil, Russia, and India). But it is hardly a surprise that these countries are no longer growing as fast as they once did. In 2010, I predicted that China’s annual growth would slow to 7.5%. It has since averaged 8%. India’s performance has been more discouraging, though growth has picked up since early 2014.

The only real disappointments are Brazil and Russia, both of which have struggled (again, not surprisingly) with much lower commodity prices. Their lethargic performance, together with the eurozone’s, is the main reason why the world economy has not managed the 4.1% growth that optimists like me thought was feasible.

The conventional wisdom on wealth and inequality is mistaken

The conventional wisdom on wealth and inequality is similarly mistaken. From 2000 to 2014, global GDP more than doubled, from $31.8 trillion to over $75 trillion. Over the same period, China’s nominal GDP soared from $1.2 trillion to more than $10 trillion – growing at more than four times the global rate.

In 2000, the BRIC economies’ combined size was about a quarter of US GDP. Today, they have nearly caught up, with a combined GDP of more than $16 trillion, just short of America’s $17.4 trillion. Indeed, since 2000, the BRICs have been responsible for nearly a third of the rise in nominal global GDP. And other emerging countries have performed similarly well. Nigeria’s economy has grown 11-fold since 2000, and Indonesia’s has more than quintupled. Since 2008, these two developing giants have contributed more to global GDP growth than the EU has.

Statistics like these utterly disprove the idea that global inequality is growing. Gaps in income and wealth may be shooting up within individual countries, but per capita income in developing countries is rising much faster than in the advanced economies. Indeed, that is why one of the key targets of the United Nations Millennium Development Goals – to halve the number of people living in absolute poverty – was achieved five years ahead of the deadline.

Economically, at least, the world is continuing to become a better place.

None of this is meant to deny that we are living in challenging and uncertain times. But one thing is clear: economically, at least, the world is continuing to become a better place.

This article originally appeared on Project Syndicate


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint.

Due to copyright agreements we ask that you kindly email request to republish opinions that have appeared in print to [email protected].

Read article More on this topic More by this author
 

Opinion

In the electric vehicle race, China coming first

China is not only a producer and consumer of EVs, but also of the battery components on which they depend.

By: Alicia García-Herrero Topic: Green economy Date: January 26, 2022
Read article More on this topic More by this author
 

Opinion

How Chinese competition helps western conglomerates

Firms like GE and Siemens may well find that their decision to split their businesses into multiple companies leads to increased profits and higher stock prices. But recent research indicates that this is not the only way conglomerates can boost efficiency.

By: Dalia Marin Topic: Global economy and trade Date: January 17, 2022
Read article More on this topic More by this author
 

Podcast

Podcast

Understanding Japan’s economic relations with China

What can Europe learn?

By: The Sound of Economics Topic: Global economy and trade Date: January 12, 2022
Read article
 

Blog Post

European governanceInclusive growth

12 Charts for 21

A selection of charts from Bruegel’s weekly newsletter, analysis of the year and what it meant for the economy in Europe and the world.

By: Hèctor Badenes, Henry Naylor, Giuseppe Porcaro and Yuyun Zhan Topic: Banking and capital markets, Digital economy and innovation, European governance, Global economy and trade, Green economy, Inclusive growth, Macroeconomic policy Date: December 21, 2021
Read article More on this topic More by this author
 

Podcast

Podcast

What to watch in 2022: China's economic outlook

Our end of 2021 recap of China’s economic activities.

By: The Sound of Economics Topic: Global economy and trade Date: December 8, 2021
Read article More by this author
 

Blog Post

European governance

The Global Gateway: a real step towards a stronger Europe in the world?

Disappointment at the lack of fresh cash from European Union global connectivity strategy is short-sighted: Europe supports global development more than any other country in the world. Using existing funds more strategically is the right priority for now.

By: Simone Tagliapietra Topic: European governance, Global economy and trade Date: December 7, 2021
Read article Download PDF More on this topic More by this author
 

External Publication

Chinese economic statecraft: what to expect in the next five years?

Chapter from 'Storms Ahead: the Future Geoeconomic world order' on the expectations from the next five years of Chinese economic policy, published on 27 October 2021.

By: Alicia García-Herrero Topic: Global economy and trade Date: November 26, 2021
Read article More on this topic
 

Blog Post

Goodbye Glasgow: what’s next for global climate action?

After COP26, and as the debate on whether Glasgow represents a success or a failure dies down, what next for global climate action?

By: Klaas Lenaerts and Simone Tagliapietra Topic: Green economy Date: November 18, 2021
Read article More on this topic More by this author
 

Podcast

Podcast

Why is China cracking down on big tech?

A look at China’s recent regulatory efforts in the digital space.

By: The Sound of Economics Topic: Global economy and trade Date: November 10, 2021
Read article
 

Opinion

COP26: why carbon pricing is crucial to China’s climate change pledges

China’s emissions trading scheme is a welcome but to reach its full potential, it needs to cover more of China’s emissions, go beyond the electricity sector and let prices reflect the true cost of carbon.

By: Alicia García-Herrero and Junyu Tan Topic: Global economy and trade, Green economy Date: October 22, 2021
Read article More on this topic More by this author
 

Podcast

Podcast

Will ‘common prosperity’ address China’s inequality?

Why is China reviving this old mantra?

By: The Sound of Economics Topic: Global economy and trade Date: October 13, 2021
Read article
 

Opinion

Xi’s pledge on financing coal plants overseas misses point

China’s domestic installation of coal-fired power plants continues at great pace.

By: Alicia García-Herrero and Simone Tagliapietra Topic: Global economy and trade, Green economy Date: October 7, 2021
Load more posts