Global Imbalances, Under‐consumption and Over‐borrowing: The State of the World Economy and Future Policies

Abstract

This contribution addresses the question of whether growth convergence can be sustained in the global economy without compromising welfare and without causing major crises. It employs a simplified stock‐flow analytical framework to examine the proposition that the pace and pattern of global growth is conditioned by ‘under‐consumption’ in some regions of the world and ‘over‐borrowing’ in other regions. A baseline projection using the Cambridge‐Alphametrics model (CAM) illustrates consequences of resumed global imbalances after the 2008–2009 crisis. An alternative scenario exemplifies the case in which China and India shift towards internal income redistribution and domestic demand‐orientated policies and suggests that this will not be sufficient to correct global imbalances or induce improved growth rates in other developing regions. Finally a more ambitious development perspective is simulated. Such a scenario requires internationally‐coordinated policy efforts, with a greater role for governments in the management of demand, income distribution and environmental sustainability, as well as measures to reduce instability of exchange rate and commodity markets.

Income Inequality and Wealth Concentration in the Recent Crisis

“…A common shortcoming of this research is that imbalances within the Eurozone are not discussed in relation to inequality. A study by Cripps et al (2011), using a stock-flow consistent (SFC) model, furthermore Barba andPivetti (2009), Hein (2012) and van Treeck (2014) argue that US households increased their debt to keep up their consumption with richer parts of the population (the so-called 'keeping up with the Joneses' effect).…”

The imprudence of labour market flexibilization in a fiscally austere world

“…By dis-saving or borrowing to maintain imports, the losing economies may momentarily avert spillovers onto their trading partners (see footnote 19 above). Indeed, the lead-up to the recent global crisis showed that when an economy enjoys a privileged position in the global financial market, it can resort to compensatory borrowing for a long time (Cripps, Izurieta and Singh, 2011). However, as debt piles up, borrowing becomes unsustainable.…”

“…This creates a dynamic wherein GDP growth is heavily influenced by export competitiveness, while improvements in labour productivity result from the relocation of existing technologies to countries with lower wages, thereby making the degree of wage compression the most important feature that differentiates countries. Cripps, Izurieta and Singh (2011) propose a framework that traces the effects of lowering (wage) income in some regions of the world economy. Since the world's current accounts sum to zero, spending (and its financial counterpart, asset accumulation) is tied to expected income and wealth targets by stable stock-flow relations.…”

The Political Economy of Industrialization

“…The last paper in this cluster of articles is the forward-looking and global modelling analysis of development prospects for the industrializing world (2010-30) by Francis Cripps, Alex Izurieta and Ajit Singh (2011). Their paper is entitled 'Global Imbalances, Under-consumption and Over-borrowing: The State of the World Economy and Future Policies'; it compares a carefully crafted cooperative 'Global Development Scenario' for the world economy and major national economies to a non-cooperative 'Business-As-Usual Scenario' (BAU), in which high profit rates in the export-led developing world (and especially in China) lead to wage repression and labour-cost saving in the OECD economies, where low interest rates and cheap credit continue to fuel over-borrowing, over-indebtedness (of households and firms) and asset price bubbles.…”