global financial crisis: implications for global trade lowy institute june 10 robert z lawrence...
TRANSCRIPT
Global Financial Crisis: Implications for Global Trade
Lowy Institute June 10
Robert Z Lawrence
Harvard Kennedy School & Peterson Institute for International Economics
The Challenge
Financial Crisis
Weaknesses of Capitalism? Free Trade? Or Financial System Laissez Faire?
Prior to Crisis
2000 View: Trading system of for Industrial countries but inadequate for development,
(besides China and India).
Response: Doha Development Agenda: Growth through higher farm prices.
Developing Countries: Widespread Growth
Developing Country Growth
0.0
2.0
4.0
6.0
8.0
10.0
12.0
Af rica
Middle East Sub-Saharan Latin America China India Asean NIEs
1997-2001
2001-2007
2008-2009
Global Growth Since 2000: The Great Divergence.
GDP Growth 1980-2013
0
1
2
3
4
5
6
7
8
9
Advanced economies
Emerging and developing economies
IMF: WEO Oct 2008
Great Irony
Eight years of trade-led widespread prosperity in developing countries.
(booming commodity prices, exports, foreign investment) Developing countries running trade surpluses, accumulating
foreign exchange reserves.
Disappointing performance in developed countries especially the US (dot.com burst, weak wage growth etc).
No surprise that attitudes shifted in Developed Countries.
The Only Problem: Global Imbalances
Big Questions: Were borrowers solvent? Was US spending beyond its means? Could lenders accumulate? Could the world add $ claims on US?
Missed totally: the weak link the intermediation process.
How Could it Happen?
Intellectual Reasons.
Political Reasons.
Response to Shock
Capital flows dry up. Commodity prices plunge. Trade Flows falling faster than great
depression.
Almost no country is spared; Interdependence proven!
Will Mistakes of 30s be repeated?
Fiscal Policy.
Monetary Policy and Financial System Rescues.
International Cooperation.
Smoot-Hawley.
Trading System: Good and Bad News
Good News: WTO and System based on Rules. Intellectual Understanding of Dangers of
Protectionism. G20 Commitments and cooperation
Bad News: Loopholes in Rules. Political demands for protection. Increased government involvement provides
opportunities for supply Spillover into trade and project finance.
Wither World Trade?
Short Run—a V an L? My view: Reverse Check Mark Good news: Many countries were in
reasonable shape. Low inflation, strong fiscal positions, high foreign exchange reserves
We are now seeing the end of the begining
But Major Challenges for Trade
US – short run, impressive fiscal expansion, and federal reserve
responses. The central weakness requires US action.– The real conflict for US is between the short and medium
term.– Short term politics are easy but longer term how to tighten
belts, remove liquidity without inflation. EU:
EU – Can the Euro survive?– Deficit and Surplus Countries.– How to restore growth
Challenges
China: Towards an internally driven economy?
Implications for other countries.
– Decoupling 2.0?– Domestic drivers in Developing Countries.– Opportunities for Commodity Producers like Australia
Financial globalization particularly via private capital markets is going to be constrained.
Export-led growth, via supply-chains that end up in the US and the EU are going to be more limited.
The competition will be for markets dominated by the emerging middle classes in developing countries.
Global Trading System
Doha: Can it be done?– Some good signs. – India, – US,– A more valuable agreement.
Longer Term.– Challenge of a multi-polar common system based on self
interest – WTO: Variable geometry and broader agenda?– Regional Agreements: Specialized Roles? – Dangers of self-fulfilling internally driven system