Since the 2008 financial crisis, the global economy has shown a relatively strong growth momentum for the first time this year. It is expected to grow 3.6% and 3.7% in 2017 and 2018, a significant increase from 3.2% in 2016.
This good news comes late. Why? In the six or seven years after the global financial crisis, the economic recovery was weak and the performance was not satisfactory. The International Monetary Fund (IMF) lowered its expectations for global growth over the past six years consecutively. However, the economic recovery of China, Japan, the United States and other emerging market countries in Asia has accelerated this year. The IMF’s growth forecast for China in 2017 is also raised from 6.6% in April this year to 6.8%, and for 2018, from 6.2% to 6.5%. Within this year, the IMF has raised China’s economic growth forecast for 4 times. This fully shows that China and the global economy are improving.
The global economic recovery has not yet been completed
Concerning the current situation of global economy, the global economic recovery has not yet been completed. This judgment is based on the following points:
First, the inflation rate in many developed countries is still very low. Since the global financial crisis in 2008, many developed countries have adopted a series of conventional and unconventional loose monetary policies to help the economy recover. Many countries have lowered their policy rates to a significant level, but the inflation rate of major countries is still lower than the mid-term goals. They are 2.1% in the US, 1.5% in the Eurozone, and less than 1% in Japan.
Low inflation rates make the economic recovery more difficult. Raising the real interest rate will increase the borrower's debt burden, and is not conducive to companies and countries to get rid of high debt. The low inflation rate will cause product prices and corporate profits to fall. At the same time, if it remains low for a long time, it may change the market's expectations on inflation and delay market investment decisions, which is not conducive to economic recovery.
Second, the unemployment rate in developed countries has declined, but it has not brought about an increase in wages.
After the outbreak of the financial crisis in 2008, the global economy was in a state of “low growth, high unemployment and high debt” for a long time. During the crisis, many European countries reached a two-digit unemployment rate. The unemployment rate in Greece and Spain once reached 30%; even in the US it was 10% during the crisis. The unemployment rate in developed countries has declined now, especially in the US, falling to 4% in October, the lowest level since 2000.
The problem is that wage in developed countries grows slowly since the financial crisis. In general, when the economy recovers, and underused capacity or labor declines, wage growth should accelerate. However, the current problem is that the theoretically feasible growth in wage doesn't happen. This raises two questions. First, market inflation expectations are difficult to increase, which is not conducive to economic recovery. Second, the low wage growth has exacerbated income and wealth inequality and people's doubts about economic globalization, which has brought uncertainties to the economic recovery.
Third, high debt. In 2007, the ratio of government debt to GDP in most major developed economies was much lower than the so-called “security line” of 60%. After the crisis, in order to restore economic growth, many countries adopted strong fiscal expenditure measures. Coupled with slow economic growth and low government tax revenues, debts of some developed countries grew rapidly, and debt-to-GDP ratios of some countries approached or even exceeded 100%.
Private sector debt (including corporate and household debt) in developed and emerging market countries is rising. In 2016, private sector debt in emerging market countries rose to 125% of GDP, and that in developed countries reached 155% of GDP.
In the short term, increasing borrowing by enterprises and households can promote consumption the whole economy. However, in the case of high debt, once a signal of crisis appears in the market, it will trigger more chain reactions. IMF's analysis, based on samples of financial data from 57 developed and emerging market countries, has shown that the ratio of household debt to GDP in these countries will increase by 5% over the next three years, and economic growth rates may decline by 1.25%.
Fourth, although the global economy is experiencing a cyclical recovery, the long-term outlook is not optimistic. In 2016, the average income of 45 emerging markets and developing countries, some 15% of the global population, declined, some of which were mainly affected by the decline in commodity prices such as crude oil.The IMF estimates that during 1996-2005, the GDP growth rate per capita of developed economies was 2.2%, and it is likely to fall to 1.4% between 2017 and 2022. In addition, over the next five years, the GDP growth rate per capita may grow slower in more than 40 emerging and developing countries than in developed economies. In other words, apart from fast-growing emerging market countries such as China, the gap between economic growth and income levels in many developing and developed countries may gradually widen.
The global economic development faces four major challenges
In the past decade, a series of changes such as weak global economic growth, economic restructuring, technological innovation and economic globalization have brought many challenges to the global economic development. Here I mainly analyze four major challenges, including changes in the financial condition and rapid development of financial technology, low productivity, population aging and increased income inequality.
First, challenges brought about by the changes in the financial condition at home and abroad and the rapid development of financial technology. Since the financial crisis, central banks in developed countries have implemented large-scale asset purchase plans to stimulate economic recovery, resulting in the rapid expansion of their balance sheets. Today, as the global economy becomes more stable, central banks in developed economies begin to reduce their balance sheets and raise policy rates to guide the monetary policy back to normal. If the monetary policy is adjusted too fast, it will cause unnecessary financial market volatility and spillover effects. If it is too slow, it will lead to further increase of the vulnerability of the financial system.
The normalization of monetary policy by central banks in developed countries will affect the international capital flow to emerging and developing economies. The gradual withdrawal of the Fed’s quantitative easing policy may lead to an increase in interest rates and a steady US dollar exchange rate, which will ultimately cause capital outflows in emerging market countries. The IMF's research estimates that in the next two years, the normalization of the Fed's monetary policy will reduce international capital flows to emerging economies by $35 billion. If these countries take timely response and preventive measures, they can reduce the negative impact of capital outflows.
The rapid development of financial technology will pose new challenges to monetary policy, especially to the existing legal currency order and the central bank's currency operations. This is also a new topic of discussion among academia and policy-makers.
The second challenge is the decline in the growth of total factor productivity. In addition to capital and labor contribution, total factor productivity also measures all other factors affecting economic growth, including technological progress and improved management efficiency, also effective indicators for measuring the progress of an economy's production. According to the IMF's research, the growth rate of total factor productivity begins to slow down before the 2008 crisis, and further declines after the crisis, especially in emerging market countries, from the 2.5% annual growth rate before the crisis to the current 0.8%. Since 2008, total factor productivity growth in developed economies has been very low and even negative.
The continued decline in total factor productivity in developed economies is an issue of great concern to economists and policy-makers. This is caused by many factors. First of all, enterprises in distress that are weak to carry on debts, coupled with the banking system impacted by the crisis, have limited investment activities of enterprises to some extent. Among them, the impact of high-risk and long-term investment in R&D and intangible assets is particularly obvious, which affects the growth of total factor productivity. In addition, the uncertainty of economic policies also leads investors to a conservative attitude, away from high-risk and high-yield projects, and further reducing the growth of total factor productivity.
In addition, total factor productivity growth is also constrained by structural problems. For example, the development of communication technology brings convenience to people's lives, but they have not yet been able to translate into increased productivity. The aging of the workforce and the slowdown in global trade integration are also factors that constrain the growth of total factor productivity.
Increased productivity is critical to improve productivity and people's life standard. Especially in the long run, it is the most important source of rising income levels. Even if the labor force does not grow, we can create more goods based on higher efficiency, while releasing resources for the development and service of other new products, thus creating new employment opportunities. Such a process applies to several industrial revolutions in the history. Therefore, improving productivity, innovating and developing new growth points is a major challenge for developed countries as well as emerging market countries.
The third challenge is the aging of the population. It is not only a top priority for developed countries, but also a problem for many emerging market countries. In 1990, every 11 Chinese workers on average paid for 1 elderly person. In 2010, however, it fell to an average of 9 workers. In 2030, every 4 workers in China may have to pay for an elderly person. In many countries, population ageing is the main reason for the decline in long-term economic growth. The aging population greatly increases the need for public resources and the social security net, and it has made it difficult for poor people to improve their living standards.
If a country's national income can be improved before the aging, the high national income will help to lower the pressure of aging. However, in many countries, when the number of labor force reaches the peak of the population, their income per capita is far behind that of developed countries at the corresponding stage, also known as “aging before rich”. Compared with the income per capita when the working age population reached its peak in the US in 2008, China's income per capita was only one-fifth of that in the United States when reaching its peak in 2011. Many other emerging market countries face the same problem. Despite of some difficulties, it is imperative to fully understand this issue and respond in a timely manner.
The fourth challenge is the widening gap in income and wealth distribution. Despite the decline in the global population in poverty, income and wealth inequality in many countries is rising. From 1981 to 2015, the highest income tax rate for individuals in developed countries fell from 62% to 35% on average, which means that high-income groups actually enjoy more tax relief. Today, the top 1% income population of the world's total has about half of the world's wealth.
When the wage growth rate is lower than the economic growth rate, the proportion of labor income will decline. Since the capital tends to be concentrated in a small number of high-income people, the decline in the share of labor income will further increase the income inequality. In the decades before the 1980s, the share of labor income in national income in many countries was basically stable, but since then the share is declining, falling to the lowest level in 50 years on the eve of the global financial crisis in 2008 and never enjoying a significant rebound so far.
The latest research by the IMF shows that the decline in the share of labor income in developed countries is mostly caused by technological changes. The development of automation has replaced a large part of the work by machines; the rapid development of information and communication has also accelerated the income growth of some high-tech workers and entrepreneurs far above average. Studies have shown that economic globalization somehow lead to the decline in the proportion of labor income, but its impact is estimated to be about half of the technology change.
Severe income inequality will cause the general public's demand to shrink, and even political and social consequences. If the benefits of globalization is not widely shared, protectionism and economic isolationism may emerge. Brexit is a typical example. Once protectionism rears its head, it will have a negative impact on trade, capital and labor flows and economic growth.
Other non-economic factors include climate change, natural disasters, corruption, imperfect governance systems and geopolitical risks.
Although the global economic situation is improving in the short term, the potential risks of global economy in the medium and long term have not been completely eliminated, calling for strong policy measures. On the bright side, the global economic recovery provides a favorable time and environment for policy adjustment and reform, enabling countries to implement reforms, increase the inclusiveness of economic growth, ensure a sound financial system, and promote international cooperation.
First, policy-makers need to adopt a comprehensive policy based on the their conditions, that is, a combination of fiscal policy, monetary policy, and structural reform. The combination depends on the different circumstances of each country. In some countries with fiscal space, increasing infrastructure investment can help boost short-term demand and support sustained growth in the medium and long term. The key is how to apply the limited public resources to the most needed, to produce the largest economic benefits. Monetary policy can also continue to play a role. The central bank should strengthen communication with the market and promote the normalization of monetary policy in a timely and stable manner. The smooth transition of monetary policy in advanced economies will not only help prevent domestic financial market turmoil, but also provide a stable international financial condition for global economic recovery.
Promoting economic structural reforms will help optimize resource allocation, improve institutional efficiency, and promote economic transformation. Low-income countries should focus on improving infrastructure and the judicial system, and promoting capital market development. Emerging market countries need to improve the labor market, eliminate industry barriers, and increase competitiveness. Developed economies can focus on improving labor supply, creating better incentives for innovation, and increasing productivity. In general, improving infrastructure and strengthening the robustness of the banking system are beneficial to all countries. A research by the IMF shows that in the next decade, structural reforms will bring about 0.5% of economic growth to developed economies annually, and 0.6% of new growth to emerging markets.
The latest analysis by the IMF shows that global R&D spending is still below the ideal level. In 2011-2015, the average R&D expenditure of developed countries accounts for 2% of GDP, and that of emerging market countries is 0.65%, while that of low-income countries is only 0.15%. China's R&D spending has increased significantly in the past decade, reaching 2% of GDP in 2016. However, in order to maximize the spillover effect of technology,more has to be spent in this area. At the same time, adopting tax incentives for R&D and improving the property rights framework will help promote technological innovation and dissemination. Simplifying the tax system for SMEs also helps new companies enter the market and reduce informal economy activity, thereby increasing productivity.
Second, achieve lasting economic growth that benefits the public. The key is to increase investment in human capital, including investment in medical care, education and vocational training. Improving education and training can both promote the labor market and improve the skills of workers to better adapt to changes in economic structure. Human capital investment also helps to increase the share of workers' income. In addition, it is essential to improve social welfare and security nets, and provide affordable medical care for all workers. Women account for half of the workforce in the world.Giving full play to women’s potential requires more support for their greater participation in the labor market. Also, promoting inclusive financial policies will help strengthen economic performance, thus reducing inequality and making the economy a more diversified and sustainable one.
Third, maintain financial stability, improve the capacity to prevent and respond to financial risks, and establish a sound financial system. All countries should coordinate to use micro and macro prudential supervision policies, and should improve the monetary policy framework in a timely manner according to various new ideas and new demands emerging in the process of economic development. When dealing with new things, information and cooperation are the keys. It is necessary to strengthen multi-faceted and multi-level dialogue and communication, including dialogue between traditional monetary and financial experts and cutting-edge industries with leading financial technology, between economic policy makers and financial companies, among different countries, and between sovereign countries and international regulatory agencies.
Cross-border coordination and regulatory cooperation are even more important in the context that international financial and banking activities have gradually crossed national borders and become global transactions. In today’s world, countries are increasingly interconnected and interdependent. Global economic development will encounter opportunities and challenges during the process of economic globalization, multi-polarization, rapid development of information technology and changes in population structure, which means that multilateralism has become more important. To achieve shared and sustainable growth, everyone must work closely together. With the opportunity of the current global economic recovery, related parties should promote economic restructuring, improve long-term development potential, and strive to achieve common development and prosperity.
New trends and impacts of economic growth
At present, there are many major trends in the world, including the rise of emerging economies, the global correlation (trade, capital, and people-to-people exchange), ever-changing science and technology and demographic changes, which will affect economic development and our daily life.
The first major trend is the rise of emerging market countries. Emerging market countries develops rapidly in recent decades. In 1980, emerging markets and developing countries accounted for only a quarter of global GDP, and rose to 40% in 2016. If calculated based on purchasing power parity, the volume of emerging market and developing country economies have already surpassed those of advanced economies.
Today's emerging market countries are an important part as well as a driving force of the global economy. In the 1990s, emerging markets and developing countries contributed only about a quarter to global economic growth, and their contribution rose to about 50% in the first seven years of the 21st century. Since the outbreak of the global financial crisis in 2008, three-quarters of the world's economic growth can be traced back to emerging markets, with China alone contributing about 1/3.
Take a look at the world economic structure throughout the history. A long time ago, China, India and Europe led the development of the world. Over time, China and India somehow withdrew from the world economy, while Europe, the United States and Japan rose rapidly in the world economy. Looking ahead, China will be increasingly important in the world economy, and the world economy will be a a multi-polar one. If we comprehensively measure a country with various indicators, such as GDP, population, military expenditure, technology, health education, etc., the world today is dominated by the United States and the Euro-zone. However, by 2030, China is likely to be a world power just like the Euro-zone and the United States, if China continues to enhance development and national strength.
The second major trend is the deepening of the integration and connectivity of the global economy. In 1980, the world trade network was relatively shallow and small, while in 2014, it has covered almost everywhere of the world with a real trade volume three times of 1980's. At the same time, cross-border capital flows of the banks expand rapidly. In 1980, cross-border capital existed only in a few developed countries. Nowadays, thanks to the development of the economic and financial systems, emerging markets gradually integrate into the global banking network. The more developed banking network enables these countries to improve the efficiency of capital use and provide further financial support for economic development.
Global integration is not limited to the economy, and people-to-people exchanges between countries have also prospered. The number of international tourists worldwide has increased from 530 million in 1995 to 1.2 billion in 2015. The number of Chinese tourists increased from 28.85 million in 2004 to 117 million in 2015.
It can be said that the rapid development of global economic integration and connectivity has been benefited from the rapid development of information and communication technologies. This is the third trend. Since the beginning of the digital revolution era, technologies and creations spring up and bring broad prospects for future development, but also pose great challenges to economic transformation management.
In 2001, along with low-income countries, only one out of every five people had a cell phone. Today, on average, every person (above six years old) has one. The coverage of the Internet has increased from about 10% in 2001 to more than 50% today. New technologies, such as self-driving vehicles, robots, Internet finance, AI and quantum computing, are profoundly influencing and changing the global economy. If more new technologies can be fully utilized in production, it will certainly increase productivity and even bring a new round of industrial revolution. Fintech develops rapidly now, and China takes the lead in this respect.
The digital era brings benefits to highly skilled workers and may also force some low-skilled jobs to withdraw from the market. According to Oxford University's research, in the near future, 98% of bank loan clerks may be replaced by computers; 96% of receptionists may be replaced by automated service procedures; 92% of the possibilities, we no longer need retail salesman; 89% of the possibilities, we will no longer take the taxi driven by a human driver, etc. These are only speculations, whether it can be achieved remains unknown. However, from hand workshops to four inventions, from the use of steam engines to the common use of electricity, the history vividly shows that the pace of human progress never stops, and that technological innovation and production revolution reshape the present industries and give birth to more new industries. These changes all improve productivity and people's living standards. However, the impact and friction of digital trends on future development and employment also need to be addressed. In addition, how to share the benefits of scientific and technological progress to humans also needs attention and promotion.
We need to face and respond to the economic transformation needs in the digital revolution. There will always be a process of transformation and structural frictions. Someone may be left behind by the times. We need flexible response and active management. While enhancing the social security system, we will improve the education, vocational training and technological upgrading, and promote the rapid and effective redistribution of production resources to the most productive industries and departments. These measures will help our people adapt to new job requirements as soon as possible and turn new technologies into development in productivity. 。
However, we should focus on economic growth, and also other changes around us, which may have a profound impact on global social and economic development. Among them, aging is one of the problems, as I mentioned before, which will lead to the decline in the labor force, productivity, and ultimately an impact on economic growth. For example, Asia faces the challenge of “aging before rich”, which means that catching up with developed countries required greater efforts.
In today’s world, countries are increasingly interconnected and dependent. The world is changing, so is China. And China needs to be better and change faster to catch up with the trend of world development.
(The author's point of view does not represent the official position of IFF. This article is an original article. If you want to repost this article, please indicate the source of the article.)