I mean it’s economy is really big. Have a look at these very nice visualisations which make exactly that point from a GDP point of view:
Or if you’re more interested in the other ‘powerhouse’ economies of the world, consider this:
Big place and nice pictures to make that point…
At least, that’s what I saw to my disappointment as I perused the £1,000 plus ($1,500+) Easter school being offered by the venerable Royal Economic Society this April. Last year they talked about Auctions and Markets – interesting, but this year they have gone for “credit, business cycle and finance”.
I am being overly harsh. If the whole thing was a big collection of theoretical Merton-Scholes / Fama financial-theory-is-fantastic-don’t-worry kind of thing there would be good reason to criticise them. I still remember Nassim Taleb’s call to boycott any business school that continued to teach portfolio theory in 2009. They still do teach that stuff, but some of the things slated for the Easter school isn’t all bad. There seems to be a focus on empirical work, at least in the recent working papers on the first lecturer (Princeton’s Prof. Hyon Shin) and a lot of his recent work looks at financial intermediaries. The second lecturer (also from Princeton, prof. Hirotaki) seems interested in empirics, but only to the extent that they fit into “theoretical models”, and an older (pre-crisis, 2007) paper of Prof Shin’s uses the assumption that traders use Value-at-Risk models and finds that this may amplify shocks to the system if traders are risk neutral. A second very timely paper of his and Gara Afonso showed, in October 2008 no less, that:
banks attempting to conserve liquidity cause an increase in the demand for intraday credit and, ultimately, a disruption of payments. Additionally, we find that when a bank is identified as vulnerable to failure and other banks choose to cancel payments to that bank, there are systemic repercussions for the whole financial system.
I think this sounds rather interesting actually, although how much of the course will be talking about exciting empirical results and research, and how much will be on theory remains to be seen. I don’t think we need to throw Taleb’s book at these people, but I am not going to throw a grand their way either. Hey, there’s a recession ending over here, (with 0.1% growth), no need to go nuts just yet.
The crisis has struck home and once more there are calls to get rid of GNP as it no longer is representative of the economy in the year 2009, and because it misses all those textbook issues – as argued in a New York Times op-ed two days ago by Eric Zencey.
I am not saying that I disagree with Dr. Zencey’s argument, I am sympathetic towards it, and perhaps his best point is that “We could keep the actual number [GDP], but rename it to make clearer what it represents; let’s call it gross domestic transactions.” This is in the context that GDP doesn’t distinguish between costs and benefits, and only accounts for monetary transactions, while failing to recognise the cost to the natural balance sheet of digging ressources out of the ground. Zencey mentions the Hurricane Katrina phenomenon which cost $86bn to clean up, and claims this would have been added to the Louisiana GDP growth despite the wanton destruction and obvious poor state many parts of Louisiana and New Orleans especially still is in. His argument is fair, although government reports on the fall-out have emphasised slow-downs in GDP growth, so the exact numbers may be a bit controversial. The main problem about GDP for Zencey is that:
If you kept your checkbook the way G.D.P. measures the national accounts, you’d record all the money deposited into your account, make entries for every check you write, and then add all the numbers together.
Technically speaking that is not exactly accurate, as we seperate out the income flows and expenditure flows into two seperate accounts of the same GDP – although there is something to Zencey’s argument that we only count the Cash Flow – something unimaginable in a corporate situation. That said, the system does do a lot of funny counting: For example, business retained earnings are treated like consumer savings freely available to spend – something they are obviously not – while, in the US accounts, public hospitals and state universities are treated as transfer income institutions, not adding directly to GDP while all military expenditure (capital and current) technically adds to the US ‘growth’.
There’s a lot of things about GDP that needs to be addressed, but the UN would probably just point to the 2008-09 SNA revisions currently being finalised, although they will not fundamentally change the system onf national accounting… It’s a long road ahead before we might replace GDP with something more socially useful. A tip of the hat goes to Juan Pablo Pardo-Guerra for pointing me to the op-ed.
Robert Fogel just released a new working paper aiming to analyse how the East Asian Miracle impacted growth theory. The paper goes a lot further, providing excellent work – as one expects of Fogel – on growth theory and how it has beeninfluenced by the economy since the Second World War, and even before. Most shocking is the results in tables 7 & 8 which give global GDP and for 2000 and forecasts for 2040. In the paper Fogel remarks that his calculations indicate a “possible, perhaps probable, restructuring less than a generation from now” of the global economy (2009: 32). If the numbers are even close to right, we are in for some serious change, with the traditional economic power balance shifting away from the Anglo-Saxon world, straight into Asia, by-passing Russia.
Global GDP Forecasts for 2040 indicates a serious change in the world economy
If the numbers are right, we are looking at a shift away from the US, EU15 and Japan, who in 2000 were responsible for 51% of Global GDP, directly over to China and India who together with the East Asian Tigers will be responsible for a whopping 63% of global GDP by 2040. I am not completely convinced about the Chinese figures just yet. They seem to rely on an annual growth rate of 8.4% while India is set for annual GDP growth of 7%. That being said, both these countries’ have had higher growth rates than Fogel’s requirement since 2000, so who knows? The EU 15 countries are forecast to grow by an average 1.2% with the U.S.A. leaping ahead at an average 3.7%. Perhaps this is more skewed than the Chinese and Indian growth forecasts, so it may well be that we will see a shift of Fogel’s proportions away from the G3-7 crowd towards Asia.
China to make leaps and bounds
On a per capita basis, the U.S. is set to stay at the top of the pile, and here their growth forecast seems a little optimistic compared to the EU one. The U.S. is set to earn 107,000 PPP U.S. dollars per capita in 2040, and close on their tail is China (!) with $85,000 per capita. India is set to increase their income ten-fold, while the ‘Rest of the World’ will double, placing them at the bottom of the totem pole. If one was to revise the U.S. and EU figures, averaging them out at 2.45% annual growth each, they stand to lose another 2.37% of their share of the world output in 2040, and the per capita income of each region is lower than both that of China and the six South East Asian Tiger Economies. The EU15 would be marginally ahead, earning $64,876 to the USA’s $64,492 per annum.
The paper also has a host of other interesting points, especially about the ‘verbal’ endogenous growth theories from the 1950s and 60s, which Fogel identifies as seperate from the mathematical ‘new growth theory’ of the 1980s. His coverage includes technical change (as dealt with by Schumpeter, Griliches, Mansfield and Schultz) and even the work of Economic Historians, such as Douglas C. North, who has published widely on economic growth and its effects.
When Fogel addresses the demographic transition usually associated with long term economic growth the paper strikes an odd tone however. He refers to the literature which shows that growth has significant long term structural effects on any economy, and these can be socially disruptive. He then goes on to provide an example from The U.S. where ”the rapid economic growth of 1945-1970 also produced new concerns about equity issues, particularly between whites, blacks, and Hispanicsm and gave momentum to the movement for equal rights for women. Economic Growth creates social problems because it is profoundly disruptive to traditional values and religious beliefs, to longstanding family patterns of organization, and to numerous monopolies of privelege” (Fogel 2009: 18).
I understand what he is saying, economic growth can – and usually does – impact on the social structure of any given problem, I just wish he had not reffered to such changes as creating “social problems” which is how he then appears to categorize the movements for universal suffrage, equal rights and racial discrimination. Beyond that, the paper is truly a great read.
Robert W. Fogel. 2009. “The Impact of the Asian Miracle on the Theory of Economic Growth.” NBER Working Paper No. 14967. May.
It seems that there is bad news around every corner, but there is a shimmer of light if one has a look at some development statistics for the last 30 years. At least the ones presented by William Easterly seem to indicate some real progress over the last many years:
Really?
This seems to indicate two things: development economists know what they are doing and life, globally, has been getting better over the last thirty years: To the former Easterly responds “One group that doesn’t deserve much credit is “development experts,” because there is a terrible crisis of confidence in development economics now, where we all freely confess we don’t really know what to advise governments on how to speed up development.” … The question then remains whether the beautifully logged series are representative of real change or just creative statistics… Any thoughts?
Now here’s some statistics which should be cause for concern…The G10 country doing the best in terms of banking liabilities as a percentage of GDP is the U.S….. with only a hundred odd percent of liabilities. That is the best performer, and that is after all the bail-out fun!
Belgium, Ireland, Switzerland, the Netherlands and the UK all have more than 3 times their GDP in private bank liabilities. Unsure where this might lead to, it is at least better than the original figure which put Ireland at a staggering 800% liabilities to GDP – although it turned out that Dresdner Kleinwort – the German consulting company – who had originally composed the chart had fallen prey to a bit of global risk themselves as they corrected the graphs with the comment
“I’m afraid to say, It looks like our outsourcing guys in Manila used the wrong exchange rate in compiling the data for Ireland. I’ve re-checked the figures and the number for Ireland is 368%.” (Financial Times)
Ignoring Manila’s fun at the FT’s expense, this calculation doesn’t start to count the government deficits or trade deficits, so with that is mind the picture is even less cheerful. An interesting question is of course whether the G10 countries have always been this heavily leveraged?
This via Turbulence Ahead and Stephen Kinsella‘s blog.
