Andrew Sentance, the Bank of England’s super-hawk, will have one final chance this week to win over fellow policymakers to his cause.
Unfortunately, the news just isn’t going his way. The first take of Britain’s official GDP figures, released last Wednesday, showed the economy flat-lining (or, “on a plateau,” as the Office for National Statistics more diplomatically put it), with the 0.5 percent growth rate merely taking us back to where we were in the autumn. High street sales are soggy and retailers are squealing about lost margins as they struggle to avoid passing on eye-watering cost increases to shoppers. And so far at least, there’s absolutely no sign of wage growth running out of control. Not surprisingly, consumer confidence has slumped to levels last seen during the recession.
Instead of stoking up an uncontrollable wage-price-spiral, inflation is eating into profit margins, gobbling up the spending power of already pressurized consumers and making businesses even more nervous about making firm investment plans. And that’s before the bulk of the government’s fiscal squeeze has fed through to jobs and public service cuts on the ground.
Backed by the raucous voices of hawks in the City, London’s financial district, Sentance has become increasingly strident in his insistence that the bank has been “selling England by the pound” (quoting 1970s rock band Genesis).
Will fellow hawks Spencer Dale and Martin Weale — who admittedly have only demanded a quarter-point rate rise, instead of the half demanded by Sentance — continue the campaign when he departs? If inflation stages another unexpected decline and the economy continues to weaken, they may admit instead that it’s time for a full stop.
The US’ recovery is petering out, the UK economy is flatlining and euroland’s crisis rolls on. There’s scant cause for optimism in the Old World. However, outside the credit-crunched post-industrial countries, the next few years — and decades — could see the blossoming of a whole new group of super-economies.
We all know about the extraordinary rise of China and India; but new research by Willem Buiter, former Bank of England Monetary Policy Committee member and now chief economist at Citigroup, says that this year is an auspicious moment for the emergence of new economic powers.
In fact, unlikely as it may seem, Buiter and his colleagues believe the period between now and 2040 could turn out to be one of the best in the whole of human history for spreading the benefits of economic growth.
The fastest-growing economies during this supercharged period, they claim, will include China and India; but also, among others, Mongolia — currently better known for kilometers of featureless steppe than for economic dynamism — Indonesia, Nigeria, Bangladesh and Vietnam.
And what will bring about this new economic miracle? It’s a tale of the mighty power of catch-up: Unlike the days of the industrial revolution, when radical new technology — steam-powered mills, trains, threshing machines — transformed people’s lives, these countries could achieve extraordinary growth largely by adopting the pre-existing methods, inventions and sometimes institutions of richer rivals.
Using the peerless research of Angus Maddison on the economic history of mankind, Buiter reminds us that for the first millennium or so, GDP growth was almost certainly negligible. Nothing changed. Peasant farmers scratched a living — just — from their little patch of land, year after year, century after century.
In fact, not much changed until the Industrial Revolution, when technological improvements and mass urbanization led to huge growth in productivity. Postwar reconstruction helped generate another jump in growth, as western European countries and Japan rebuilt and played catch-up with the US. There was a further jump from the 1990s on, as the opening up of former communist countries to trade with the West, and later the integration of China in the global trading system, brought rapid improvements in living standards for millions.
Today, Buiter and his colleagues say there is an auspicious combination of large numbers of countries with big populations that are a long way behind their peers in the rest of the world, but are revving up for takeoff.
Of course it’s not that simple — a range of factors are significant in what economists call the “convergence” of living standards toward the levels of the wealthiest countries.
High investment is important — and the capital to fund it, often from high levels of domestic saving. A young and relatively well-educated population is handy — recent research has shown that investment in schooling has been critical to China’s success. And some openness to international trade and investment (though not to the pernicious credit booms of the 2000s) is important. Bad government, armed conflict or just very bad luck (such as a spate of natural disasters) can set a country’s progress back by decades.
Venezuela was richer than many western European nations in 1957, for example, with income per head at two-thirds the US level; but decades of poor policies have seen it falling further behind instead of catching up, with GDP per capita now barely a fifth that of the US. Zimbabwe provides an even starker example of the catastrophic consequences of bad government.
It could all go wrong at the level of international diplomacy, too: Failure to make progress in the Doha round of trade talks, as evidenced yet again in Geneva on Friday, shows how little political will remains, in Washington especially, for further dismantling of trade barriers and raises the specter that protectionism could reverse some of the gains of the past decade.
However, even without an ambitious WTO deal, there is much to be won by, for example, freeing trade between emerging economies. A recent report by the Asian Development Bank urged the countries of “the south” — a catch-all term embracing Africa and Latin America as well as Asia — to burnish their trade and investment links, and reduce their dependence on the US and Europe. The bank’s research suggested they could almost double their share of world exports — from 33 percent in 2004 to 55 percent in 2030 — by waking up to the potential of markets closer to home.
None of this is good news if you’re concerned about Britain’s status as a mighty world economic power; but there hasn’t been much good news on that front for decades. It could be great news, though, for many millions of people who have so far missed out on the benefits of a century or more of economic development.
There’s a new drive to assess “happiness” and other alternative measures of success, prompted by the puzzle that after a certain point, rising GDP doesn’t seem to make people feel any better. However, if you don’t have food to eat and you can’t send your children to school, the benefits of extra income are blindingly obvious. Let’s hope as many as possible of the countries preparing to harness the power of catch-up in the coming decades follow Buiter’s key piece of advice — “don’t blow it.”