Amar Bhattacharya G-24 Secretariat Lecce, May 31, 2013

1. Structural Transformation and Sustainable Growth of the Global Economy Beyond the Crisis and Lessons for Global Governance Amar Bhattacharya G-24 Secretariat Lecce, May 31, 2013

2. Overview • Structural transformation in the global economy • Impact and legacy of the crisis • Sustainable growth beyond the crisis • Implications for global governance

3. Overview • Structural transformation in the global economy • Impact and legacy of the crisis • Sustainable growth beyond the crisis • Implications for global governance

4. Structural Transformation • World Economy at a point of structural transformation in the relationship and position between developed and developing countries • Change has been highlighted and accentuated by the crisis but had started well before • For almost 60 years developing country growth tracked that of developed countries and with depreciating countries led to growing divergence • During the past decade there has been a structural decoupling even though there are strong cyclical links

5. Growth in EMDCs has consistently outpaced AEs for decades Source: G-24 calculations based on data from World Economic Outlook, IMF and World Development Indicators, World Bank

6. This trend is evident in G-24 countries, especially when GDP is weighted Source: Canuto (2013), World Bank Poverty Reduction and Economic Management Department

7. Structural Transformation • Not a story of China and India or of a few emerging markets and developing countries • Prior to crisis, 94 EMDCs recorded growth in excess of 5 percent per annum and 90 percent of EMDCs grew faster than the average of AEs • Trend will be continued; although average growth of both AEs and EMDCs lower than before the crisis, differential will be sustained • Particularly striking that low income countries and SSA are part of this trend • Underpinning this impressive growth has been a virtuous cycle of rising savings and investment, growing trade and macroeconomic resilience

8. Increasing Number of EMDCs are on path to Convergence Dispersion of Average Growth Number of countries <2.5% 2.5-5% >5% AdvancedEconomies EMDCs Source: G-24 calculations based on data from World Economic Outlook Database April 2013, IMF.

9. Income groups are gradually converging

10. Long-term savings in EMDCs have been on a rising trend Source: G-24 calculations based on Loayza et al. (2000) World Economic Outlook, IMF and World Development Indicators , World Bank databases

11. Investment and Savings Trends in Developing Countries, 1994-2015(Percent) Source: G-24 calculations based on data from World Economic Outlook Database, IMF

12. Structural Transformation • Sustained growth differential between AEs and EMDCs leading to a profound change in the global economic landscape with the share of EMDCs in the global economy measured in PPP terms greater than that of AEs • Similar trend between the G7 and the BRICS reflecting a new rebalancing of power • Convergence between GDP at market prices and GDP PPP in contrast to the pre-2000 an important element of the new story of convergence

13. EMDCs account for increasingly large shares of global GDP Share of GDP (Market Prices) Share of GDP (PPP) AdvancedEconomies EMDCs Source: G-24 calculations based ondata from World Economic Outlook Database, IMF

14. EMDCs account for increasingly large shares of global GDP Share of GDP (Market Prices) Share of GDP (PPP) G7 BRICS Source: G-24 calculations based ondata from World Economic Outlook Database, IMF

15. Growing Convergence Between GDP at Market Prices and GDP PPP (Share of EMDCs in Global GDP) Source: World Economic Outlook, IMF

16. Overview • Structural transformation in the global economy • Impact and legacy of the crisis • Sustainable growth beyond the crisis • Implications for global governance

17. The crisis has been deeper and more prolonged than anticipated GDP (% change)

18. Europe Has Been At the Center of the Crisis • Europe has been principal factor behind the deepening and prolongation of the crisis • Delayed response in setting up effective firewall to bolster confidence • Excessive emphasis on austerity has not led to expected improvements in debt sustainability or necessary internal devaluations • Euro area deleveraging has been a major constraint • There has been demand rotation but not adequate demand support in AEs • Reliance on prolonged unconventional monetary policies have had negative spillover effects

19. Euro-area deleveraging has been a major constraint Annualized increase in lending, Euro Area 3m/3m saar Source: World Bank, Global Economic Prospects, 2012 (based on European Central Bank Datastream)

20. Impact of Crisis on EMDCs • Large and immediate impact through trade channel but recovery faster and more sustained in EMDCs • Financial flows were also affected but differentially • Long-term commodity prices have continued to increase with high food prices still a cause of concern; trends have had large differential impacts across countries • Overall growth rates in EMDCs have withstood the crisis better than AEs because of improved resilience and use of counter cyclical policies • However reduced fiscal space has increased vulnerability to future shocks and constrains needed long-term investments

21. Exports sharply dropped during the crisis Source: IMF, World Economic Outlook, 2013 (based on Markit Economics and IMF Staff calculations)

22. And recovery in international trade has been uneven World exports, Jan 2006-Nov 2012 (Jan 2006 = 100) Source: United Nations, World Economic Situation and Prospects, 2013

23. Financial flows have been affected, but differentially Remittances and other resource flows to developing countries Source: World Bank, Migration and Development Brief, April 19, 2013 (based on data from WDI and World Bank Global Development Prospects Group

24. Long-term commodity prices have increased since the 1960s, reaching an all-time high in 2011… Nominal commodity prices Real commodity prices Source: World Bank, PINK data. NOTE: Annual price Indices, 2005=100

25. And steady food prices are forecast for 2013 Source: IMF, World Economic Outlook 2013 (based on IMF Primary Commodity Price System and IMF Staff calculations)

26. Net-exporters and net-importers of primary commodities have been affected differently Note: The sample consists of 48 high-income countries, 97 middle-income countries and 40 low-income countries. Source: G-24 calculations based on UNCTAD data

27. Growth rates in EMDCs have withstood the crisis better than those in AEs GDP Growth AdvancedEconomies EMDCs Source: G-24 calculations based on data from World Economic Outlook, IMF and World Development Indicator, World Bank

28. But reduced fiscal space increases the vulnerability of EMDCs to future shocks 2007: - 25% of developing countries had a deficit of >3% of GDP - 49% were running a surplus 2012: - 53% of developing countries had a deficit of >3% of GDP - 23% had a surplus Source: World Bank Global Economic Prospects, 2013 (based on World Bank data)

29. Overview • Structural transformation in the global economy • Impact and legacy of the crisis • Sustainable growth beyond the crisis • Implications for global governance

30. Prospects for Sustained Growth Beyond Crisis • Differential growth prospects between AEs and EMDCs expected to be sustained • But significant heterogeneity across regions and countries • EMDCs are still a long way from the global productivity frontier with significant potential for catch-up gains • Potential output growth has been downgraded in many leading EMDCs because of country specific structural factors

31. Differential growth prospects between EMDCs and AEs are forecast Real GDP, index 1980=100 Other high-income countries Euro-area

32. Amongst EMDCs, there is also heterogeneity across regions Average GDP Growth 2003-2008 2009-2012 2013-2015 Source: G-24 calculations based on data from World Economic Outlook, IMF and World Development Indicator, World Bank

33. EMDCs are a still long way from the productivity frontier Source: Canuto (2013), World Bank Poverty Reduction and Economic Management Department

34. Prospects for potential output growth in some EMDCs have been downgraded Output Relative to Precrisis Trends in WEO Estimates in 2013 (percent of precrisis trend GDP) Reductions in Medium-Term Output (percent; relative to the September 2011 WEO) Source: Helbling (2013), based on World Economic Outlook and IMF staff estimates. Note: AE= advanced economies; EM = emerging market and developing economies; CEE = central and eastern Europe; CIS = Commonwealth of Independent States; DA = developing Asia; LAC = Latin America and the Carribean; SSA = sub-Saharan Africa

35. Major Challenges to Sustained and Sustainable Growth • Infrastructure development and financing • The jobs crisis and prospects for long-term employment creation • Growing income inequality with lagging countries and growing inequality in both AEs and EMDCs • Sustainability including climate impact and resilience also a source of enormous concern

36. Infrastructure is of critical importance to sustainable growth for EMDCs

37. But, the existing long-term development financing architecture does not meet the need Global infrastructure financing vs need $USD trillions Source: Split of current sources of finance own assessment based on various estimates including Estache (2010); MDB working group paper on infrastructure (2011); Macquarie (2009)

38. The job crisis continues, especially in Europe, which has record unemployment Source: Hong (2013), based on United Nations, World Economic Situation and Prospects, 2013

39. Unemployment trends in EMDCs differ Quarterly Unemployment Rates (%) Source: Hong (2013), based on United Nations, World Economic Situation and Prospects, 2013

40. And inequality is increasing • Increasing inequality in US—top 1 percent accounting for 23 percent of national income and top 0.01 percent for 12 percent • Increasing global integration associated with growing income inequality in many EMDCs depending on starting points • Growing inequality compromises equality of opportunity and long-term productivity growth (Stiglitz)

41. Sustainability is also an enormous concern • The risks of climate change have likely been underestimated • Greenhouse gas concentrations or stocks have increased from around 285ppm CO2e in the 1800s to around 445ppm today. • Could result in an eventual temperature increase (50-50 chance) of more than 5deg Celsius compared with the pre-industrial era. • High probability of extreme weather events and a rising global sea level • Potential cause of migration of hundreds of millions, perhaps billions, of people around the world: likelihood of severe and sustained conflict • Growth and stability in the medium and long-term are at risk if climate change is not addressed Source: Stern (2013), ‘Economic Growth, Poverty Reduction and Managing Climate Change’

42. Sustainable growth is crucial, but requires leadership and proactivity • Ensuring the environmental sustainability and climate resilience is crucial for long-term growth and development • Investing in low-carbon growth requires clear and credible public policy and institutional involvement to leverage finance (including excess global savings), manage risk (commercial and political), integrate approaches and lead by example Source: Stern (2013), ‘Economic Growth, Poverty Reduction and Managing Climate Change’

43. Overview • Structural transformation in the global economy • Impact and legacy of the crisis • Sustainable growth beyond the crisis • Implications for global governance

44. Implications for Global Governance • Growing interconnectedness poses new challenges in global coordination and governance arrangements • Recent waves of financial crises has underscored importance of coordination in the economic and financial sphere but also the inherent challenges of such coordination • The new wave of global challenges coincides with major shifts in relative positions and the role of old and new powers

45. Implications for Global Governance Significant evolution in the institutional architecture: • G20 as premier forum for global economic and financial coordination with continued evolution in its role • Enhancement of role of Financial Stability Board • Strengthening in role of the IMF (resources, instruments, surveillance)

46. The Institutional Architecture • Surveillance Discussion • G20 MAP • FSAPs/ROSCs • Article IV Consultations • WEO/GFSR • Spillover Reports • Early Warning Exercise (EWE) in collaboration with FSB • Plenary • Standing Committee on Assessment of Vulnerability • AGV • Standing Committee on Standards Implementation and Implementation Monitoring Network

47. The Overall Surveillance Framework • Complementary architecture between IMF and FSB including on multilateral surveillance • IMF comparative strengths are integrating macro, macrofinancial and financial perspectives as well as integrating bilateral and multilateral aspects in Article IV consultations; and well broad array of instruments to assess global systemic risks (WEO, GFSR, spillover reports and EWE in collaboration with FSB) • FSB’s strengths are its network of financial stability experts through the AGV, access to national supervisors, interface with BIS and SSBs and synergy between the Plenary and all three standing committees and their working groups

48. The global rank of economies has shifted markedly in the last four decades GDP (PPP), $Billions Source: WEO Database, IMF

49. Contributions to World Growth(percent) Source: A. Virmani based on IMF data

50. Contributions to Growth by Decade Source: J.Y. Lin (2011) calculations based on data from World Development Indicators, World Bank