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THE WORLD ECONOMIC

THE WORLD ECONOMIC

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THE WORLD ECONOMIC

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  1. THE WORLD ECONOMIC OUTLOOK Sasol Executive Development Programme (Doha; 3 October 2011) Global Prospects - A New Recession ? - Too much debt, too many deficits ? - Will the Euro survive ? Emerging Markets - Eastern Europe, East Asia and Latin America: - Africa: It's not all Africa's fault ! - The BRICs: Some strong, some not A.Boltho Magdalen College University of Oxford

  2. A NEW RECESSION ? SIMILARITIES DIFFERENCES Stock markets Finance Confidence Production Commodity prices World trade but, unfortunately, also: 4.0 Much less room for policies

  3. COMMODITY PRICES COMMODITY PRICES (June 2007/June 2010 = 100) (June 2007/June 2010 = 100) 200 200 Oil 180 180 2007-08 160 160 Food commds. 2007-08 140 140 Gold Oil 120 120 2010-11 2010-11 100 100 80 80 60 60

  4. FREIGHT RATES (Baltic Exchange Dry Bulk Freight index) Thousands 9 Then 8 7 6 5 August-December 2008 4 3 Now 2 July-Sept. 2011 1 0

  5. SHORT-TERM PROSPECTS (GDP; percentage changes) 2009 2010 2011 2012 2013 United States -3.5 3.0 1.7 2.3 3.1 Eurozone -4.1 1.7 1.6 1.1 1.9 Japan -6.3 4.0 -0.4 2.9 2.6 China 9.2 10.3 8.8 8.2 9.2 4.0 -2.3 3.8 2.8 3.2 3.9 World

  6. RECESSION AND RECOVERY (GDP; per cent changes; 3 qtrs. mv. avrgs.) 4 Euro zone United 2 States 0 -2 -4 -6 Japan -8 2007 2008 2009 2010 2011 2012 2013

  7. RISKS AND UNCERTAINTIES Slow growth over the medium term is highly likely in both North America and Western Europe because of: The deleveraging that follows a financial crisis The uncertainties surrounding the future of the Euro Zone

  8. TYPES OF RECESSIONS (output peak at time 0 = 100; sample of 122 recessions) 106 105 "Normal" recessions 104 103 102 Recessions associated 101 with financial shocks 100 99 98 0 1 2 3 4 5 6 7 8 9 10 11 12 Source: IMF

  9. HOUSEHOLDS DEBT/GDP RATIOS 110 Spain 90 70 France Germany Italy 50 30 10 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012

  10. CORPORATIONS* DEBT/GDP RATIOS Spain 140 120 France 100 80 Italy 60 Germany 40 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 * Non-financial sector.

  11. GOVERNMENT DEBT/GDP RATIOS Italy 120 France 100 Spain 80 Germany 60 40 20 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012

  12. A HELPFUL JUDGMENT ON THE EUROZONE "A monetary union without a political union is simply not viable. The Eurozone will soon face the choice between an unimaginable step forward to political union or an equally unimaginable step back [to disintegration]". Wolfgang Munchau, Financial Times , 9.5.2011.

  13. THE PROBLEMS OF THE EUROZONE The immediate problem is one of excessive public deficits and debts in some of the peripheral countries The longer-run problem is one of low external competitiveness and deficits in, again, some of the peripheral countries Austerity in Greece, Ireland or Portugal (but also in Spain and Italy) can help reduce both sets of deficits, but only at the cost of a prolonged period of very low growth 4.0 In the circumstances, defections from Monetary Union can no longer be ruled out

  14. GROWTH OF EARNINGS (1999 Q.1 = 100) Spain 140 Italy France 130 120 Germany 110 100 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

  15. WHO WILL FINANCE ALL THESE DEFICITS ? Deficits must be financed Budget deficits can be financed at home (if there are sufficient domestic savings) External deficits must be financed by foreigners In existing monetary unions (such as Germany or Italy) the deficits of uncompetitive areas (East Germany or the Mezzogiorno) are financed by the richer regions. No such mechanism exists in the Eurozone And public opinion in the richer countries is hardly likely to favour one !

  16. SIX SCENARIOS i) Germany revalues in real terms (i.e. allows some wage inflation at home) ii) Greece, Portugal, Ireland (and others ?) "restructure" their debt, but stay in the euro, trying to devalue in real terms. The costs of this deflation, in terms of lost output, could, however, be very high iii) Greece (and others ?) leave the euro ... but may not gain much from this iv) Germany leaves the euro ... but may not gain much from this v) The Eurozone gradually transforms itself into an economic union (combined with ii above) vi) It all breaks down ...

  17. WHAT WOULD GREECE GAIN BY LEAVING THE MONETARY UNION ? Monetary independence: Hence lower short-term interest rates (as long as the Central Bank agrees) Opportunity to devalue the currency But also: Almost certainly an increase in inflation and in inflationary expectations Hence a rapid erosion of any short-run competitiveness gain Hence a likely increase in long-term interest rates And a massive increase in its debt burden (unless debt was redenominated)

  18. WHAT WOULD GERMANY GAIN BY LEAVING THE MONETARY UNION ? This would be very popular with public opinion which overwhelmingly believes that EMU is a burden for the country It would be less popular with business Frankfurt would lose in importance as an international financial centre relative, in particular, to London The country's new currency would appreciate massively overnight The German banking sector would suffer huge losses on its euro-denominated bond assets And, in addition, there would almost certainly be chaos on international financial markets

  19. BUT IT COULD STILL ALL GO WRONG Germany's Constitutional Court may veto further aid Slovakia's Parliament may not approve the European Financial Stability Facility Finland may insist on unrealistic (and wrong) collateral guarantees from Greece Greece (and Italy ? and others ?) may be unable to deliver the required austerity Eurosceptic parties may come to power in some countries (prompting market speculation on breakdown) etc., etc.

  20. GDP PER CAPITA GROWTH (average annual percentage changes; 1970-2010) 7 6 5 4 3 2 1 0 MEast N.Am. Japan ANZ W.Eur. NICs E.Eur.* Rus.* Lat.Am. China ASEAN India S.S.Afr. Sth.Afr.** & NAfr. * 1992-2008. ** 1995-2008.

  21. GDP PER CAPITA (1990 $; in purchasing power parities; log scale) Eastern Europe 8000 Latin 5000 America* East Asia** 4000 2000 Sub-Saharan Africa*** 1000 500 500 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 * Excluding Brazil. ** Excluding China. *** Excluding SouthAfrica

  22. EMERGING MARKETS STRUCTURAL INDICATORS (mid- to late 2000s) Latin Eastern East Asia Africa Europe America 31 Savings/GDP 22 20 19 71 64 Second. educat.* 37 80 6 Income ineq.** 7 18 11 4.0 Protectionism*** 4 6 5 10 Manufactured 82 81 57 15 exports % * Enrolment ratio. ** Ratio of top to bottom income quintile. *** Average tariff on manufactured imports.

  23. EXPORT PERFORMANCE Share of exports of manufactures in world trade 18 NICs+ASEAN 16 14 12 10 8 Eastern 6 Europe 4 Latin America 2 Sub-Sah. Africa 0 1980 1985 1990 1995 2000 2005

  24. GDP PER CAPITA (1990 $; in purchasing power parities; log scale) 8000 East Asia* 6000 4000 OPEC 2000 1000 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 * NICs and ASEAN

  25. AFRICA'S FIVE 'EXOGENOUS' PROBLEMS i) Unfavourable geography ii) Unfavourable history iii) Political and ethnic fragmentation iv) Developed countries' protectionism v) AIDS

  26. AFRICA'S UNFAVOURABLE GEOGRAPHY 1 Tropical environment Low rainfall and high temperatures depress agricultural productivity Presence of endemic vector-borne infectious diseases (especially malaria) lower labour productivity Infectious diseases may also lower human capital Transport barriers Small coastline relative to land area Very few natural coastal ports Population generally far from coast Absence of navigable rivers All generating very high transport costs 1. South East Asia is also tropical, but proximity to the sea lowers average temperatures; Africa, by contrast, is a much larger land mass

  27. AFRICA'S UNFAVOURABLE HISTORY The legacy of the slave trade: The population generally lives far from the coast line The population is concentrated on rugged terrain This raises the cost of transportation of irrigation of farming

  28. AFRICA'S POLITICAL AND ETHNIC FRAGMENTATION Africa's countries are known for their ethno-linguistic fractionalization Research has shown that ethnic diversity has negative influences on economic performance by generally promoting bad policies via, for instance: Slowing down public goods provision Encouraging corruption Fostering political instability Ethnic diversity may account for 28 per cent of the difference in per capita GDP growth between East Asia and Africa over the period 1960-90

  29. DEVELOPED COUNTRIES' PROTECTIONISM (2000-2010) Europe Annual (implicit) subsidy per cow in EU* $ 875 Annual per capita income in S.S. Africa $ 815 America 2009-13 subsidy to 12,000 US cotton farmers** $ 5.0 bill. Estimated loss for 10 million African cotton farmers $ 1.0 bill. * Support to EU dairy industry divided by number of cows(= $ 2.40 per day). Financial Times, 1/2 July, 2006. ** Financial Times, 31 July 2008.

  30. PREVALENCE OF HIV IN MAJOR AREAS (in per cent of population aged 15-49 ) 2006 East Asia 0.2 M.East & N.Afr. 0.2 South Asia 0.3 Latin America 0.6 East Eur. & 0.7 Central Asia Sub-Saharan 5.2 Africa

  31. LIFE EXPECTANCY IN SUB-SAHARAN AFRICA (at birth) 1970-75 2005-10 World 58.5 67.9 Russia 69.0 67.7 South Africa 53.7 51.2 Botswana 56.1 53.3 Lesotho 49.8 46.0 Swaziland 49.6 47.4 Zimbabwe 55.8 46.6 Zambia 50.2 46.9

  32. SUB-SAHARAN AFRICA AND THE WORLD* ECONOMY, 1950-2015 (GDP; per cent changes; 3 years moving averages) 8 Sub-Saharan Africa* 6 4 2 World Economy 0 1950 55 1960 65 1970 75 1980 85 1990 95 2000 05 2010 15 * Excluding South Africa. Sources: A.Maddison and Oxford Economics

  33. DEMOCRACY Freedom House Indicator of Political Rights and Civil Liberties (lower numbers indicate greater freedom) 6.5 Middle East & North Africa* 5.5 East Asia** 4.5 Sub-Saharan Africa*** 3.5 Latin America 2.5 1.5 1972 1976 1980 1984 1988 1992 1996 2000 2004 2008 * Excluding Israel. ** Excluding China. *** Excluding South Africa.

  34. GOVERNANCE Harvard index of African governance 100 80 60 40 20 0 Som. Mrts. 2000 1 2 3 4 2005 6 7 2008 2008 : The index includes indicators such as Rule of Law, Human Rights, Note Safery & Security, Human Development and Economic Opportunity.