CEPREMAP WORLD GROWTH AND INTERNATIONAL CAPITAL FLOWS IN THE XXI s CENTURY A prospecive analysis wih he INGENUE 2 model by he INGENUE TEAM Michel AGLIETTA and Vladimir BORGY (Cepii), Jean CHATEAU (Ocde), Michel JUILLARD (Cepremap), Jacques LE CACHEUX, Gilles LE GARREC, Vincen TOUZÉ (Ofce) For he Tokyo Club Conference The fuure srucure of inernaional capial flows
OUTLINE The paradox of world saving in he early years of he XXI h cenury The conjecure of a world growh regime: demographic rends and echnological caching-up The baseline scenario: he paern of ne financial flows and asses A faser caching-up in China and India How o ge from here o here?
THE PARADOX OF WORLD SAVING Emerging marke economies and Japan finance he deb-induced consumer spree in he US (Ne financial saving in % of GDP) Counries or regions Average 1990-99 Average 2000-03 2004 Advanced Economies: -0.5-0.4-1.3 Unied Saes -2.4-3.2-6.0 Euro Zone +0.4 +0.4 +0.7 Japan +2.3 +2.5 +3.7 Emerging Economies: -1.9 +1.7 +2.3 China +1.8 +2.0 +4.1 Oher Asia -1.2 +1.8 +2.7 Lain America -2.6-2.0 +1.2 Ceecs -2.7-4.3-4.7
THE PARADOX OF WORLD SAVING A massive misallocaion of world saving unsusainable in he long run The so-called saving glu reveals weak producive invesmen as an afermah of he Asian and subsequen crises: breakdown in domesic demand rends, huge real depreciaion of exchange raes, chronic over capaciies of supply. The prolonged balance shee recession in Japan has come o a near end wihou reviving domesic demand ye. And unprecedened slump in US household saving is generaing he deb counerpar of a $3.2 rillion reserve accumulaion.
THE CONJECTURE OF A WORLD GROWTH REGIME A world growh regime ransferring resources beween regions: Ageing rich regions echnology capial Growing working age pop regions Households in rich regions have incenives o expor heir saving o faser growh regions wih higher capial yields
DEMOGRAPHIC TRENDS Working age populaion is spli beween growing and declining regions Working age populaion annual growh rae 1960-2050 4,0 3,0 2,0 1,0 0,0-1,0-2,0 1960 1970 1980 1990 2000 2010 2020 2030 2040 2050 N. America W. Europe Japan S. America Medierranean Africa Russia China India E. Europe
DEMOGRAPHIC TRENDS High savers raios reach heir op in sequenial waves 40 High Savers Raio (age group 45-69 yrs in percenage of oal populaion) 1960-2050 35 30 25 20 15 10 5 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050 N. America W. Europe Japan S. America Medierranean Africa Russia China India E. Europe
Producion secors Producion of he world good : Producion of he regional inermediae good : Producion of he regional final good Uiliaion of he regional final good I C YF + = ), ( M B G AF YF = ) ( 1, N K F AI YI = 1 1 1 * * ) ( ) ( = µ µ µ µ µ γ X A Y POTENTIAL FOR CATCHING UP The growh process in Ingenue 2
POTENTIAL FOR CATCHING UP A Schumpeerian Paradigm There is a global echnology fronier which shifs ouwards wih he incremens in knowledge due o leading-edge innovaions in fronier counries (namely Norh America). The counries behind he fronier implemen echnologies already developed elsewhere. Par of he inpus of echnological diffusion are brough via foreign rade. The furher a counry is behind he global echnology fronier, he faser i can grow. As emphasied by Gerschenkron, backwardness can be an advanage for growh provided appropriae insiuions are developed wihin he counry
POTENTIAL FOR CATCHING UP Crucial Hypoheses of World growh The caching-up in oal facor produciviy: mechanics of echnological diffusion A A [ ] A1, A1, 1 + λ µ + ( µ ) i, = 1 i 1 i i, 1 A1, 1 Ai, 1 λ Is an acceleraion coefficien of he growh rae of TFP in he leading region µ is a brake facor capuring social impedimens o he speedy diffusion which depends on he disance beween he level of TFP relaive o ha of he leader
POTENTIAL FOR CATCHING UP The paern of TFP Growh in he baseline Scenario Norh America keeps leading Three caching-up regions: China, India, Easern Europe Toal Facor Produciviy : 1950-2100 (percenage of "Norh America" level) 1,0 0,8 0,6 0,4 0,2 0,0 1950 1960 1970 1980 1990 2000 2010 2020 2030 2040 2050 2060 2070 2080 2090 2100 N. America W. Europe Japan S. America Medierranean Africa Russia China India E. Europe
BASELINE SCENARIO Japan, Europe and Russia have he lowes growh raes America slows down fas, hen recovers In China he speed of caching-up parly offses he demographic decline 6 GDP Growh rae (2000-2050) 5 4 3 2 1 0 2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050 N. America W. Europe Japan S. America Medierranean
BASELINE SCENARIO Real exchange raes appreciae in he fases-ageing regions (Europe, Japan, Russia) agains Norh America. They remain relaively sable in oher regions 2,5 Evoluion of Real Exchange Rae (2000-2050) 2,0 1,5 1,0 0,5 0,0 2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050 N. America W. Europe Japan S. America Medierranean
BASELINE SCENARIO The redeploymen of capial flows o he world regions wih he bes growh poenial Evoluion of Curren Accoun Balance (percenage of World GDP) : Ownership Raio 0,6 0,5 0,4 0,3 0,2 0,1 0,0-0,1-0,2-0,3-0,4 2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050 N. America W. Europe Japan S. America Medierranean Africa Russia China India E. Europe 1,20 1,15 1,10 1,05 1,00 0,95 0,90 0,85 0,80 0,75 0,70 2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050 N. America W. Europe Japan S. America Medierranean Africa Russia China India E. Europe
BASELINE SCENARIO Main feaures for Europe The demographic profile and he weak cachingup in TFP will make Europe a slow growh region. Europe will be a pervasive world credior wih an appreciaing real exchange rae European households will benefi from globalisaion via capial income drawn from heir credior posiion and gains in purchasing power on impored goods
FASTER CATCHING-UP IN CHINA AND INDIA Main Hypoheses Supply-side facor: an enhanced echnological diffusion more pronounced in China han in India in he firs half cenury Toal Facor Produciviy (annual growh) : 2,4 2,2 2,0 1,8 1,6 1,4 1,2 1,0 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050 Norh America Chinese World - Fas caching-up process Indian World - Fas caching-up process Chinese World - Baseline Indian World - Baseline
FASTER CATCHING-UP IN CHINA AND INDIA Main Hypoheses Demand-side facor: exension in coverage of public pension sysems. Convergence of he paricipaion raes for age group (60-69) oward he level of Norh America INGENUE 2 : Age-linked rae of employmen coverging o Norh America : 1,00 0,90 Source : ILO 0,80 0,70 0,60 0,50 0,40 0,30 0,20 0,10 0,00 10 15 20 25 30 35 40 45 50 55 60 65 70 Norh America China India Share of pensions in GDP In % 2000 2050 (baseline) 2050 (expanded public pension) China World 2.1 7.3 8.0
FASTER CATCHING-UP IN CHINA AND INDIA Boos in Produciviy and Real Income The faser echnological diffusion acceleraes growh and lowers he propensiy o save in a firs sage. Then growh slows down genly and saving recovers wih higher income GDP Growh rae (difference from baseline scenario) Evoluion of he Ne Saving (in percenage of GNP) (difference from baseline scenario) 0,50,55,45 0,00,35-0,50,25-1,00,15,05-1,50,05-2,00 1995 2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050 1995 2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 N. America W. Europe Japan S. America Medierranean Africa Russia China India E. Europe N. America W. Europe Japan S. America Medierranean Africa Russia China India E. Europe
FASTER CATCHING-UP IN CHINA AND INDIA Transiion Cos o Beer Social Welfare The improved social welfare is cosly while he reform is under way: The paricipaion of older workers is reduced The higher dependency raio mus be financed via higher axes and saving Privae consumpion per capia (level) (Percenage poin difference from baseline scenario) GDP per capia level (2000-2050) (Percenage poin difference from baseline scenario) % 0,5% % 0,0% % -0,5% % -1,0% % -1,5% % -2,0% % -2,5% % -3,0% % -3,5% % -4,0% 1995 2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050 2055 2060 2065 2070 2075 2080 2085 2090 2095 2100 1995 2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050 2055 2060 2065 2070 2075 2080 2085 2090 2095 N. America W. Europe Japan S. America Medierranean Africa Russia China India E. Europe N. America W. Europe Japan S. America Medierranean Africa Russia China India E. Europe
COMBINED SCENARIO OF HIGHER GROWTH IN TFP AND IMPROVED SOCIAL WELFARE The growh-enhancing facor dominaes on GDP and privae consumpion The effecs on saving are in opposie direcions so ha hey cancel ou on ne capial flows and inernaional financial posiions GDP Growh in Asian regions : Ownership raio in Asian regions : 0,98 0,93 0,88 0,83 000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050 0,78 2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 205 China - Alernaive scenarios India - Alernaive scenarios China - Alernaive scenarios India - Alernaive scenarios China - Baseline scenario India - Baseline Scenario China - Baseline scenario India - Baseline Scenario The inernaional impac of a change o a more inward-looking growh regime in Asia is hus mued
HOW TO GET FROM HERE TO THERE? 1. The baseline scenario poins ou o he need of resoring a susainable saving/invesmen balance in he US A subsanial real depreciaion of he dollar: will boos ne privae saving in slowing down domesic demand will change he srucure of demand in favor of nonraded goods, hus miigaing he negaive impac on employmen A reducion in he budge defici is he sures way o improve naional saving (weak Ricardian equivalence in he US)
HOW TO GET FROM HERE TO THERE? 2. The baseline scenario depics Europe as a low growh region on persising in inefficien policies Europe has a declining working-age populaion and is relaively close o he echnology fronier. The only source of poenial growh will sem from boosing innovaion Overcoming Europe s shorcomings requires: more public spending on higher educaion and R&D beer links beween public and privae research Long-run growh is enhanced by counercyclical economic policy (Aghion and Howi). In a siuaion of high profis and low producive invesmens, domesic demand should be raised o induce firms o spend insead of buying back heir equiy capial
HOW TO GET FROM HERE TO THERE? 3. The baseline scenario shows ha he world growh regime in he XXI h cenury will have is engine in regions wih a huge labor force and fas caching-up Overhauling he growh regime in Asia owards domesic demand is a op prioriy. I involves: Promoing financial reforms o se up smooh wellregulaed credi sysems for he privae secor, including consumer credi. Invesing in infrasrucure and mass educaion o lower he barriers o echnological diffusion Iniiaing long-sanding social policies o vasly improve social welfare sysems and above all exend heir coverage