Egypt's Sisi approves EU-funded Green Facility grant agreement    EGP closes stable vs USD on Thursday July 17th    Egypt expresses condolences to Iraq over fire tragedy    Egypt, Oman discuss environmental cooperation    Sukari Gold Mine showcases successful public–private partnership: Minister of Petroleum    Egypt's Environment Minister attends AMCEN conference in Nairobi    At London 'Egypt Day', Finance Minister outlines pro-investment policies    Egypt's FRA chief vows to reform business environment to boost investor confidence    Egyptian, Belarusian officials discuss drug registration, market access    Syria says it will defend its territory after Israeli strikes in Suwayda    Pakistan names Qatari royal as brand ambassador after 'Killer Mountain' climb    Health Ministry denies claims of meningitis-related deaths among siblings    EU–US trade talks enter 'decisive phase', German politician says    Sri Lanka's expat remittances up in June '25    Egypt's Health Min. discusses drug localisation with Sandoz    Needle-spiking attacks in France prompt government warning, public fear    Foreign, housing ministers discuss Egypt's role in African development push    Korea Culture Week in Egypt to blend K-Pop with traditional arts    Egypt, France FMs review Gaza ceasefire efforts, reconstruction    CIB finances Giza Pyramids Sound and Light Show redevelopment with EGP 963m loan    Greco-Roman tombs with hieroglyphic inscriptions discovered in Aswan    Egypt reveals heritage e-training portal    Three ancient rock-cut tombs discovered in Aswan    Egypt's EHA, Schneider Electric sign MoU on sustainable infrastructure    Sisi launches new support initiative for families of war, terrorism victims    Egypt expands e-ticketing to 110 heritage sites, adds self-service kiosks at Saqqara    Egypt's Irrigation Minister urges scientific cooperation to tackle water scarcity    Palm Hills Squash Open debuts with 48 international stars, $250,000 prize pool    Egypt's Democratic Generation Party Evaluates 84 Candidates Ahead of Parliamentary Vote    On Sport to broadcast Pan Arab Golf Championship for Juniors and Ladies in Egypt    Golf Festival in Cairo to mark Arab Golf Federation's 50th anniversary    Germany among EU's priciest labour markets – official data    Cabinet approves establishment of national medical tourism council to boost healthcare sector    Egypt's PM follows up on Julius Nyerere dam project in Tanzania    Paris Olympic gold '24 medals hit record value    A minute of silence for Egyptian sports    Russia says it's in sync with US, China, Pakistan on Taliban    It's a bit frustrating to draw at home: Real Madrid keeper after Villarreal game    Shoukry reviews with Guterres Egypt's efforts to achieve SDGs, promote human rights    Sudan says countries must cooperate on vaccines    Johnson & Johnson: Second shot boosts antibodies and protection against COVID-19    Egypt to tax bloggers, YouTubers    Egypt's FM asserts importance of stability in Libya, holding elections as scheduled    We mustn't lose touch: Muller after Bayern win in Bundesliga    Egypt records 36 new deaths from Covid-19, highest since mid June    Egypt sells $3 bln US-dollar dominated eurobonds    Gamal Hanafy's ceramic exhibition at Gezira Arts Centre is a must go    Italian Institute Director Davide Scalmani presents activities of the Cairo Institute for ITALIANA.IT platform    







Thank you for reporting!
This image will be automatically disabled when it gets reported by several people.



Adapt or die
Published in Daily News Egypt on 18 - 07 - 2011

MILAN: In rapidly growing emerging markets, a combination of internal economic forces, supportive policies, and the shifting nature of the global economy drive high-speed and far-reaching change. The transformation of economic structures occurs so quickly that it is virtually impossible not to notice — though the complexity of the change is, at times, bewildering.
In this fluid environment, mistakes are frequently made. Arguably the most damaging is to stick to a successful growth strategy (a combination of comparative advantage and supportive policies) for too long. In the economy's tradable sector, comparative advantage always shifts, causing structural change and creative destruction. Countries undergoing a “middle-income transition” out of poor-country status frequently try to resist these changes, but doing so causes growth to slow, if not stop altogether.
While the private sector (domestic and external) drives these shifts, government policies and public-sector investment patterns play an essential supporting and complementary role. These need to adapt, too. The policy framework that has proven to serve the major emerging economies best is one that focuses not only on macro and monetary stability, but also on adaptation, guided by a forward-looking (though inherently imperfect) assessment of coming micro and macro structural shifts and the measures needed to support them.
What of the large advanced countries? For historical reasons, the policy mindset is less flexible and adaptive. Structural change is viewed largely as the province of the private sector, and hence not as a key part of long-term policy thinking. In the postwar period, until recently, advanced economies dominated the global economy. Emerging economies' impact on them was relatively small, and they have yet to respond adequately to the rapid structural changes in the global economy.
A small example: as recently as July 8, after the latest disappointing employment report in the United States, President Barack Obama expressed the widely held view that an agreement on the debt ceiling and deficit reduction would remove the uncertainty that is holding back business investment, growth, and employment. In other words, America's fiscal problems explain its extremely weak economic recovery. Once a fiscal deal is done, government can step aside and let the private sector drive the structural changes that are needed to restore a pattern of inclusive growth.
To be fair, there have been exceptions to this stance. In the US, a postwar alliance of government, business, and academia created the human capital and technology base of a dynamic economy, reinforced by the post-Sputnik commitment to scientific and technological excellence and innovation. In Germany, the post-2000 reforms that reset the economy's productivity, flexibility, and competitiveness have proved crucial to the country's current economic strength and resilience.
Despite these examples, economic and financial commentators appear increasingly puzzled about the weak US recovery, with its modest GDP growth and meager employment gains. Growth estimates since the 2008 crisis have been revised downward several times.
The political narrative runs in parallel. A recent (admittedly partisan) study by the US Congress's Joint Economic Committee documents the relative weakness of the current recovery. Indeed, the differences between the current situation and other postwar US recoveries are so large that the term “recovery” in today's context is dubious. But US leaders nonetheless accept the cyclical view of the economy, see a weak recovery, and blame it on post-crisis policy failures.
But, while that might play well politically, the sensible conclusion is that this is not just a cyclical recovery, but rather the beginning of a delayed process of structural adaptation to a rapidly shifting global economy, to emerging economies' growth and shifting comparative advantage, and to powerful technological forces. While these changes are difficult to think about with any degree of precision, that doesn't make them unimportant.
Of course, no one would deny that there are cyclical elements in the downturn of 2008. But they were accompanied by structural imbalances that had been building over at least 15 years, and that are at the heart of the US economy's inability to bounce back in a normal cyclical way.
Skeptics might well question why, if these alleged structural imbalances are now impeding GDP and employment growth, they did not appear before the crisis. The answer is that they did, but not in growth and employment figures. Other signals were missed, ignored, or deemed unimportant.
A short list of these signals would include excess consumption (now gone) and deficient savings, based on an asset bubble and high debt; a persistent and growing current-account deficit (signaling that domestic consumption and investment exceeded income and output); and negligible net employment growth (over two decades) in the economy's tradable sector. With domestic aggregate demand in short supply, the only functioning growth engine, external trade in goods and services, is not an employment engine.
Missing all of these signals produced the pre-crisis illusion of sustainable growth and employment, and helps explain why the crisis, rather than its causes, is viewed as the culprit. The crisis, however, merely exposed the underlying imbalances and unwound some of them.
The “grand bargain” that PIMCO CEO Mohamed El-Erian recently alluded to in describing the appropriate response to the current situation in the US needs to include a fiscal stabilization plan. But it also must include a shift to a policy framework that accurately reflects the non-cyclical nature of the longer-term structural adaptations that will be required to restore growth and employment.
Michael Spence, a Nobel laureate in economics, is Professor of Economics at New York University's Stern School of Business, Distinguished Visiting Fellow at the Council on Foreign Relations, and Senior Fellow at the Hoover Institution, Stanford University. His latest book is The Next Convergence – The Future of Economic Growth in a Multispeed World (www.thenextconvergence.com). Project Syndicate (www.project-syndicate.org)


Clic here to read the story from its source.