Looking forward to 2009?

It will be a watershed year, ushering a new world economic order--with the disorder most likely coming first.  I just don't have the foggiest idea what this new order will look like.

It will be a time when we will all have to change our tune and have to think out of the box. I for one will worry more about growth in the advanced countries than in the developing world, will be warning against the dangers of protectionism, will be singing the praises of the IMF (if its recent actions and pronouncements are a guide), and will fret about too much state intervention. Changing times require changing lines...

Here are four things that will determine how much doom and gloom is yet to come:

Will the U.S. policy response be “bold” enough? Barack Obama has promised that it will be, echoing at least part of FDR's famous call for “bold, persistent experimentation” at the height of the Great Depression in 1932. In particular, he will need to go beyond Keynesian policies of fiscal stimulus to heal the deep wounds to economic confidence that lie at the root of the present crisis. So far, confidence-building measures have been limited to financial markets,  but the needs of Main Street are no less important. Workers who worry about being laid off are unlikely to go on a spending spree regardless of how much money fiscal stimulus puts in their pockets. Just as banks are hoarding cash, households will try to preserve wealth by increasing their saving. To counter this, incentives targeted directly at preserving employment will have to be part of the solution.

Will Europe get its act together? This could have been Europe’s moment. After all, the crisis originated in the U.S. and left American policy focused on its domestic troubles, opening up room for global leadership by others. Instead, the crisis has demonstrated the deep divisions within Europe—on everything from financial regulation to the requisite policy response. Germany has dragged its feet on fiscal stimulus, stymieing what should have been the second leg of a globally-coordinated fiscal action plan. Alas, the best that can be hoped at this stage is that Europe will not undermine the global fiscal stimulus which even the International Monetary Fund—the guardian of fiscal orthodoxy—regards as absolutely essential.

Will China hold together? China is a country of enormous tensions and cleavages beneath the surface, and these will find more occasion to erupt into open conflict in difficult economic times. Experts on China differ in their estimate of the rate of economic growth the country needs to create employment for the millions that flock into its urban areas every year. But it is virtually certain that China will fall short of this threshold in 2009. The question is whether policy actions to date will do enough to stem a socially and politically dangerous slowdown in the economy.  Whichever way the Chinese leadership responds, future generations may remember 2009 less for its global economic and financial crisis than for the momentous transformation it will have caused in China.

Will there be enough global economic cooperation? When domestic needs become paramount, global economic cooperation suffers. But the costs of protectionism in trade and finance are especially large at moments like these. So far the International Monetary Fund has reacted with new-found vigor, establishing a much-needed short-term lending facility and warning against too little fiscal stimulus. The World Trade Organization, meanwhile, has wasted valuable time on the irrelevant Doha round. It should have focused its efforts on monitoring and implementing the commitment made by the Group of 20 countries not to raise trade barriers.

Did I say happy new year?

Comments

[D S Lamont]

Bravo! This is spot on.

The IMF's paper this week encouraged a coordinated global approach to fiscal stimulus - exactly what Keynes would have wanted With that, and international commitment to policies of high employment, he would have wanted a free/open trading system - what he lauded as "the wisdom of Adam Smith". (See Markwell, "Keynes and International Relations").

US leadership in international economic cooperation - including an Obama Administration commitment against protectionism - will be absolutely vital, for the US economy and for the world economy on which sustained US recovery depends.

[Michael Settle]

Nice piece of work. Since most revolutions take place in times of rising expectations, I found your comment on China to be spot on.

Paul Krugman wrote a thoughtful article for the New York Review of books that addresses the relative size of the stimulus package. It was published in early December. I reccommenr it to you. HNY

[Adam Smith]

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Abstract:

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[Youri Kemp]

Hi Prof Rodrik,

Another New World Order? Haven't we had enough of that from the neo-con's?

LOL....

It seems as if "change", is just another way to say "new".

Obama wants to bring change to America. I don't know what he has for the world, but it is correct that there will be some new things moving forward!

Europe has the resemblance of an old 'picky’ maid. Fussy about everything and accomplishing nothing.

Europe is on the verge of a new social revolution, which will rival that of the first wave of revolutions.

The same oligarchic dynasties, who worked feverishly to replace monarchies in earlier centuries, are being hoarded by a new wave of anarchists--I don't know what to call them, other than anarchists (for lack of a better term)-- who are hating, with an extreme passion, the social caste system in Europe.

This is not just new immigrants, but older and pervaseively lower class families, who have just not been benefitting the way they should in their country.

What's happening in Greece should be a fore-warning to countries like France, the UK, in particular, and, the rest of 'old' Europe.

Belgium, has mis-read the growing under-tide of the national political scene, which has been connected through communication and shared experiences, on what to expect from a country and leadership.

While Leterme was shaken, stirred and then defenestrated, due to his poor response to the growing economic crisis, one can only imagine what other political pressure he faced to do, or, not do things--this was not the first time he decided to ask to be relieved of his duties.

The new Belgium PM, Rompuy, seems to be from the old European established guard.

I see major trouble ahead for Belgium--which will be a contrasting event, compared to the tensions we see displayed in Greece, brought on by the catalyst of that fatal shooting.

Belgium will have a similar event, overplayed. And, then, analysts will be asking; "what in the world happened in Belgium!?!?!"

The world is changing and the old guard, is either pretending the change agents do not exist--or-- are simply trying their hardest to remain relevant.

As for global business, 2009 will be a wasted year, unless, they can cut a Doha deal--which, is, by all intents and purposes, a dead deal if we are seeing so much subsidies and protection, through the back door, by the way of economic stimulus packages!

A horrible feeling 2009, can be avoided, however. But, folks who have control now, have to let go and let God deal with it--old Europe, Bushites, neo-con's, progressive's and the rest of the developing world; Just let go and let God deal with it!!

Really, there is nothing this old guard can do about it.

Work with everyone, or simply become irrelevant!

Happy New Year.

Youri
http://globalviewtoday.blogspot.com/

[D. Watson]

So the question becomes if you think the ideal position is that of a contrarian? Is it really a change of tune to continue saying "not necessarily" to the 'consensus' view?

[Youri_Kemp]

That's a riddle all in to itself!

LOL....

Youri
http://globalviewtoday.blogspot.com/

[Brett]

Considering that we're already seeing signs of new protectionism in the Developing World (Brazil and Russia with tariffs, China with export subsidies), I'm pessimistic.

[wjd123]

If we had put trade together properly in the first place--with an eye toward countries that have the wear-with-all to follow international rules along with trading partners with similar political economies as ours-- we wouldn't be facing many of the problems Dani worries about.

I for one am not willing to go back to the status quo. Why should we waste this crisis just to work our way back to business as usual.

I'm not as worried about protectionism as Dani. I'm not fretting over protectionism against China. I would welcome it. And I'm not as worried as Dani about our politicians responding to voters' complaints over leakage in our fiscal stimulus package. Our politicians have done a stellar job of doing nothing about trade deficits for a very long time. Why would they suddenly leap into action against fiscal leakage. They will do nothing and hope voters won't catch on. You can be sure that 90% of the media will stay away from the problem 90% of the time. All here that think the Obama administration will give leakage priority raise your hands.

Here is the protectionism Dani worries about:

"It is pretty easy to increase the multiplier; just raise import tariffs by enough so that the marginal propensity to import out of income is reduced substantially (to zero if you want the multiplier to go all the way to 2.8). Yes, yes, import protection is inefficient and not a very neighborly thing to do--but should we really care if the alternative is significantly lower growth and higher unemployment? More to the point, will Obama and his advisers care? Being the open economy that it is, I fear that the U.S. will have to confront this dilemma sooner or later. In an environment where the dollar has already appreciated against the Euro and even more significantly against emerging market currencies, fiscal stimulus here will produce an even larger current account deficit. If American consumers decide to spend 40 cents of a dollar of additional income on cheap imports from China and other foreign countries, the multiplier will be a mere 1.3. How long will it take before politicians of all stripes cry foul over the leakage through the trade account and the "gift to foreigners" that this represents? And they will have Keynesian logic on their side."--Dani Rodrik

[Mr. Todd]

The Financial Times has their own New Year round up, with more specific questions, and vaguer answers.

http://mrbloggington.blogspot.com/2009/01/fts-giant-crystal-balls.html

[memory]

"future generations may remember 2009 less for its global economic and financial crisis than for the momentous transformation it will have caused in China."

And so on. As usual, the New Year is an occasion for predicting apocalyptic change. It's virtually always the percentage action to bet against it. For documentation, see e.g. Philip Tetlock, Expert Political Judgement: How Good Is It? How Can We Know?

I therefore predict that the Chinese government will be quite successful in keeping the lid on any major protests is 2009.

[wjd123]

I've invented a new science of trade, the science of comparative psychology. It goes hand and hand with comparative advantage.

The gains of comparative advantage have to be assessed in light of comparative psychology. For instance the social psychology of China and the United States are bad for each other. The Chinese have a need to save while Americans spend. Together they produced a huge trade deficit and a credit bubble. Every gain of comparative advantage is sooner or later wiped out by the losses due to the misfit in comparative phychology.

Ok, you say it was the misappropiation of easy money that got us into this mess not a difference in social psychology.

I beg to differ. One of the founding principles of my new science is that there are as many types of human nature as there are societies. As such what happened was almost assured.

[Cobain Hades]

Hi Memory,

Are you Chinese? I wish there would be as much as transformation in China in 2009. But there wouldn't be any major ones happen, I bet, especially in political side.

[don]

"Experts on China differ in their estimate of the rate of economic growth the country needs to create employment for the millions that flock into its urban areas every year. But it is virtually certain that China will fall short of this threshold in 2009.'
Don't the people 'flock' to the cities in response to jobs? Why would they 'flock' to the cities if there were no jobs there? I'm disappointed in seeing such stuff reproduced in your otherwise excellent blog. It seems to me like propaganda (an excuse, if you will) for China to maintain its policy of currency mercantilism. By the way, you don't say so explicitly, but isn't China's currency policy a bigger global trade distoriton than the stuff considered in the Doha Round? Is it 'protectionist' for countries to insist that such policies be curbed?

[Per Kurowski]

“Will the U.S. policy response be “bold” enough?” More important than that is whether the U.S. policy response will be “consistent” enough.

At this moment without still really comprehending how we got into this mess, mostly because so many scapegoats are tossed around serving other agendas, the market needs to find a story line that makes sense in order to trust tomorrow. A discourse of tax rebates and stimulus packages does simply not add up to a credible story.

[Michael Warhurst]

Protecting jobs is a problem???
In the history of industrialization there has never been an economy that exported its jobs and survived. Exporting jobs is economic suicide!
The basic equation is that by exporting jobs - unreciprocated free trade = unsupportable one way trade - we are replacing the champion consumers of all time (the N.American middle class) with workers in Asia and Latin countries who can hardly feed themselves and will add zero to world consumption and demand for manufactured goods!
This means that by rallying behind the neocon rhetoric of 'no protectionism' as if protecting power consumers jobs was a bad thing, we are greatly shrinking the world's economic pie. All of this to satisfy the ideological urgings of the neocons who created this mess in the first place.
What we need is trade which is restricted by reciprocity so that we are not unemploying power consumers to replace them with slave wage earners who cannot feed themselves and thereby condemning the world to economic depression for the second time in a century due to neocon ideology!!
In 1929 the percentage of the US GDP that was derived from exports was a mere 5%. For neocons to say that a few percentage points drop in GDP caused by 'protectionism' created the whole Great Depression was born is utter BS and they know it - or they should. If they don't they need to retire from economics as a pursuit because they are unqualified for the job!
WE need to create jobs but if we are simply exporting all of the well paying jobs to slave wage economies then the jobs we create through economic stimulus will only be 'offshored' anyway - so what's the point? This will continue to happen until N. American workers are willing to work for $5 a day just like the Chinese, Latin Americans etc etc!! By this time the world economy, consumption and demand will be so low that the whole world will be trapped in a depression that will make the 1930's look like a cake walk!

[lark]

Our global economy has a pre-existing inclination to export jobs to low wage locations. The current harsh climate for profits will increase that inclination. Meanwhile American taxpayers will be yoked to bailing out the MNC's who happen to have headquarters here.

How many millions of jobs will be lost under this system, this year?

That system was designed by economists. It deserves to be destroyed.

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