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Feb 09

Global recovery good for others too

According to Martin Wolf, the star FT (Financial Times) journalist, the world economy is enjoying a synchronised recovery which is good news not just for the G7 but emerging and developing countries too:

  • Commodity prices have rebounded

  • Trade volumes have recovered

  • FDI capital flows to emerging countries have strengthened

His conclusions are based on precise percentages for growth rates issued by the World Bank – data which we consider to be seriously flawed in absolute terms but perhaps useful in indicating trends up or down – so have to be considered against that backcloth

Given that caveat, Wolf goes on to say that a slowdown in the potential rate of growth is happening and affecting many emerging nations, partly due to demographic ageing, partly to a weakening in productivity growth

In addition, downside risks of ‘financial stress, increased protectionism and rising geopolitical tensions’ threaten all

Big boys like China and India can manage such dangers – not so, their smaller brothers

And if the latter are to catch up with the G7 in the prosperity stakes, then they will need much faster growth

To achieve this, they will have to overcome two major hurdles:

  • Ageing of their populations will proceed as in most developed countries

  • A productivity slowdown partially due to the impact of IT and the internet having matured, slower diffusion of new technology and best practices and a sharp reduction in growth of FDI (Foreign Direct Investment) investment

Significant policy changes are thus needed, and urgently:

  • To improve the quality of their labour forces via improving the quantity and quality of education, especially at secondary and tertiary levels and the participation of females

  • To encourage greater entrepreneurial effort, more competition, higher investment and faster improvements in productivity

Conclusions:

  • Emerging and developing economies should use today’s buoyant global growth to encourage higher investment, especially FDI, and make reforms needed to raise productivity growth

  • They should act now

  • Economic sunshine never lasts – they should expect stormier weather ahead

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