Last week, the World Bank's Europe & Central Asia region published Diversified Development, a highly readable report written by Indermitt Gill, Ivailo Izvorski, Willem van Eeghen, and Donato De Rosa. The subtitle, making the most of natural resources in Eurasia, indicates that the report focuses on countries that are currently highly specialized as a result of their comparative advantage in natural resources. It addresses the question to what extent these countries have to diversify to ensure long-term prosperity. Clearer than ever before, the authors show that that is the wrong question to ask. That question gets the causality backwards. A diversified economy can result from successful development, but forced diversification is unlikely to lead to successful development.
Ninety years ago, in his A Tract on Monetary Reform Keynes famously wrote “In the long run we are all dead”. That observation recently stirred a lot of debate for all the wrong reasons, after Niall Ferguson obnoxiously claimed that Keynes did not care about the future because he was childless. Whether Keynes cared about the long-term future or not (and whether he had children or not) is completely irrelevant in this context, as many (e.g. Brad DeLong and Paul Krugman) have pointed out.
The actual context in which Keynes wrote this observation was a discussion about the quantity theory of money, which states that doubling the supply of money will only double the prices, but will have no consequences for other parts of the economy. This is the classical dichotomy between real and nominal variables. Keynes argued: “Now in the long run this is probably true”. But “In the long run we are all dead. Economists set themselves too easy, too useless a task if in tempestuous seasons they can only tell us that when the storm is long past the ocean is flat again.” So, Keynes’ point was obviously not that the future doesn’t matter. His point was that simple theories that might describe long-term relationships are just not good enough to deal with current issues. In the short run, changes in money supply can have all kinds of important consequences beyond the price levels. Economists will have to make their hands dirty and delve into the complicated dynamics of the here and now.
Millions of Chinese have just celebrated the beginning of the year of the Dragon - a year which according to Chinese tradition is auspicious for ambitious undertakings. These may be required as the global economy faces severe headwinds. According to the January edition of Global Economic Prospects (GEP) report the world economy is expected to grow at 2.5 percent and 3.1 percent in 2012 and 2013, significantly below the 3.6 percent projected for both years in last July’s GEP. But even achieving these much weaker outturns is highly uncertain. The downturn in Europe and weaker growth in several large developing countries, such as Brazil and India, could potentially reinforce one another, resulting in an even weaker outcome. But without growth it will be more difficult to reduce the high debt of some advanced economies to sustainable levels and create much needed jobs world-wide.
New Year’s resolutions are always of the lofty – but often short-lived kind. I will go to the gym more often, lose more weight, or volunteer more often than I do now. One resolution made by a number of us in the Research Group of the Bank – and elsewhere, has been to find a way to get more people excited about investing in data collection and analysis on trade. I recognize this is not the most glamorous of topics at any time of the year – but nonetheless a resolution as important as any made each year for decades as the calendar turns another page.
Here is why 2011 is different and resolutions made can be kept, however, and why data and research should be high on anyone’s development and trade agenda.
There were a number of high level dialogues in 2010 and 2011 related to global finance, trade, and development issues. These included the High Level Summit on the MDG’s in September 2010 and the G20 Summit in Seoul in November 2010. These events provided important opportunities -- in the post-crisis environment – to inform priorities going forward on aid effectiveness and trade. The President of the Bank, Mr. Zoellick, outlined in October 2010 -- in a very high profile speech at Georgetown University – a new vision of development economics which included new ways of looking at and advancing research tied to make aid more effective and inclusive.
(Also available in Spanish)
Many observers predict that this week’s G-20 Summit in Seoul will be remembered mainly as a dance of high diplomacy aimed at persuading members to refrain from competitive devaluation of currencies and to reign in excessive current account imbalances.
If most headlines from Seoul are about spats over currencies and whose deficit or surplus is most harmful, then leaders will have missed the Seoul of the Matter.
Indeed, such an outcome would be a setback for developing countries and could potentially erode the legitimacy of the G-20 as an inclusive broker of financial and economic cooperation in the global economy.