Thursday, October 11, 2012

The Next Convergence - Part 3

Part 3. The crisis and its aftermath:

Emerging markets during and after the global crisis;

Instability in the global economy and lessons from the crisis;

Stimulus in the crisis and the need for cooperative behavior;

Rebalancing the global economy and its consequences for growth;

The excess-savings challenge in China; The openness of the global system and the WTO;

Legacies of the crisis: slow growth and sovereign-debt issues in advanced countries;

Periodic systemic risk and investment behavior

Spence presents three categories of challenges confronting growth in the 21st century:

1. Instability and volatility

2. Re balancing

3. Adding up problems

Of these three issues I see the last, perhaps better defined as the coordination problem, as the one that may present significant headwinds for what Spence calls sustainable growth. Given the speed of change and increasing complexity of global relationships, the first two issues, which I see as consistent historical challenges will interact with the coordination problem to present obstacles to transition for emerging economies and a force that may reinforce vicious circles for the bottom billion.

On pages 134-5 Spence roughly outlines an emergence in the interplay between domestic and global financial regimes that seems to be shaped by state action and regulation. I am looking forward to whatever attention our book club devotes to these ideas and the consequences of either this type of model or alternative developments.

Spence underscores both the importance of open trade and the emerging forces that may act to shape the path toward increased openness. In particular, he takes about both the US and China (137) and the potential future impact on bond and money markets. This concern has been raised by participants in our book club and, without positive attention to the US deficit and debt the likelihood of both increased volatility in money and debt markets as well as unpleasant re balancing in the US seems to be probable.

In writing about the 2009 world wide financial crisis, Spence writes (139):

"Here we have an example of two things. One is that policies can have unintended consequences. The second is that the response driving by national priorities differed from a cooperative global response."

This last observation, it seems to me, continues to characterize the contemporary intersection of domestic and global policy making around the globe.

The hot button that I suspect will generate significant levels of conversation in October is found on page 145 - "The prevailing view now is that this [financial crisis] was largely a failure of regulation. Regulatory failures surely contributed, but is was more than that." I wonder how our group will react to the discussion of the role of "regulatory and self regulatory components"(146). I couldn't help but think of Smith's analysis of behavior, first in The Theory of Moral Sentiments and later in The Wealth of Nations. In particularly, the institutional framework that both reflects and shapes these two manifestations of control are important. As inclusive institutions (to use the language from last month's book) incentivize other thinking, the presence of individual impartial spectators shape a broader view of costs and benefits. That is, perhaps the self regulation that Spence hopes for is rooted in Smith's mechanism of self reflection and self control. The virtues of beneficence and prudence (informal institutions) emerge in those open access societies that develop inclusiveness.

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