The IMF for several years has been excessively optimistic in forecasting the growth and recovery of the global economy, particularly developed world economies. In its report released today it downgrades its previous estimate of the current year’s growth but lifts its forecast of world growth in 2014 to 3.6 per cent within which it sees advanced countries growing at over two per cent for the first time in three years.
Maybe this will prove correct but the basis for the optimism seems fragile. The IMF says, “The impulse to global growth is expected to come mainly from the United States, where activity will move into higher gear as fiscal consolidation eases and monetary conditions stay supportive”. This is hardly a view shared by those who fear a turmoil as a result of the Obama-House loggerhead on the Budget and debt ceiling; nor is it a view shared by those of us who see the spending reduction as a having major benefits.
The latter perspective was well put recently by Resmed’s Peter Farrell , who argues, “Any time you can stop any government spending money, it’s got to be a plus for the taxpayer … because it will force them to think about what’s real. Turning off the faucet for the EPA, the dysfunctional Environmental Protection Agency, the national labour relations board etc is all good to stop these guys spending.”
The IMF analysis is based on the Keynesian/Friedmanite framework which cuts the link between savings, investment and economic growth. Investment becomes an expenditure no different from consumption, saving a residual of unspent income and capital expenditure an automatic outcome of increased demand.
Yet, sequential waves of post 1945 economic success stories demonstrate the importance of policies that encourage savings and market based investment in bringing about prosperity. The “economic miracles” in Germany and Japan came on the back of freeing up markets, and associated massive hikes in national savings and productive investment.
The rise of the Newly Industrialised Countries (NICs) of Hong Kong, Taiwan, Singapore and Korea followed similar economic liberalisations and their success has been followed by similar achievements by China and India.
All these success stories have been based on their economies generating very high shares of savings and ensuring market-oriented investment.
Since 2006, the developed countries of the world have shown negligible economic growth. The Euro zone countries, Japan and the UK have all grown by less than 2 per cent in the six years to 2012; the US has grown by five per cent (but median household income in 2012 was 8.3 per cent below 2007).
By contrast, the NICs have shown real growth of 23 per cent, and India and China 54 and 78 per cent respectively.
Investment, in terms of shares of GDP, in the established major economies (the Euro zone, the US, UK and Japan) is at 20 per cent and less. None of this group of countries has restored the share of investment to pre-GFC levels. Cannibalising savings to fund budget deficits is an important factor in this.
The NICs, China and India have higher shares of investment within their economies and have restored their pre-GFC levels investment shares
For First World nations to rediscover the path to growing prosperity they must reject the mainstream economists’ tool box involving activist fiscal and monetary policies. Instead they have to emulate the approaches adopted by the rapidly growing developing nations and the NICs. This involves reducing the size and role of government within their economies, balancing budgets and lowering taxation.
Achieving this is clearly proving difficult in view of the rise of social expenditure and the regulatory barriers to business innovation. Efforts to address these imbalances find little support from influential voices within agencies like the IMF, which nonsensically counsel against “austerity” for governments with persistent budget deficits. The US, UK and France are among the many developed economies where the government share of GDP remains considerably larger than in 2006.