World Economy 2014
A New Multilateralism for the 21st Century: the Richard Dimbleby Lecture
By Christine Lagarde
London, 3 February 2014
(IMF) The existing instruments of cooperation have proven extremely successful over the past decades, and they must be preserved and protected. That means that institutions like the IMF must be brought fully up to date, and made fully representative of the changing dynamics of the global economy. We are working on that.
More broadly, the new multilateralism must be made more inclusive—encompassing not only the emerging powers across the globe, but also the expanding networks and coalitions that are now deeply embedded in the fabric of the global economy. The new multilateralism must have the capacity to listen and respond to those new voices.
The new multilateralism also needs to be agile, making sure that soft and hard forms of collaboration complement rather than compete with each other. It needs to promote a long-term perspective and a global mentality, and be decisive in the short term—to overcome the temptation toward insularity and muddling through.
Fundamentally, it needs to instill a broader sense of social responsibility on the part of all players in the modern global economy. It needs to instill the values of a global civil market economy—a global “guild hall”, as it were.
What might this mean in practice? It clearly means many things, starting with all global stakeholders taking collective responsibility for managing the complex channels of the hyperconnected world.
For a start, that means a renewed commitment to openness, and to the mutual benefits of trade and foreign investment.
It also requires collective responsibility for managing an international monetary system that has traveled light years since the old Bretton Woods system. The collective responsibility would translate into all monetary institutions cooperating closely—mindful of the potential impact of their policies on others.
In turn, that means we need a financial system for the 21st century. What do I mean by that?
I mean a financial system that serves the productive economy rather than its own purposes, where jurisdictions only seek their own advantage provided that the greater global good prevails and with a regulatory structure that is global in reach. I mean financial oversight that is effective in clamping down on excess while making sure that credit gets to where it is most needed. I also mean a financial structure in which industry takes co-responsibility for the integrity of the system as a whole, where culture is taken as seriously as capital, and where the ethos is to serve rather than rule the real economy. …
We also need the new 21st century multilateralism to get to grips with big ticket items like climate change and inequality. On these issues, no country can stand alone. Combating climate change will require the concerted resolve of all stakeholders working together—governments, cities, corporations, civil society, and even private citizens. Countries also need to come together to address inequality. As but one example, if countries compete for business by lowering taxes on corporate income, this could make inequality worse. (Video of the lecture)
See Wednesday-Night,com BITCOIN
Into the Bitcoin Mines
(NYT) On the flat lava plain of Reykjanesbaer, Iceland, near the Arctic Circle, you can find the mines of Bitcoin.
To get there, you pass through a fortified gate and enter a featureless yellow building. After checking in with a guard behind bulletproof glass, you face four more security checkpoints, including a so-called man trap that allows passage only after the door behind you has shut. This brings you to the center of the operation, a fluorescent-lit room with more than 100 whirring silver computers, each in a locked cabinet and each cooled by blasts of Arctic air shot up from vents in the floor.
These computers are the laborers of the virtual mines where Bitcoins are unearthed. Instead of swinging pickaxes, these custom-built machines, which are running an open-source Bitcoin program, perform complex algorithms 24 hours a day. If they come up with the right answers before competitors around the world do, they win a block of 25 new Bitcoins from the virtual currency’s decentralized network.
The network is programmed to release 21 million coins eventually. A little more than half are already out in the world, but because the system will release Bitcoins at a progressively slower rate, the work of mining could take more than 100 years.(21 December 2013)
Bitcoin exchange Mt. Gox goes dark in blow to virtual currency
(Reuters) – Mt. Gox, once the world’s biggest bitcoin exchange, abruptly stopped trading on Tuesday and its chief executive said the business was at “a turning point” but gave no details.
Several other digital currency exchanges, including Bitstamp and BTC-E, issued statements attempting to reassure investors of both bitcoin’s viability and their own security protocols.
The website of Mt. Gox suddenly went dark on Tuesday with no explanation, and the only activity at the company’s Tokyo office was outside, where a handful of protesters said they had lost money investing in the virtual currency.
Hours later, Mt. Gox CEO Mark Karpeles told Reuters in an email: “We should have an official announcement ready soon-ish. We are currently at a turning point for the business. I can’t tell much more for now as this also involves other parties.” He did not give any other details.
David Yermack: Bitcoin Lacks the Properties of a Real Currency
(MIT Technology Review) Bitcoin also lacks additional characteristics usually associated with currencies. It cannot be deposited in a bank; instead it must be held in “digital wallets” that have proved vulnerable to thieves and hackers. There is nothing comparable to the deposit insurance relied on by banking consumers. No lenders use bitcoins as the unit of account for consumer credit, auto loans, or mortgages, and no credit or debit cards are denominated in bitcoins.
Even if volatility subsides and the currency finds a place in the world payments system, it has another fatal economic flaw. Only 21 million units can ever be issued, and a fixed money supply is incompatible with a growing economy. In a bitcoin-dominated economy, workers would have to accept pay cuts every year, and prices for goods would gradually fall. Such conditions might lead to public unrest reminiscent of the late 19th century’s free-silver and populist movements—an ironic consequence of a currency known for its futuristic cachet.
Exclusive: World Bank aims to boost lending by 50 percent over 10 years
(Reuters) – The World Bank hopes to boost its lending by 50 percent over 10 years by cutting costs, loosening a restriction on how much it can lend, and charging richer nations higher fees for some services, several people familiar with the matter said.
The bank’s board signed off on the plan to raise lending by $100 billion this week, and the details are supposed to be worked out ahead of the spring meetings of the World Bank and the International Monetary Fund in April, said the sources, who were not authorized to speak publicly.
The bank’s current loan portfolio is around $200 billion.
The World Bank, a poverty-fighting institution based in Washington, has been undergoing its first major strategic realignment since 1996 to make it more efficient and attuned to what countries need.
Under the new strategy, the bank said it was seeking ways to boost its overall lending portfolio in order to keep itself relevant amid greater competition for development funds.
Bitcoin is under attack
(CNN Money) Bitcoin is under attack by cybercriminals, bringing down some of the world’s largest Bitcoin exchanges in the process.
Unknown attackers are exploiting a Bitcoin design flaw to record fake transactions, muddying up the Bitcoin system’s public accounting and causing widespread confusion for the centers where people trade them.
The Bitcoin flaw allows these attackers to make a withdrawal from their own account and tamper with the record of that transaction. So they could cash out, but claim they never got the Bitcoins.
Developing Economies Hit a BRICS Wall
(Spiegel) Until recently, investors viewed China, Brazil and India as a sure thing. Lately, though, their economies have shown signs of weakness and money has begun flowing back to the West. Worries are mounting the BRICS dream is fading. … reality has begun to catch up to the BRICS states. Growth rates in 2013 were far below where they were at their high-water marks. Whereas China’s growth rate reached a high of 14 percent just a few years ago, for example, it topped out at just 8 percent last year. In India, economic expansion fell from a one-time apex of 10 percent to less than 5 percent in 2013; in Brazil growth went from a high of 6 percent to 3 percent. Such values are still higher than those seen in the EU, but they are no longer as impressive.
And worry is spreading. Now, there is a new moniker being used to describe the developing giants: the “fragile five” … meant as a warning to the now brittle-seeming countries of Brazil, India and South Africa as well as to Turkey and Indonesia, both of which are threatened with collapse.
IMF Raises 2014 Global Growth Outlook
Sees Global Economic Growth at 3.7%, With U.S. Leading Recovery
(WSJ) The International Monetary Fund raised its global economic growth outlook for the year on Tuesday, with expansion to be fueled by U.S., euro-zone and Japanese growth, though deflation and financial-sector risks threaten a full recovery.
“The recovery is strengthening,” though it is still weak and uneven, IMF Chief Economist Olivier Blanchard said as the fund released its latest World Economic Outlook report.
The IMF raised its 2014 global growth forecast to 3.7%, up 0.1 percentage point from its last outlook in October (21 January 2014).
UNDP: Global economic growth is creating more inequality
Developing countries experienced an 11% increase in the gap between poor and rich between 1990 and 2010, the United Nations Development Programme says in a report. If this gap isn’t closed, it could lead to societal unrest, UNDP warns. Reuters (1/29), Inter Press Service (1/29)
Davos 2014: World Economic Forum – Day Four as it happened
(The Guardian) Highlights from the final day of the World Economic Forum in Davos, including a debate on the Global Economic Outlook this afternoon
Davos 2014: What is at stake?
As world leaders meet at the World Economic Forum, we ask what it would take to lessen the divide between rich and poor.
(Al Jazeera) The theme of this year’s gathering is ‘The Reshaping of the World: Consequences for Society, Politics and Business,’ which looks at the causes of future global instability, like climate change, income inequality and the vast and growing rates of youth unemployment around the world.
One of the highlights of the event was the speech by Iran’s President Hassan Rouhani. Making his most public effort yet to present a friendly face to the world, he said: “No country can resolve their problems on their own. No economic institution can actually grow without paying attention to social issues. No power can have permanent domination over anything. The economic recession, the economic problems in the world show that all of us are on the same ship, the same boat. And if we do not have wise pilots for the ship, we will have problems. Recent problems have shown that economic policies should be based on social justice and the interests of everybody involved … so that everybody’s interests are protected … so that we have durable systems of governance … so that all people can benefit from them.”
Rouhani is positioning himself as a leader vital to global stability and security. His was a speech that combined themes of conciliation, moderation and investment.
Japanese Primer Minister Shinzo Abe also took the chance to remind everyone that Asia has become the growth engine of the world.
But while world leaders are discussing growth, Oxfam said in advance of the annual meeting that the world’s elite have rigged laws in their own favour, undermining democracy and creating a chasm of inequality across the globe.
Inequality has run so out of control, that the 85 richest people on the planet “own the wealth of half the world’s population,” Oxfam said in an introduction to a new report on widening disparities between the rich and poor.
Davos 2014: What we learned
(BBC) … Technology – job destroyer?
There was a lot of discussion about whether advances in technology would lead to a loss of jobs as more and more things become automated. This led to countless comparisons to the industrial revolution.
And it was surprising just how many – including Google’s Eric Schmidt – thought that, although these developments in technology were a good thing, it would result in more people being jobless.
“The jobs problem will be the defining one of the next ten to twenty years,” Mr Schmidt said in a small discussion on the sidelines of the Economic Forum.
One participant – who argued that algorithms were already doing most jobs including writing a magazine – came up with a very unexpected argument (for Davos anyway). Imagine the day when all jobs were done by robots, and we were left to choose how we spent our days – without being driven by the need to pay the mortgage. What a radical thought!
Davos diary: A new sense of dread is settling over the world’s elites
In Davos, two scenarios are taking shape, like tribal forces on opposing mountainsides. The coming waves of innovation will show who’s right, whether government – having saved the financial system – should now get out of the way of a new industrial revolution. Or whether those states need to step it up, spending tax money on training, helping pick winning technologies and pumping consumers with even more credit to buy what the innovators are creating. At least for now there is general agreement with Eric Schmidt’s take on the race between humans and machines – “that it’s important the humans win.”
(Globe & Mail) Once again, the argument between creative destruction and state-funded stability is the talk of policy-makers, who have woken up to a new year of economic growth around the world and yet a dreaded sense that this global expansion will not bring nearly enough jobs and wage increases to satisfy any public. It’s a tension not seen, perhaps, since the late 1930s, when Schumpeter made his case and a three-decade-long burst of innovation proved him right. For then.
Another machine revolution is upon us. There is a new wave forming behind the past decade’s surge of mobile technology, with disruptive technologies like driverless cars and automated personal medical assistants that will not only change lifestyles but rattle economies and change pretty much every assumption about work.
The talk of one Davos session this week was 3-D printers – for housing. A prototype, it was claimed, is already printing small houses fit for human habitation. Within five years, the entire construction industry could be replaced by a phalanx of printers. Goodbye, a million construction jobs. Hello, a thousand code-writers. …
For all the talk of growth, though, the global economy is also in an employment morass that has the smartest people in the room humbled and anxious. The rebound is not producing jobs and pay increases to the degree that many of them expected. Most governments are tapped out, fiscally, and can only call on the private sector – “the innovators” – to do more.
That in itself seems humbling. Davos was the place where governments often found succor, in a cacophony of panels, speeches and forums that seemed to usually conclude with the view that a government – democratic or theocratic, clean or corrupt – had good reason to go home and get on with it.
Of course, after 9/11, governments coming here expressed dismay at their seeming inability to fight the new enemy. State warfare was gone. Then came the financial crash of 2008, and the state was back. Bailouts, crackdowns, virtual printing presses for money – the interventionists had their day in the Swiss sun.
But rather than a celebration, these countries are all owning up to a new challenge, as amorphous and yet more insidious than anything else on the agenda. You wander into the Google Club and sense that much of what Davos has known is coming unglued. [See comments from Guy Stanley and Tony Deutsch below]
And across the ocean, The British Virgin Islands: A Forbidden City
(ICIJ) In the British Virgin Islands students learn finance in high school, hoping to land a job in the offshore services industry. A French journalist for Le Monde attended a lecture in which teenagers were told: “The Virgin Islands have survived a terrible hurricane. And that hurricane’s name is I-C-I-J!”
Davos 2014: from PMs and CEOs to Goldie Hawn, Matt Damon and Bono
Simon Goodley explores the ‘constellation of egos’ that makes the World Economic Forum the ultimate business meeting
(The Guardian) … one particular crowd-puller – and hugely important for all those stressed executives who are a little short of me-time – is likely to be actress Goldie Hawn holding forth on the merits of meditation. The star of Shampoo and Private Benjamin is part of a “mindfulness” panel – one of 25 sessions that will cover mental health and wellbeing.
For those keen on learning about life away from the boardroom, the private jet and swish ski resorts there is a 75-minute simulation session available which is designed to demonstrate exactly what it is like to be a Syrian refugee.
Think-tank raises heat in IMF sovereign debt debate
(Financial Times) The fund is now locked in a protracted consultation period with governments, investors, bankers and academics on how to overhaul the process, and will present formal recommendations to its board in June.
The latest body to step into the politically sensitive and contentious debate is the Centre for International Governance Innovation, a prominent Canada-based think-tank, which presented its arguments directly to the IMF’s executive board on Thursday.
The CIGI’s experts[Brett House and co-author Richard Gitlin] proposed setting up a “Sovereign Debt Forum” for countries and their creditors that the think-tank argued would ameliorate many of the problems identified by the IMF without treading into more controversial areas.
World Economic Forum warns of ‘lost’ generation, dangers in growing inequality
A chronic gap between rich and poor is yawning wider, posing the biggest single risk to the world in 2014, even as economies in many countries start to recover, the World Economic Forum said on Thursday. Its annual assessment of global dangers … concludes that income disparity and attendant social unrest are the issue most likely to have a big impact on the world economy in the next decade.
Ben Bernanke’s Global Legacy
The world is still struggling to digest Alan Greenspan’s mixed legacy as Chairman of the US Federal Reserve Board from 1987 to 2006. So it is too soon to assess whether his departing successor, Ben Bernanke, is headed for history’s chopping block or its pedestal. But the crucial international role that Bernanke and the Fed played during his tenure – a time when domestic economic weakness translated into relatively ineffective American global leadership – should not be overlooked.
In these last five crisis-ridden years, the Fed has affected the world economy in two ways: through its hyperactive policy of purchasing long-term assets – so-called quantitative easing (QE) – and through its largely overlooked role in providing international liquidity. Let us consider each.
Whatever the impact of QE on the US economy, its impact on the rest of the world has been, on balance, generally benign. The first round of QE was unambiguously beneficial, because it minimized, or even eliminated, the tail risk of a global depression after the collapse of Lehman Brothers in September 2008. (14 January)
Traders Losing $1 Million Build EU Case for Bitcoin Rules
(Bloomberg) Trading Bitcoins could bleed you dry, the European Union’s top banking regulator said as it weighs whether to regulate virtual currencies.
Thefts from digital wallets have exceeded $1 million in some cases and traders aren’t protected against losses if their virtual exchange collapses, the European Banking Authority said today in a report warning consumers about the risks of cybermoney.
Virtual currencies such as Bitcoin have come under increased scrutiny from regulators and prosecutors around the globe. China’s central bank barred financial institutions from handling Bitcoin transactions last week and German police arrested two suspects in a fraud probe into illegally generated Bitcoins worth 700,000 euros ($963,000). — Dec 13, 2013
Bitcoin: More Than a Currency, a Potential for Innovation
by David Descôteaux
(Montreal Economic Institute) Bitcoin digital currency has attracted the regular attention of the financial press for the past several months. Its price fluctuates enormously, influenced by new innovative developments but also by positive or negative decisions by governments and central banks concerning its use. Is the Bitcoin system here to stay and become an integral part of our economic lives? Whatever the outcome of this particular experiment, the innovations made possible by new information technology have the potential to revolutionize monetary and financial matters. This Economic Note offers an overview of the Bitcoin phenomenon in order to better understand the issues that it raises.
‘Businessweek’ Cover Dreams Up a Fantasy Land of Bitcoins and Unicorns
The Bitcoin-Mining Arms Race Heats Up
Bitcoin is the digital currency that thrills nerds, inspires libertarians, and incites the passions of economists who debate the value of money made from nothing but ones and zeroes. Devotees watch the fluctuations of Bitcoin’s price with a fanaticism typically reserved for college football scores. Alternative currency startups are being lavishly funded by venture capitalists while visionaries gush about the world-changing possibilities of money free from government control. Silicon Valley is the natural center for Bitcoin mania. An advocacy group named Arisebitcoin recently put up 40 billboards around the Bay Area with messages such as: “The Revolution has started … where do you stand?”
As with an actual precious metal, Bitcoins are in limited supply—they must be “mined.” Unlike with precious metals, this mining is done purely by computer. Miners set their machines to run a series of complex calculations that tally up and certify all the transactions of other Bitcoin holders around the world. If the miner’s computers complete these calculations and solve a complex mathematical puzzle before anyone else, he earns about 25 Bitcoins as payment. It’s a nice haul: With the price of each Bitcoin nosing up near $1,000, that’s $25,000 for 10 minutes or so of work. For the moment at least, miners are the rare grunts who can also get rich.
Mint condition: countries tipped as the next economic powerhouses
Forget the Brics and the Civets, Mexico, Indonesia, Nigeria and Turkey are the new kids on the bloc according to economists
(The Guardian) First it was the Brics. For a while the Civets were in vogue. Now the Mints are the ones to watch. Confused? Well, once you know your acronyms it all becomes clear.
The Brics are Brazil, Russia, India and China – four emerging economies lumped together in 2001 by Jim O’Neill, then at Goldman Sachs, to show that western investors needed to take notice of what was happening in the post-cold war global economy.
Robert Ward, of the Economist Intelligence Unit, linked Colombia, Indonesia, Vietnam, Egypt and Turkey but the Civets never really took off. Now O’Neill is championing the Mints, a name first coined by the fund managers Fidelity, for what he thinks will be the second generation of emerging market pace-setters: Mexico, Indonesia, Nigeria and Turkey.
The Mints share some common features. They all have big and growing populations with plentiful supplies of young workers. That should help them grow fast when ageing and shrinking populations will lead inexorably to slower growth rates in many developed countries (and China) over the coming decades.
And they are nicely placed geographically to take advantage of large markets nearby, with Indonesia close to China, Turkey on the edge of the European Union and Mexico on America’s doorstep.
The only problem with this is: Turkey’s economic success threatened by political instability
Joseph Stiglitz: A dismal new year for the global economy
Unemployment levels in the US and the eurozone point to a tough 2014 despite some small signs of optimism
(The Guardian) Economics is often called the dismal science, and for the last half-decade it has come by its reputation honestly in the advanced economies. Unfortunately, the year ahead will bring little relief.
Real (inflation-adjusted) per capita GDP in France, Greece, Italy, Spain, the United Kingdom, and the United States is lower today than before the Great Recession hit. Indeed, Greece’s per capita GDP has shrunk nearly 25% since 2008.
There are a few exceptions: After more than two decades, Japan’s economy appears to be turning a corner under Prime Minister Shinzo Abe’s government; but, with a legacy of deflation stretching back to the 1990s, it will be a long road back. And Germany’s real per capita GDP was higher in 2012 than it was in 2007 – though an increase of 3.9% in five years is not much to boast about.
Elsewhere, though, things really are dismal: unemployment in the eurozone remains stubbornly high and the long-term unemployment rate in the US still far exceeds its pre-recession levels.
In Europe, growth appears set to return this year, though at a truly anaemic rate, with the International Monetary Fund projecting a 1% annual increase in output. In fact, the IMF’s forecasts have repeatedly proved overly optimistic: the Fund predicted 0.2% growth for the eurozone in 2013, compared to what is likely to be a 0.4% contraction; and it predicted US growth would reach 2.1%, whereas it now appears to have been closer to 1.6%.
With European leaders wedded to austerity and moving at a glacial pace to address the structural problems stemming from the eurozone’s flawed institutional design, it is no wonder that the continent’s prospects appear so bleak.
Klaus Schwab: The Global Economy in 2014
Ultimately, however, the path to sustained growth requires not just new policies, but also a new mindset. Our societies must become more entrepreneurial, more focused on establishing gender parity, and more rooted in social inclusion. There simply is no other way to return the global economy to a path of strong and sustained growth.
(Project Syndicate) the world’s four largest economies are currently undergoing major transitions. The US is striving to boost growth in a fractured political environment. China is moving from a growth model based on investment and exports to one led by internal demand. Europe is struggling to preserve the integrity of its common currency while resolving a multitude of complex institutional issues. And Japan is trying to combat two decades of deflation with aggressive and unconventional monetary policies.
For each, the formulation and outcome of complex and sensitive policy decisions implies many “unknowns,” with global interdependence heightening the risk of large unintended consequences. For example, the US Federal Reserve’s policy of quantitative easing (QE) has had a major effect on other countries’ currencies, and on capital flows to and from emerging markets.