Shifts in global demand must be co-ordinated
Zhu Min says to get the world economy back on its feet, some nations need to boost consumption while others increase investment, and policies need to be co-ordinated at a global level
Whether we like it or not, the world around us is in a state of constant change. But recent economic trends suggest that this change may be shifting its direction in a fundamental way.
Consider the advanced economies. During the past two decades, economic growth in these countries was led by consumption - so much so that economic activity in these economies swung from investment to consumption by a total of 10 percentage points of gross domestic product. As a result, in 2010, the share of consumption in their GDP had reached 81.6 per cent.
Meanwhile, emerging markets and developing economies provided almost a mirror image of this trend, raising their investment and boosting the supply of goods to the rest of the world at the cost of consumption in their own economies. By 2010, the share of consumption in their GDP had declined, from 73.4 per cent to 67.1 per cent.
It is unlikely that the consumption share of GDP can increase further in advanced economies. The main drivers of this increase were primarily financial engineering and wealth effects from strong asset prices. Neither of these factors is currently at play to push consumption's share of GDP higher.
But can the advanced economies' consumption even be sustained at the current level? Perhaps not. Current levels of consumption are associated with over-extended governments and households, whose debt levels remain high, implying that more savings are required. Banks also need to raise capital. In general, many economic agents need an extended period of deleveraging.
However, current policies in the major advanced economies are aimed at maintaining current consumption levels in order to support growth and employment. If the consumption share of GDP none-theless declines, simple arithmetic tells us that investment and exports need to be higher to maintain total demand.
Should we expect emerging markets and developing economies to pick up the slack? To sustain strong growth in these economies as external demand weakens, domestic demand needs to become the major engine of growth. This means stronger domestic consumption and appropriate levels of investment to support such consumption growth. In economies where investment levels are leading to excess capacity, resources could shift from investment to consumption, provided that these countries' external accounts remain sustainable.