Friday, October 19, 2012

Avoiding economic traps

Economist Edward Hugh notes in In Search Of Lost Demand that

"There are countries which are not so heavily in debt, and which do have a large growth capacity and a huge quantity of so called “pent up” demand - the so called Emerging Economies...these economies are still only around 40% of global GDP, so it is demand in 40% which is having to pull the other 60% with it. The interesting part is that in the space of a decade these economies have surged from 20% to 40% of the total. If the same trend continues by 2020 they could easily constitute 60%. Then things could be different, since we could have 40% of the total living from exporting to the other, faster growing, 60%. But we aren’t there yet"

Can the emerging economies avoid the traps that have entangled the developed world? As an example there's the liquidity trap that the Bank of Japan finds itself grappling with.  It's a long range question, but worth considering given that macroeconomic policies have played a large role in guiding the developed countries into the mess they are in now. 

Economic policymakers seem to act as if exponential trends will continue indefinitely. Yet it is well documented that there are limits to growth. Policymakers in the emerging economies would do well to learn lessons from the mistakes that have been made that led to the current global crisis.

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