Tradable Prosperity

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The global economy is experiencing a major growthchallenge. Many advanced countries are attempting to revive sustainable growthin the face of a decelerating global economy. But the challenges acrosscountries are not the same. In particular, thetradable and non-tradable parts of a range of economies differ in importantways.

In the non-tradable sector(60-70% of the economy in advanced countries), the main growth inhibitors areweak demand, as in the United States following the financial crisis, and structuraland competitive impediments to productivity,as in Japan. In the tradable sector, growth depends on a country’s productivityrelative to incomes and competitiveness. At the global level, there can also bea shortage of aggregate demand on the tradable side.

The Nobel laureateeconomist Robert Solow has shown that growth comes from three sources: theworking population, capital investment, and technological progress. A growingyoung population helps to maintain fiscal balance and ensure intergenerational equity, but it does not by itself increaseincomes. On the other hand, economic growth below the sum of growth in theworking population and the labor-saving part of technological change fuelsunemployment.

Developing countries,once they enter rapid-growth mode, generate growth from capital deepening via investment, in a sense making up for pastunderinvestment. And it is possible for advanced countries to fall behind byunder-investing, particularly in the public sector, relying instead on lesssustainable debt-fueled means of generating demand. So a legitimate part of astrategy to restore growth is investment.

But, as Solow noted,investment has its limits, owing to diminishing marginal returns. Often, theselimits are not binding, but, once capitaldeepening is exhausted, technological progress, which makes inputs moreproductive in creating final value, is the long-run driver of growth.

The challenge is toapply these insights in a world characterized by global economicinterdependence, major imbalances, and a worsening growth and employmentproblem. It is a world in which economies are connected directly in thetradable sector of the global economy, and indirectly through the demand andemployment linkages between the tradable and non-tradable sectors of individualeconomies.

In the short run, thenon-tradable sector is, by definition, subject to domestic-demand constraints.A shortfall in non-tradable demand inevitably limits growth on that side of theeconomy.

Government can, ofcourse, bridge the gap via deficit spending (preferably focused onemployment-generating investment that enhances future growth). But the advancedcountries are, to varying degrees, fiscally constrained by relatively high andrising public debt, largely owing to fiscal imbalances that were hidden fromview until defective growth models brokedown in the crisis of 2008.

Just how fiscallyconstrained these countries are remains subject to debate. Italy and Spain are clearly constrained bythe absence of private capital in their respective sovereign-debt markets, withrising yields threatening their fiscal stability and reform programs. They needthe eurozone core and the International Monetary Fund as temporary lenders of last resort until they restore policycredibility and regain investors’ confidence.

The USsovereign-debt market shows no similar evidence of having reached a limit yet.But bond markets do not issue many early warning signals: witness the sudden run-up of yields in Italyand Spaina year ago.

The more complexgrowth issues have to do with the tradable part of the global economy, whereglobal aggregate demand – and the derived demand that lands in various placesin global supply or value-added chains – is the target of competition. Totaldemand and its growth do matter, but so does market share. Given the growthpatterns across advanced and developing countries priorto the crisis, and then the large negative shock, it is likely thatthere is a shortfall of tradable globalaggregate demand, impeding an importantcomponent of global growth.

But, for individualeconomies, relative productivity versus income levels determines the share ofglobal tradable aggregate demand that is accessible. Unlike the non-tradableside of the economy, the domestic component of global tradable demand is not anabsolute constraint on growth; nor is the rate of growth of global tradabledemand an absolute constraint, given the possibility of increasing share.

Of course, noteveryone can gain share at the same time. Fortunately, if countries increaseproductivity with the aim of boosting relative productivity and growthpotential on the tradable side, this will increase incomes and accelerate thegrowth of global aggregate demand. It may look like a zero-sum game, but it isnot.

When incomes getsignificantly out of line with productivitylevels (as they have recently), reviving growth requires resetting the terms of trade, which can be done withexchange rates, whether managed or set by markets. In the eurozone, wherecountries with competitiveness problems do not have the exchange-rateadjustment mechanism, restrained income growthand productivity-boosting reforms areprobably needed, as was the case in Germany between 2000 and 2006, and now inseveral southern European countries.

What is true forcountries on the tradable side is also true for workers, who are differentiallyaffected by the evolution of global supply chains. The efficient integration ofglobal supply chains has created employment opportunities in developingcountries and in the higher value-added sectors of advanced countries. But ithas also reduced employment options for a subsetof middle-income people in the tradablesectors of advanced economies.

Many countries arestruggling to adapt their growth patterns to the new challenges they face in aslowing global economy. To be effective and properly targeted, policies need toinclude an accurate diagnosis of growth potential and impediments in both thetradable and non-tradable parts of the economy. Focusing on one (say, thecompetitiveness problem in the tradable sector) to the exclusion of the other(perhaps a serious non-tradable demand shortfall or stagnant absoluteproductivity) will not be enough

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关键词：Prosperity Prosper ABLE ABL SPE particular countries following demand growth

The global economy is experiencing a major growth challenge. the tradableand non-tradable parts of a range of economies differ in important ways.
In the non-tradable sector (60-70% of the economy in advancedcountries), the main growth inhibitors are weak demand, as in the United Statesfollowing the financial crisis, and structural and competitive impediments to productivity, as in Japan.
In the tradable sector, growth depends on a country’s productivityrelative to incomes and competitiveness. At the global level, there can also bea shortage of aggregate demand on the tradable side.
The Nobel laureate economist Robert Solow has shown that growth comesfrom three sources: the working population, capital investment, andtechnological progress.Developing countries, once they enter rapid-growth mode, generate growthfrom capital deepening via investment, in asense making up for past underinvestment. And it is possible for advancedcountries to fall behind by under-investing, particularly in the public sector,relying instead on less sustainable debt-fueled means of generating demand. Soa legitimate part of a strategy to restore growth is investment. But, as Solow noted, investment has its limits, owing to diminishingmarginal returns. Often, these limits are not binding,but, once capital deepening is exhausted, technological progress, which makesinputs more productive in creating final value, is the long-run driver ofgrowth.

The challenge is to apply these insights in a world characterized byglobal economic interdependence, major imbalances, and a worsening growth andemployment problem. It is a world in which economies are connected directly inthe tradable sector of the global economy, and indirectly through the demandand employment linkages between the tradable and non-tradable sectors ofindividual economies.

In the short run, the non-tradable sector is subject todomestic-demand constraints.Government can, of course, bridge the gap via deficit spending(preferably focused on employment-generating investment that enhances futuregrowth).But the advanced countries are, to varying degrees, fiscally constrainedby relatively high and rising public debt.Just how fiscally constrained these countries are remains subject todebate. Italy and Spainare clearly constrained by the absence of private capital in their respectivesovereign-debt markets, with rising yields threatening their fiscal stabilityand reform programs.The USsovereign-debt market shows no similar evidence of having reached a limit yet

The more complex growth issues have to do with the tradable part of theglobal economy.it is likely that there is a shortfallof tradable global aggregate demand, impedingan important component of global growth.Total demand and its growth do matter, but so does market share. for individual economies,relative productivity versus income levels determines the share of globaltradable aggregate demand that is accessible.When incomes get significantly out of line withproductivity levels (as they have recently), reviving growth requires resetting the terms of trade, which can be done withexchange rates, whether managed or set by markets. In the eurozone, wherecountries with competitiveness problems do not have the exchange-rateadjustment mechanism, restrained income growthand productivity-boosting reforms areprobably needed(reduce the  income level by cutting the overwelfare and lift the productivity to enhance the competitiveness)

What is true for countries on the tradable side is also true for workers.The efficient integration of global supply chains has created employmentopportunities in developing countries and in the higher value-added sectors ofadvanced countries. But it has also reduced employment options for a subset of middle-income people in the tradable sectors of advanced economies.

so Focusing on one (say, the competitiveness problem in the tradablesector) to the exclusion of the other (perhaps a serious non-tradable demandshortfall or stagnant absolute productivity) will not be enough.

I just read the news that three foreigners have been employed as municipal administrators in He Fei. And it is said that many foreigners in England like to further their studies in China. As a result, economy is not a problem of one country alone, it depends on the whole world.
China has succussfully accomplished the project of  home appliance going rural, which increases the demand in rural area. This procedure is expected to be expaneded to furniture industry, to replace old furniture with the new one by means of subsidies. While at the same time,  Chinese society are aging, reducing the number of labors. Experts are proposing to increase the retiring age, and some argue that the earilier the one-child policy is abolished, the less passive China will be.

whachel1976 发表于 2012-7-19 01:42
I just read the news that three foreigners have been employed as municipal administrators in He Fei. ...

I agree with you that the policy to subsidize the citizen to buy home appliance and possible furniture will boost the domestic demand but abolishing the only one child policy maybe will increase the population which need more capital to be equiped so to reduce the per captia GDP  in china