Globalization in the future ... a question of scale?
In the past weeks I have been talking about China's move up the value chain and what consequences this might have. First off, the evidence showed us that Chinese manufacturing prices were climbing and second off I discussed whether the more general emergence of big presences such as China and India would question the scale and sustainability of global output. These two issues are neatly combined in the recent World Economic Outlook by the IMF; hat tip to NewEconomist (good post!). The point seems to be that where the cheap exports from China has had a deflationary pressure on global markets in the past years we are likely to see that shift because of changes in spare capacity.
"Globalisation is unlikely to hold down inflation in rich countries over the next two years to the extent it has over the past few years, the International Monetary Fund has warned. This raises the risk that interest rates will head higher than the market is expecting. The IMF’s April World Economic Outlook says that “globalisation has undoubtedly provided some break on inflation in the industrialised economies in recent years”, allowing central banks to tighten monetary policy gradually. But it cautions that “globalisation cannot be relied upon to keep a lid on inflationary pressures in present circumstances”. Indeed, the IMF warns that globalisation could even help fuel inflation over the next few years, with rising import prices pushing up overall price levels.
The difference is largely due to the decline in global spare capacity, eroded by strong economic growth worldwide. IMF research suggests that the effect of globalisation on inflation in industrialised countries varies dramatically from year to year, depending on how much spare capacity there is abroad.
The IMF finds that integration of global product and financial markets has made inflation in big economies less sensitive to domestic capacity constraints. Wages and prices do not rise as rapidly as they did in past decades when national economies operate at full capacity.
Instead, inflation has become more sensitive to global capacity constraints. In recent years, particularly from 1997 to 1999 and from 2001 to 2002, spare capacity internationally has been a significant disinflationary force, particularly in the US.
But the IMF argues that this influence could now swing into reverse. “Strong global growth and diminishing economic slack have reduced the restraining impact of declining import prices on inflation, and with strong global growth expected to continue, the primary risk is that a further upturn in import prices could result in stronger inflationary pressures going forward.” It says this danger is particularly marked in countries that are “well advanced in the economic cycle” – a category that includes the US and the UK. It urges central banks to “remain vigilant for any signs of a pick-up in inflation in the period ahead”."
In my opinion the recent supply side news coming out of China is a good mirror on what the IMF report tries to argue and also the reason why scale and sustainability, how idealistic and ecological these topics may seem, represent important perspectives especially if inflation can be paired with globalization such as it is suggested.